10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number 1-14760

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)

Maryland	23-2919819
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)
2929 Arch Street, 17th Floor, Philadelphia, PA	19104
(Address of principal executive offices)	(Zip Code)

(215) 243-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    (Do not check if a smaller reporting company)

Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

A total of 98,908,898 common shares of beneficial interest, par value $0.01 per share, of the registrant were outstanding as of November 4, 2010.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		1
	Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September  30, 2010 and 2009		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2010 and 2009		3
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2010 and 2009		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46
Item 4.	Controls and Procedures		47
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		48
Item 5.	Other Information		48
Item 6.	Exhibits		48
	Signatures		49

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)

	As of September 30, 2010			As of December 31, 2009
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,283,187		$	1,467,566
Allowance for losses		(80,988	)		(86,609	)
Total investments in mortgages and loans		1,202,199			1,380,957
Investments in real estate		823,881			738,235
Investments in securities and security-related receivables, at fair value		705,209			694,897
Cash and cash equivalents		25,680			25,034
Restricted cash		196,405			156,167
Accrued interest receivable		35,755			37,625
Other assets		33,924			28,105
Deferred financing costs, net of accumulated amortization of $9,233 and $7,290, respectively		20,550			23,778
Intangible assets, net of accumulated amortization of $1,628 and $82,929, respectively		3,338			10,178
Total assets	$	3,046,941		$	3,094,976
Liabilities and Equity
Indebtedness (including $151,895 and $234,433 at fair value, respectively)	$	1,879,185		$	2,077,123
Accrued interest payable		21,555			17,432
Accounts payable and accrued expenses		21,278			21,889
Derivative liabilities		254,287			186,986
Deferred taxes, borrowers’ escrows and other liabilities		19,690			21,625
Total liabilities		2,195,995			2,325,055
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.01 par value per share, 200,000,000 shares authorized, 97,071,758 and 74,420,598 issued and outstanding, including 14,159 unvested restricted share awards at December 31, 2009		971			744
Additional paid in capital		1,676,061			1,630,428
Accumulated other comprehensive income (loss)		(151,858	)		(118,973	)
Retained earnings (deficit)		(676,609	)		(745,262	)
Total shareholders’ equity		848,632			767,004
Noncontrolling interests		2,314			2,917
Total equity		850,946			769,921
Total liabilities and equity	$	3,046,941		$	3,094,976

The accompanying notes are an integral part of these consolidated financial statements.

1

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2010			2009			2010			2009
Revenue:
Investment interest income	$	37,252		$	56,370		$	117,755		$	337,851
Investment interest expense		(22,415	)		(35,326	)		(69,203	)		(230,206	)
Net interest margin		14,837			21,044			48,552			107,645
Rental income		18,443			11,640			52,203			31,150
Fee and other income		3,204			8,741			15,555			20,240
Total revenue		36,484			41,425			116,310			159,035
Expenses:
Real estate operating expense		15,574			10,128			42,839			28,312
Compensation expense		6,766			7,809			21,704			19,469
General and administrative expense		4,331			5,365			14,588			14,894
Provision for losses		10,813			18,467			35,807			204,067
Asset impairments		—			—			—			46,015
Depreciation expense		7,230			5,051			19,903			13,612
Amortization of intangible assets		150			371			673			1,038
Total expenses		44,864			47,191			135,514			327,407
Income (loss) before other income (expense), taxes and discontinued operations		(8,380	)		(5,766	)		(19,204	)		(168,372	)
Interest and other income (expense)		30			1,109			347			3,158
Gains (losses) on sale of assets		—			(61,846	)		11,616			(375,604	)
Gains on extinguishment of debt		14,278			47,858			51,290			95,414
Change in fair value of financial instruments		14,237			(3,808	)		35,120			(12,256	)
Unrealized gains (losses) on interest rate hedges		12			15			50			(471	)
Equity in income (loss) of equity method investments		—			(3	)		4			(11	)
Income (loss) before taxes and discontinued operations		20,177			(22,441	)		79,223			(458,142	)
Income tax benefit (provision)		627			216			484			(441	)
Income (loss) from continuing operations		20,804			(22,225	)		79,707			(458,583	)
Income (loss) from discontinued operations		(2,556	)		436			(1,630	)		(881	)
Net income (loss)		18,248			(21,789	)		78,077			(459,464	)
(Income) loss allocated to preferred shares		(3,406	)		(3,406	)		(10,227	)		(10,227	)
(Income) loss allocated to noncontrolling interests		210			503			803			12,900
Net income (loss) allocable to common shares	$	15,052		$	(24,692	)	$	68,653		$	(456,791	)
Earnings (loss) per share—Basic:
Continuing operations	$	0.20		$	(0.39	)	$	0.86		$	(7.02	)
Discontinued operations		(0.03	)		0.01			(0.02	)		(0.01	)
Total earnings (loss) per share—Basic	$	0.17		$	(0.38	)	$	0.84		$	(7.03	)
Weighted-average shares outstanding—Basic		90,990,778			65,025,946			82,153,353			64,990,708
Earnings (loss) per share—Diluted:
Continuing operations	$	0.19		$	(0.39	)	$	0.84		$	(7.02	)
Discontinued operations		(0.03	)		0.01			(0.02	)		(0.01	)
Total earnings (loss) per share—Diluted	$	0.16		$	(0.38	)	$	0.82		$	(7.03	)
Weighted-average shares outstanding—Diluted		92,661,435			65,025,946			83,401,943			64,990,708
Distributions declared per common share	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2010			2009			2010			2009
Net income (loss)	$	18,248		$	(21,789	)	$	78,077		$	(459,464	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(20,720	)		(18,554	)		(63,423	)		3,135
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		(12	)		(15	)		(50	)		471
Realized (gains) losses on interest rate hedges reclassified to earnings		11,391			8,592			34,662			33,551
Change in fair value of available-for-sale securities		901			1,533			(4,074	)		(12,047	)
Realized (gains) losses on available-for-sale securities reclassified to earnings		—			—			—			44,275
Realized (gains) losses on sales of assets of VIEs		—			—			—			28,196
Total other comprehensive income (loss)		(8,440	)		(8,444	)		(32,885	)		97,581
Comprehensive income (loss) before allocation to noncontrolling interests		9,808			(30,233	)		45,192			(361,883	)
Allocation to noncontrolling interests		210			503			803			12,223
Comprehensive income (loss)	$	10,018		$	(29,730	)	$	45,995		$	(349,660	)

The accompanying notes are an integral part of these consolidated financial statements.

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Nine-Month Periods Ended September 30
	2010			2009
Operating activities:
Net income (loss)	$	78,077		$	(459,464	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		35,807			204,067
Share-based compensation expense		2,277			2,983
Depreciation and amortization		22,432			16,721
Amortization of deferred financing costs and debt discounts		2,046			10,215
Accretion of discounts on investments		(3,193	)		(3,981	)
(Gains) losses on sales of assets		(8,971	)		377,267
Gains on extinguishment of debt		(51,290	)		(95,414	)
Change in fair value of financial instruments		(35,120	)		12,256
Unrealized (gains) losses on interest rate hedges		(50	)		471
Equity in (income) loss of equity method investments		(4	)		11
Asset impairments		—			46,015
Unrealized foreign currency (gains) losses on investments		(91	)		(412	)
Changes in assets and liabilities:
Accrued interest receivable		573			(1,473	)
Other assets		443			(4,226	)
Accrued interest payable		(29,872	)		19,080
Accounts payable and accrued expenses		(1,499	)		1,032
Deferred taxes, borrowers’ escrows and other liabilities		(6,098	)		(49,630	)
Cash flow from operating activities		5,467			75,518
Investing activities:
Proceeds from sales of other securities		18,040			—
Purchase and origination of loans for investment		(19,346	)		(22,583	)
Principal repayments on loans		82,710			264,067
Investment in Jupiter Communities		—			(1,300	)
Investments in real estate		(13,752	)		(3,420	)
Proceeds from dispositions of real estate		7,064			7,611
Proceeds from sale of collateral management rights		14,105			—
(Increase) decrease in restricted cash		(45,783	)		(792	)
Cash flow from investing activities		43,038			243,583
Financing activities:
Proceeds from issuance of convertible senior debt and other indebtedness		—			1,177
Repayments on secured credit facilities, repurchase agreements and other indebtedness		(14,062	)		(24,024	)
Repayments on residential mortgage-backed securities		—			(223,335	)
Repayments and repurchase of CDO notes payable		(17,380	)		(36,531	)
Repayments and repurchase of convertible senior notes		(12,357	)		(13,215	)
Acquisition of noncontrolling interests in CDOs		(47	)		—
Payments for deferred costs		(170	)		(540	)
Common share issuance, net of costs incurred		6,384			37
Distributions paid to preferred shares		(10,227	)		(10,227	)
Cash flow from financing activities		(47,859	)		(306,658	)
Net change in cash and cash equivalents		646			12,443
Cash and cash equivalents at the beginning of the period		25,034			27,463
Cash and cash equivalents at the end of the period	$	25,680		$	39,906
Supplemental cash flow information:
Cash paid for interest	$	31,471		$	229,873
Cash paid (refunds received) for taxes		(1,774	)		108
Non-cash decrease in trust preferred obligations		—			(227,084	)
Non-cash increase in investments in real estate from the conversion of loans		91,287			313,946
Non-cash decrease in convertible senior notes from extinguishment of debt		(32,934	)		(49,398	)

The accompanying notes are an integral part of these consolidated financial statements.

4

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We conduct our business through our subsidiaries, RAIT Partnership, L.P. and Taberna Realty Finance Trust, or Taberna, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. Taberna is also a Maryland REIT.

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments, and to mitigate interest rate risk through derivative instruments.

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2009 included in Part II, Item 5 of this quarterly report on Form 10-Q. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on an evaluation as to who has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria above are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidated the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

5

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

d. Investments in Loans

We invest in commercial mortgages, mezzanine loans, debt securities and other loans. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

e. Allowance for Losses, Impaired Loans and Non-accrual Status

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

f. Investments in Real Estate

Investments in real estate are shown net of accumulated depreciation. We capitalize all costs related to the improvement of the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements – 30 years; furniture, fixtures, and equipment – 5 to 10 years; and tenant improvements – shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

g. Investments in Securities

We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “k. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

6

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

h. Transfers of Financial Assets

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

i. Revenue Recognition

1) Investment interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible.

For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

2) Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) providing property management services to third parties, and (d) providing fixed income trading and advisory services to our customers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from CDOs while such CDOs are consolidated.

7

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

During the three-month periods ended September 30, 2010 and 2009, we received $1,343 and $4,164, respectively, of earned asset management fees. Of these fees, we eliminated $983 and $1,064, respectively, of management fee income upon consolidation of VIEs.

During the nine-month periods ended September 30, 2010 and 2009, we received $6,447 and $13,041, respectively, of earned asset management fees. Of these fees, we eliminated $2,965 and $5,941, respectively, of management fee income upon consolidation of VIEs.

j. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

k. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category are trust preferred securities, or TruPS, and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.

8

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that result in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

l. Income Taxes

RAIT and Taberna have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our shareholders. Management believes that all of the criteria to maintain RAIT’s and Taberna’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

From time to time, our TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the CDO entities. Certain CDO entities may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our taxable income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us.

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates

9

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and as new information becomes available, the balances are adjusted as appropriate.

Certain TRS entities are currently subject to ongoing tax examinations in various jurisdictions. The IRS is currently examining Taberna Capital Management LLC’s, or TCM’s, federal income tax returns for the 2006 through 2008 tax years. TCM engaged the services of Taberna Capital (Bermuda), Ltd., or TCB, from June 2006 through June 2008 and RAIT Capital Ireland Ltd., or RCI, from July 2008 through June 30, 2010, to provide various sub-advisory services in connection with TCM’s management of various CDOs. Pursuant to transfer pricing studies prepared by an international accounting firm, TCM deducted the costs paid to TCB and RCI for their services from its income for federal income tax purposes. The IRS has challenged the transfer pricing methodology applied by TCM for 2006 and 2007 and has issued a Notice of Proposed Adjustment, or NOPA, for the 2006 and 2007 tax years. The NOPA proposes to reduce the deductions by $7,057 and $14,988 for the 2006 and 2007 tax years. With respect to the 2008 tax year that has recently been included by the IRS in its examination, TCM deducted $18,971 under this transfer pricing methodology. During 2010, management obtained and provided to the IRS a second transfer pricing study prepared by another independent, international public accounting firm for the period 2006 and 2007 that supports its deductions and responded to the IRS NOPA refuting the proposed adjustments. Management believes it has complied with the requirements outlined in the Internal Revenue Code and believes that its tax filing position will be sustained based on its merits. Accordingly, no reserve has been established.

m. Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing,” and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements. See Note 9 for additional disclosures pertaining to VIEs.

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and requires a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This accounting standard update is to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Existing disclosure guidance is amended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses and to disclose credit quality indicators, past due information, and modifications of its financing receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the impact that this accounting standard update may have on our consolidated financial statements.

NOTE 3: INVESTMENTS IN LOANS

Our investments in mortgages and loans are accounted for at amortized cost.

10

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Investments in Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity Interests

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of September 30, 2010:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	712,547		$	(2,008	)	$	710,539			44		6.7	%		Nov 2010 to Dec. 2020
Mezzanine loans		421,089			(6,150	)		414,939			114		9.3	%		Nov. 2010 to Nov. 2038
Preferred equity interests		83,239			(1,225	)		82,014			24		9.8	%		Nov. 2011 to Aug. 2025
Total CRE Loans		1,216,875			(9,383	)		1,207,492			182		7.8	%
Other loans		78,290			(1,287	)		77,003			5		5.3	%		Nov. 2010 to Oct. 2016
Total		1,295,165			(10,670	)		1,284,495			187		7.6	%
Deferred fees		(1,308	)		—			(1,308	)
Total investments in loans	$	1,293,857		$	(10,670	)	$	1,283,187

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

During the nine-month periods ended September 30, 2010 and 2009, we completed the conversion of seven and 22 commercial real estate loans with a carrying value of $110,528 and $403,510 to owned properties. During the nine-month periods ended September 30, 2010 and 2009, we charged off $19,241 and $83,924, respectively, related to the conversion of commercial real estate loans to owned properties. See Note 5.

The following table summarizes the delinquency statistics of our investments in loans as of September 30, 2010 and December 31, 2009:

Delinquency Status	As of September 30, 2010		As of December 31, 2009
30 to 59 days	$	22,113	$	20,760
60 to 89 days		28,997		82,685
90 days or more		62,822		44,310
In foreclosure or bankruptcy proceedings		54,838		47,625
Total	$	168,770	$	195,380

As of September 30, 2010 and December 31, 2009, approximately $143,212 and $171,372, respectively, of our commercial mortgages and mezzanine loans were on non-accrual status and had a weighted-average interest rate of 8.9% and 9.7%, respectively. As of September 30, 2010, approximately $20,908 of other loans were on non-accrual status and had a weighted-average interest rate of 7.2%. There were no other loans on non-accrual status as of December 31, 2009.

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for the three-month periods ended September 30, 2010 and 2009:

	For the Three-Month Period Ended September 30, 2010								For the Three-Month Period Ended September 30, 2009
	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables		Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables			Total
Beginning balance	$	78,672		$	—	$	78,672		$	108,842		$	128,790		$	237,632
Provision		10,813			—		10,813			18,467			—			18,467
Deductions for net charge-offs		(8,497	)		—		(8,497	)		(41,689	)		(1,133	)		(42,822	)
Sale of residential mortgages and mortgage-related receivables		—			—		—			—			(127,657	)		(127,657	)
Ending balance	$	80,988		$	—	$	80,988		$	85,620		$	—		$	85,620

11

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

The following table provides a roll-forward of our allowance for losses for the nine-month periods ended September 30, 2010 and 2009:

	For the Nine-Month Period Ended September 30, 2010								For the Nine-Month Period Ended September 30, 2009
	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables		Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables			Total
Beginning balance	$	86,609		$	—	$	86,609		$	117,737		$	54,236		$	171,973
Provision		35,807			—		35,807			107,580			96,487			204,067
Deductions for net charge-offs		(41,428	)		—		(41,428	)		(139,697	)		(23,066	)		(162,763	)
Sale of residential mortgages and mortgage-related receivables		—			—		—			—			(127,657	)		(127,657	)
Ending balance	$	80,988		$	—	$	80,988		$	85,620		$	—		$	85,620

As of September 30, 2010 and December 31, 2009, we identified 30 and 31 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $182,712 and $189,961 as impaired. As of September 30, 2010 and December 31, 2009, we had allowance for losses of $80,988 and $86,609 associated with our commercial mortgages, mezzanine loans and other loans.

The average unpaid principal balance of total impaired loans was $181,301 and $208,311 during the three-month periods ended September 30, 2010 and 2009 and $181,169 and $197,812 during the nine-month periods ended September 30, 2010 and 2009. We recorded interest income from impaired loans of $141 and $1,145 for the three-month periods ended September 30, 2010 and 2009 and $2,633 and $2,886 for the nine-month periods ended September 30, 2010 and 2009.

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of September 30, 2010:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	689,070	$	(232,605	)	$	456,465		5.1	%		24.0
Other securities		10,000		(10,000	)		—		5.0	%		42.1
Total trading securities		699,070		(242,605	)		456,465		5.1	%		24.3
Available-for-sale securities		3,600		(3,510	)		90		2.4	%		32.1
Security-related receivables
TruPS receivables		110,637		(23,851	)		86,786		6.9	%		12.2
Unsecured REIT note receivables		61,000		1,546			62,546		6.6	%		7.0
CMBS receivables (2)		158,868		(86,290	)		72,578		6.0	%		33.3
Other securities		105,807		(79,063	)		26,744		2.9	%		31.2
Total security-related receivables		436,312		(187,658	)		248,654		5.6	%		23.7
Total investments in securities	$	1,138,982	$	(433,773	)	$	705,209		5.2	%		24.2

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

(2) CMBS receivables include securities with a fair value totaling $29,259 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $40,848 that are rated “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $2,460 that are rated “CCC” by Standard & Poor’s and securities with a fair value totaling $13 that are rated “D” by Standard & Poor’s.

12

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

A substantial portion of our gross unrealized losses is greater than 12 months.

TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to FASB ASC Topic 860, “Transfers and Servicing.”

The following table summarizes the non-accrual status of our investments in securities:

	As of September 30, 2010							As of December 31, 2009
	Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value		Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value
TruPS and TruPS receivables	$	178,682		3.5	%	$	52,812	$	108,125		4.9	%	$	26,400
Other securities		40,754		2.9	%		824		24,500		3.1	%		370
CMBS receivables		14,204		5.7	%		413		—		—			—

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of September 30, 2010 and December 31, 2009, investment in securities of $806,700 and $888,681, respectively, in principal amount of TruPS and subordinated debentures, and $219,868 and $230,768, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

NOTE 5: INVESTMENTS IN REAL ESTATE

As of September 30, 2010, we maintained investments in 44 real estate properties and three parcels of land. As of December 31, 2009, we maintained investments in 36 real estate properties and three parcels of land.

The table below summarizes our investments in real estate as of September 30, 2010:

	Book Value			Number of Properties		Average Physical Occupancy
Multi-family real estate properties	$	582,872			33		84.6	%
Office real estate properties		215,191			9		52.5	%
Retail real estate property		39,364			2		57.7	%
Parcels of land		22,208			3		—
Subtotal		859,635			47		74.8	%
Plus: Escrows and reserves		5,697
Less: Accumulated depreciation and amortization		(41,451	)
Investments in real estate	$	823,881

As of September 30, 2010, we have identified three properties as assets held for sale. The carrying amount of these assets is $65,238 and liabilities related to these assets are $10,769. These amounts are included in the investments in real estate and indebtedness, accrued interest payable, accounts payable and accrued expenses, and deferred taxes, borrowers’ escrows and other liabilities financial statement captions. Liabilities related to assets held for sale exclude $48,114 of first mortgages held by RAIT I and RAIT II that are eliminated in our consolidated balance sheet. See Note 14—Assets Held For Sale and Discontinued Operations.

During the nine-month period ended September 30, 2010, we converted seven loans with a carrying value of $110,528, relating to eight multi-family properties and one office property, to owned real estate. Upon conversion, we recorded the nine properties at fair value of $91,287. We previously held bridge or mezzanine loans with respect to these real estate properties.

13

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

As of January 1, 2010, we adopted an accounting standard which changed the determination of the consolidation of VIEs. Accordingly, we consolidated two office properties as of January 1, 2010 as we were determined to be the primary beneficiary of the VIEs. The fair value of the properties consolidated, net of their related liabilities at fair value, was $5,005 as of January 1, 2010.

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the 11 properties acquired during the nine-month period ended September 30, 2010, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	113,190
Cash and cash equivalents		561
Restricted cash		1,735
Other assets		4,178
Total assets acquired		119,664
Liabilities assumed:
Loans payable on real estate		17,372
Accounts payable and accrued expenses		3,812
Other liabilities		1,832
Total liabilities assumed		23,016
Estimated fair value of net assets acquired	$	96,648

The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective conversion date:

Description	Estimated Fair Value
Fair value of consideration transferred:
Commercial real estate loans	$	109,661
Other considerations		(13,013	)
Total fair value of consideration transferred	$	96,648

During the nine-month period ended September 30, 2010, these investments contributed revenue of $6,600 and a net loss allocable to common shares of $931. During the nine-month period ended September 30, 2010, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the acquisition occurred on January 1, 2009 and 2010, respectively. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Nine-Month Period Ended September 30, 2010		For the Nine-Month Period Ended September 30, 2009
Total revenue, as reported	$	116,310	$	159,035
Pro forma revenue		119,738		166,938
Net income (loss) allocable to common shares, as reported		68,653		(456,791	)
Pro forma net income (loss) allocable to common shares		68,670		(455,419	)

These amounts have been calculated after adjusting the results of the acquired businesses to reflect the additional depreciation that would have been charged assuming the fair value adjustments to our investments in real estate had been applied from January 1, 2009 and 2010, respectively, together with the consequential tax effects.

We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.

14

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

As of September 30, 2010, our investments in real estate of $823,881 are financed through $85,817 of mortgages held by third parties and $756,392 of mortgages held by our RAIT I and RAIT II CDO securitizations. Together, along with commercial real estate loans held by RAIT I and RAIT II, these mortgages serve as collateral for the CDO notes payable issued by the RAIT I and RAIT II CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation.

NOTE 6: INDEBTEDNESS

We maintain various forms of long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs. The following table summarizes our total recourse and non-recourse indebtedness as of September 30, 2010:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	143,613	$	143,447		6.9	%		Apr. 2027
Secured credit facilities		38,736		38,736		4.7	%		Feb. 2011 to Dec. 2011
Senior secured notes		63,950		63,950		11.7	%		Apr. 2014
Loans payable on real estate		22,432		22,432		5.5	%		Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		4,422		9.2	%		Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		331,883		298,087		7.8	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,370,250		1,370,250		0.7	%		2045 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,172,505		147,473		1.0	%		2037 to 2038
Loans payable on real estate		63,375		63,375		5.8	%		Nov. 2010 to Aug. 2016
Total non-recourse indebtedness		2,606,130		1,581,098		1.0	%
Total indebtedness	$	2,938,013	$	1,879,185		1.8	%

(1) Our convertible senior notes are redeemable, at par at the option of the holder, in April 2012, April 2017, and April 2022.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1,771,696 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1,348,963 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2010 was $896,099. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $298,087 as of September 30, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (such as CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the nine-month period ended September 30, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the nine-month period ended September 30, 2010, we repurchased $102,750 in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $72,637. The purchase price consisted of $12,357 in cash, the issuance of 18,915,000 common shares, and the issuance of a $22,000 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $29,974, net of deferred financing costs and unamortized discounts that were written off.

15

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Secured credit facilities. As of September 30, 2010, we have borrowed an aggregate amount of $38,736 under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of September 30, 2010, the first secured credit facility had an unpaid principal balance of $20,576 which is payable in December 2011 under the current terms of this facility. As of September 30, 2010, the second secured credit facility had an unpaid principal balance of $16,160 which is payable in October 2011 under the current terms of this facility. As of September 30, 2010, the third secured credit facility had an unpaid principal balance of $2,000. We are amortizing this balance with monthly principal repayments of $500 which will result in the full repayment of this credit facility by February 2011.

Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47,000 aggregate principal amount of our convertible senior notes for a total consideration of $31,240. The purchase price consisted of (a) our issuance of the $22,000 senior secured convertible note, (b) 1,500,000 common shares issued, and (c) $6,000 in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1,427 of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1,050 principal amount of the senior secured convertible note into 300,000 common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly-owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Junior subordinated notes, at fair value. On October 25, 2010, pursuant to a securities exchange agreement, we exchanged $18,671 in aggregate principal amount of the junior subordinated notes with an interest rate of 8.7% for $18,671 of junior subordinated notes with a reduced interest rate and provided $5,000 of our convertible senior notes as collateral for the new junior subordinated notes. The new junior subordinated notes have a fixed rate of interest of 0.5% through March 30, 2015, thereafter with a floating rate of three-month LIBOR plus 400 basis points, with such floating rate not to exceed 7.0%. The maturity date remains the same at March 30, 2035. At issuance, we elected to record these junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their interest coverage and overcollateralization triggers, or OC Triggers, tests as of September 30, 2010.

During the nine-month period ended September 30, 2010, we repurchased, from the market, a total of $26,500 in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $4,840 and we recorded a gain on extinguishment of debt of $21,316, net of deferred financing costs that were written off.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC Trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC Trigger test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC Trigger test failures are due to defaulted collateral assets and credit risk securities. During the nine-month period ended September 30, 2010, $12,556 of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure

16

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

as well as to hedge specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of September 30, 2010, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of September 30, 2010 and December 31, 2009:

	As of September 30, 2010					As of December 31, 2009
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,750,698	$	(254,287	)	$	1,826,167	$	(186,986	)
Interest rate caps		36,000		1,369			36,000		1,335
Net fair value	$	1,786,698	$	(252,918	)	$	1,862,167	$	(185,651	)

For interest rate swaps that are considered effective hedges, we reclassified realized gains (losses) of $(11,391) and $(8,592) to earnings for the three-month periods ended September 30, 2010 and 2009. For interest rate swaps that are considered ineffective hedges, we reclassified unrealized gains (losses) of $12 and $15 to earnings for the three-month periods ended September 30, 2010 and 2009.

The following table summarizes the effect on income by derivative instrument type for the nine-month periods ended September 30, 2010 and 2009:

	For the Nine-Month Period Ended September 30, 2010					For the Nine-Month  Period Ended September 30, 2009
Type of Derivative	Amounts Reclassified  to Earnings for Effective Hedges— Gains  (Losses)			Amounts Reclassified  to Earnings for Hedge Ineffectiveness— Gains (Losses)		Amounts Reclassified to Earnings for Effective Hedges— Gains  (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)
Interest rate swaps	$	(34,662	)	$	50	$	(33,551	)	$	(450	)
Currency options		—			—		—			(21	)
Total	$	(34,662	)	$	50	$	(33,551	)	$	(471	)

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges were thereafter recorded in earnings. As of September 30, 2010, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $970,276 and a liability with a fair value of $139,772. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month and nine-month periods ended September 30, 2010 and 2009. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in investment interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

17

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, trust preferred obligations, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, senior secured notes, loans payable on real estate and other indebtedness approximates cost due to the nature of these instruments.

The following table summarizes the carrying amount and the fair value of our financial instruments as of September 30, 2010:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,283,187	$	1,213,398
Investments in securities and security-related receivables		705,209		705,209
Cash and cash equivalents		25,680		25,680
Restricted cash		196,405		196,405
Derivative assets		1,369		1,369
Liabilities
Recourse indebtedness:
Convertible senior notes		143,447		101,743
Secured credit facilities		38,736		38,736
Senior secured notes		63,950		63,950
Junior subordinated notes, at fair value		4,422		4,422
Junior subordinated notes, at amortized cost		25,100		2,917
Loans payable on real estate		22,432		22,432
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,370,250		668,690
CDO notes payable, at fair value		147,473		147,473
Loans payable on real estate		63,375		63,375
Derivative liabilities		254,287		254,287

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of September 30, 2010
Trading securities
TruPS	$	—	$	—	$	456,465	$	456,465
Other securities		—		—		—		—
Available-for-sale securities		—		90		—		90
Security-related receivables
TruPS receivables		—		—		86,786		86,786
Unsecured REIT note receivables		—		62,546		—		62,546
CMBS receivables		—		72,578		—		72,578
Other securities		—		26,744		—		26,744
Derivative assets		—		1,369		—		1,369
Total assets	$	—	$	163,327	$	543,251	$	706,578

18

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a) (b)		Significant Unobservable Inputs (Level 3) (b)		Balance as of September 30, 2010
Junior subordinated notes, at fair value	$	—	$	—	$	4,422	$	4,422
CDO notes payable, at fair value		—		—		147,473		147,473
Derivative liabilities		—		254,287		—		254,287
Total liabilities	$	—	$	254,287	$	151,895	$	406,182

(a) During the nine-month period ended September 30, 2010, there were no transfers between Level 1 and Level 2, nor were there any transfers into or out of assets categorized as Level 3.

(b) During the nine-month period ended September 30, 2010, we determined that junior subordinated notes elected under the fair value option should be categorized as a Level 3 liability due to the limited market activity for these financial instruments and increased reliance on management’s estimates and assumptions.

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value for the nine-month period ended September 30, 2010:

Assets	Trading Securities—TruPS  and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2009	$	471,106		$	73,649		$	544,755
Change in fair value of financial instruments		196,434			16,418			212,852
Purchases and sales, net		(140,203	)		(3,281	)		(143,484	)
Deconsolidation of VIEs		(70,872	)		—			(70,872	)
Balance, as of September 30, 2010	$	456,465		$	86,786		$	543,251

Liabilities	Trust Preferred Obligations			CDO Notes Payable, at Fair Value			Junior Subordinated Notes, at Fair Value		Total Level 3 Liabilities
Balance, as of December 31, 2009	$	70,872		$	146,557		$	—	$	217,429
Change in fair value of financial instruments		—			13,472			—		13,472
Purchases and sales, net		—			(12,556	)		—		(12,556	)
Deconsolidation of VIEs		(70,872	)		—			—		(70,872	)
Transfer in from Level 2 to Level 3 (a)		—			—			4,422		4,422
Balance, as of September 30, 2010	$	—		$	147,473		$	4,422	$	151,895

(a) During the nine-month period ended September 30, 2010, we determined that junior subordinated notes elected under the fair value option should be categorized as a Level 3 liability due to the limited market activity for these financial instruments and increased reliance on management’s estimates and assumptions.

Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
Description	2010			2009			2010			2009
Change in fair value of trading securities and security-related receivables	$	26,004		$	13,300		$	109,003		$	(168,736	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		7,555			7,445			(891	)		159,039
Change in fair value of derivatives		(19,322	)		(24,553	)		(72,992	)		(2,559	)
Change in fair value of financial instruments	$	14,237		$	(3,808	)	$	35,120		$	(12,256	)

The changes in the fair value for the investment in securities, CDO notes payable and other liabilities for which the fair value option was elected for the three-month and nine-month periods ended September 30, 2010 and 2009 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives for which the fair value option was elected for the three-month and nine-month periods ended September 30, 2010 and 2009 was mainly due to changes in interest rates.

19

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 9: VARIABLE INTEREST ENTITIES

On January 1, 2010, we adopted an accounting standard which provided guidance when to consolidate a VIE. Under the new standard, the determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Upon adoption, we evaluated our investments under this new consolidation standard and the following changes in previous consolidation conclusions were made:

• TruPS Investment and Obligations – Previously, we held implicit interests in trusts which issued TruPS. Under the previous consolidation guidance, we were considered to be primary beneficiaries of the trusts and reported their assets and liabilities in our consolidated balance sheet. RAIT does not meet both criteria to be the primary beneficiary of these entities as we do not have the power to direct the activities of the underlying trusts. Therefore, we deconsolidated these entities as of January 1, 2010 thereby reducing our assets and liabilities by $70,872.

• Investments in Real Estate – We identified two properties to be VIEs that we previously did not consolidate as we were not previously the primary beneficiary: Willow Grove and Cherry Hill. RAIT evaluated its interests in these real estate properties and determined that we are the primary beneficiary. Upon consolidation of these properties on January 1, 2010, we increased our assets and liabilities by $20,931.

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of September 30, 2010, our consolidated VIEs were: Taberna Preferred Funding VIII, Ltd., Taberna Preferred Funding IX, Ltd, RAIT CRE CDO I, Ltd., RAIT Preferred Funding II, Ltd., Willow Grove and Cherry Hill.

	As of September 30, 2010			As of December 31, 2009 (a)
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,933,494		$	1,959,118
Allowance for losses		(10,738	)		(10,903	)
Total investments in mortgages and loans		1,922,756			1,948,215
Investments in real estate		21,353			—
Investments in securities and security-related receivables, at fair value		705,123			694,809
Cash and cash equivalents		45			272
Restricted cash		157,286			117,322
Accrued interest receivable		51,134			38,397
Deferred financing costs, net of accumulated amortization of $8,016 and $5,897, respectively		18,591			20,132
Total assets	$	2,876,288		$	2,819,147
Liabilities and Equity
Indebtedness (including $147,473 and $217,429 at fair value, respectively)	$	1,706,876		$	1,794,339
Accrued interest payable		31,350			21,855
Accounts payable and accrued expenses		1,147			232
Derivative liabilities		254,287			186,986
Deferred taxes, borrowers’ escrows and other liabilities		1,756			3,136
Total liabilities		1,995,416			2,006,548
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(147,554	)		(115,004	)
RAIT Investment		123,871			167,011
Retained earnings (deficit)		904,555			760,592
Total shareholders’ equity		880,872			812,599
Total liabilities and equity	$	2,876,288		$	2,819,147

(a) Includes the assets and liabilities described in the TruPS Investments and Obligations above. Based on the adoption of the accounting standard, these VIEs were deconsolidated as of January 1, 2010 and no longer appear in our consolidated financial statements. Upon deconsolidation, investments in securities and indebtedness both decreased by $70,872 as of January 1, 2010.

20

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. Certain amounts included in the table above are eliminated upon consolidation with other RAIT subsidiaries that maintain investments in the debt or equity securities issued by these entities.

RAIT does not have any contractual obligation to provide the VIEs listed above with any financial support. RAIT has not provided and does not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

NOTE 10: EQUITY

Preferred Shares

On January 26, 2010, our board of trustees declared first quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled $3,406.

On April 22, 2010, our board of trustees declared second quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2010 to holders of record on June 1, 2010 and totaled $3,415.

On July 27, 2010, our board of trustees declared third quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on September 30, 2010 to holders of record on September 1, 2010 and totaled $3,406.

On October 28, 2010, our board of trustees declared fourth quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on December 31, 2010 to holders of record on December 1, 2010.

Common Shares

Share Repurchases:

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares was $240 and was used to purchase 152,800 common shares, in the aggregate, in March 2010.

Equity Compensation:

On January 26, 2010, the compensation committee awarded 1,500,000 phantom units, valued at $1,905 using our closing stock price of $1.27 on that date, to our executive officers. Half of these awards vested immediately and the remainder vests in one year from the date of grant. On January 26, 2010, the compensation committee awarded 500,000 phantom units, valued at $635 using our closing stock price of $1.27 on that date, to our non-executive officer employees. These awards generally vest over three-year periods.

During the nine-month period ended September 30, 2010, 73,425 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

Share Issuances:

During the nine-month period ended September 30, 2010, we issued 18,915,000 common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $102,750 of our convertible notes.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we have registered and reserved for issuance, in the aggregate, 18,787,635 common shares. During the nine-month period ended September 30, 2010, we issued a total of 1,918,831 common shares pursuant to the DRSPP at a weighted-average price of $2.29 per share and we received $4,353 of proceeds. As of September 30, 2010, 11,711,509 common shares, in aggregate, remain available for issuance under the DRSPP.

21

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Standby Equity Distribution Agreement (SEDA):

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50,000, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12,500,000 common shares. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50,000 worth of common shares under the SEDA. During the period from the effective date of the SEDA through September 30, 2010, 1,152,984 common shares were issued pursuant to this arrangement at a weighted average price of $2.17 and we received $2,500 of proceeds. As of September 30, 2010, 11,347,016 common shares, in the aggregate, remain available for issuance under the SEDA.

Capital on Demand™ Sales Agreement:

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 17,500,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. During the period from the effective date of the COD sales agreement through September 30, 2010, 549,518 common shares were issued pursuant to this arrangement at a weighted average price of $1.57 and we received $863 of proceeds. In October 2010, 1,584,234 common shares were issued pursuant to the COD sales agreement at a weighted average price of $1.74 and we received $2,750 of proceeds. After reflecting the common shares issued in October 2010, 15,366,248 common shares, in the aggregate, remain available for issuance under the COD sales agreement.

NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2010 and 2009:

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2010			2009			2010			2009
Income (loss) from continuing operations	$	20,804		$	(22,225	)	$	79,707		$	(458,583	)
(Income) loss allocated to preferred shares		(3,406	)		(3,406	)		(10,227	)		(10,227	)
(Income) loss allocated to noncontrolling interests		210			503			803			12,900
Income (loss) from continuing operations allocable to common shares		17,608			(25,128	)		70,283			(455,910	)
Income (loss) from discontinued operations		(2,556	)		436			(1,630	)		(881	)
Net income (loss) allocable to common shares	$	15,052		$	(24,692	)	$	68,653		$	(456,791	)
Weighted-average shares outstanding—Basic		90,990,778			65,025,946			82,153,353			64,990,708
Dilutive securities under the treasury stock method		1,670,657			—			1,248,590			—
Weighted-average shares outstanding—Diluted		92,661,435			65,025,946			83,401,943			64,990,708
Earnings (loss) per share—Basic:
Continuing operations	$	0.20		$	(0.39	)	$	0.86		$	(7.02	)
Discontinued operations		(0.03	)		0.01			(0.02	)		(0.01	)
Total earnings (loss) per share—Basic	$	0.17		$	(0.38	)	$	0.84		$	(7.03	)
Earnings (loss) per share—Diluted:
Continuing operations	$	0.19		$	(0.39	)	$	0.84		$	(7.02	)
Discontinued operations		(0.03	)		0.01			(0.02	)		(0.01	)
Total earnings (loss) per share—Diluted	$	0.16		$	(0.38	)	$	0.82		$	(7.03	)

For the three-month and nine-month periods ended September 30, 2009, securities convertible into 15,104,889 and 15,799,188 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three-month and nine-month periods ended September 30, 2010, securities convertible into 11,094,817 common shares were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities described below. All of these relationships and transactions were approved or ratified by our audit committee as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

22

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Our Chairman, Betsy Z. Cohen, is the Chief Executive Officer and a director of The Bancorp, Inc., or Bancorp, and Chairman of the Board and Chief Executive Officer of its wholly-owned subsidiary, The Bancorp Bank, a commercial bank. On September 22, 2010, Mrs. Cohen advised our Board of Trustees that she plans to retire as our Chairman of the Board and as a Trustee effective December 31, 2010. Mrs. Cohen’s son, Daniel G. Cohen, was our chief executive officer from the date of the Taberna acquisition until his resignation from that position on February 22, 2009. Mr. Cohen was a trustee of RAIT from the date of the Taberna acquisition until his resignation from that position on February 26, 2010. Mr. Cohen is the Chairman of the Board of Bancorp and Vice-Chairman of the Board of Bancorp Bank. Scott F. Schaeffer is our Chief Executive Officer and President and, effective December 31, 2010 upon the retirement of Mrs. Cohen, will become our Chairman and a Trustee on our Board of Trustees. Mr. Schaeffer’s spouse, Linda Schaeffer, is a director of Bancorp and she and Mr. Schaeffer own, in the aggregate, less than 1% of Bancorp’s outstanding common shares. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of September 30, 2010 and December 31, 2009, we had $112 and $410, respectively, of cash and cash equivalents and $580 and $1,601, respectively, of restricted cash on deposit at Bancorp. During the three-month and nine-month periods ended September 30, 2009, we received $0 and $11 of interest income from Bancorp. We did not receive any interest income from the Bancorp during the three-month and nine-month periods ended September 30, 2010. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp at an annual rental expense based upon the amount of square footage occupied. We have signed a sublease agreement with a third party for the remaining term of our sublease. Rent paid to Bancorp was $79 and $71 for the three-month periods ended September 30, 2010 and 2009, respectively, and $226 and $239 for the nine-month periods ended September 30, 2010 and 2009. Rent received for our sublease was $42 and $124 for the three-month and nine-month periods ended September 30, 2010, respectively.

Mr. Cohen holds controlling positions in various companies with which we conduct business. Mr. Cohen serves as the Chairman of the board of directors and Chief Executive Officer of Cohen & Company Inc. or, Cohen & Company, and as the Chairman of the board of managers, Chief Executive Officer and Chief Investment Officer of Cohen Brothers, LLC, or Cohen Brothers, a majority owned subsidiary of Cohen & Company. Each transaction between us and Cohen & Company is described below:

a). Office Leases—We maintain sub-lease agreements for shared office space and facilities with Cohen & Company. Rent expense during the three-month periods ended September 30, 2010 and 2009, relating to these leases was $12 and for the nine-month periods ended September 30, 2010 and 2009 was $37. Rent expense has been included in general and administrative expense in the accompanying consolidated statements of operations. Future minimum lease payments due over the remaining term of the lease are $271.

b). Common Shares— As of December 31, 2009, Cohen & Company and its affiliate entities owned 510,434 of our common shares. During the period ended September 30, 2010, Cohen & Company and its affiliates sold these shares and do not own any of our common shares as September 30, 2010.

c). Brokerage Services—During 2010, Cohen & Company sold $7,000 in aggregate principal amount of debt securities to an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we earned $38 in principal transaction income. During the nine-month period ended September 30, 2009 we repurchased $14,000 of our RAIT CRE CDO I notes payable rated BBB and $300 of CMBS receivables from a third party using the broker-dealer services of Cohen & Company. Cohen & Company received $113 of total principal transaction income in connection with these transactions.

d). Star Asia—Star Asia is an affiliate of Cohen & Company. During 2010, Star Asia purchased $2,315 in aggregate principal of debt securities from an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we did not earn any principal transaction income. In March 2009, Star Asia issued debt securities to a third party, upon which a subsequent exchange offer was entered into with Taberna Preferred Funding III, Ltd., or Taberna III, for $22,425 and Taberna Preferred Funding IV, Ltd., or Taberna IV, for $19,434. Taberna Capital Management was the collateral manager for Taberna III and Taberna IV. We received an opinion from an independent third party concluding that the transaction was fair from Taberna III and IV’s financial viewpoint. There were no fees earned by Taberna Capital Management or Star Asia. In June 2009 we sold our interests in Taberna III and Taberna IV. See Note 13—Asset Dispositions.

e). Kleros Preferred Funding VIII, Ltd.—Kleros Preferred Funding VIII, Ltd., or Kleros VIII, is a securitization managed by Cohen & Company. In June 2007, we purchased approximately $26,400 in par amount of bonds rated A through BBB issued by Kleros VIII, for a purchase price of approximately $23,997. As of September 30, 2010, the bonds have a current fair value of $0 and have been on non-accrual since December 31, 2007.

Edward E. Cohen, the spouse of Betsy Z. Cohen and father of Daniel G. Cohen, is the Chairman of Resource America, Inc, or Resource America. Jonathan Z. Cohen, the son of Betsy Z. Cohen and brother of Daniel G. Cohen, is the Chief Executive Officer of

23

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

Resource America. During the three-month period ended September 30, 2009, we repurchased $3,500 of our RAIT CRE CDO I notes payable rated BBB from a third party using the broker-dealer services of a subsidiary of Resource America. The Resource America subsidiary received $7 principal transaction income in connection with this transaction.

Brandywine Construction & Management, Inc., or Brandywine, is an affiliate of Edward E. Cohen. Brandywine provided real estate management services to two properties underlying our investments in real estate. During the three-month periods ended September 30, 2010 and 2009, Brandywine earned management fees of $22 and $29, respectively, and $74 and $75 for the nine-month periods ended September 30, 2010 and 2009. We believe that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties.

NOTE 13: ASSET DISPOSITIONS

On April 22, 2010 RAIT sold or delegated its collateral management rights and responsibilities relating to eight Taberna securitizations with approximately $5,858,931 in total assets under management to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16,518. These securitizations were not consolidated by RAIT and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. The transaction generated a $7,938 in gain on sale of asset.

During 2009, we disposed of our investments in six residential mortgage portfolios and four Taberna CDOs. All assets sold and related liabilities were removed from our consolidated balance sheet on the date of sale, with any gains or losses on dispositions recorded in our accompanying statements of operations under gains (losses) on sale of assets.

On July 16, 2009, we sold our residential mortgage portfolio to an affiliate of Angelo, Gordon & Co., L.P., pursuant to a Purchase and Sale Agreement, dated as of July 15, 2009 between our subsidiary, Taberna Loan Holdings I, LLC, and AG Park Lane I Corp. We sold all of our notes and equity interests, or the retained interests, together with any principal or interest payable thereon, issued by the following six securitizations of residential mortgage loans: Bear Stearns ARM Trust 2005-7, Bear Stearns ARM Trust 2005-9, Citigroup Mortgage Loan Trust 2005-1, CWABS Trust 2005 HYB9, Merrill Lynch Mortgage Investors Trust, Series 2005-A9 and Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2. The purchase price paid by the buyer was $15,800, plus accrued interest and we recorded a $61,841 loss on sale of assets.

Previously we consolidated Taberna Preferred Funding III, Ltd, Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding VI, Ltd. and Taberna Preferred Funding VII, Ltd., four securitizations in which we were determined to be the primary beneficiary primarily due to our majority ownership of the equity interests issued by the securitizations. On June 25, 2009, we sold all of our equity interests and a portion of the non-investment grade debt that we owned in these four securitizations and determined that we were no longer the primary beneficiary and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation”. We recorded losses on the sales of assets related to these VIEs of $313,808 in June 2009.

Summarized Statement of Operations

The table below summarizes the statement of operations for the four Taberna CDOs and six residential mortgage portfolios sold in June and July 2009, respectively. The information presented below is for the nine-month periods ended September 30, 2009 (dollars in thousands).

	For the Nine- Months  Ended September 30, 2009
Revenue:
Investment interest income	$	176,780
Investment interest expense		(129,899	)
Net interest margin		46,881
General and administrative expenses		(830	)
Provision for losses		(101,980	)
Income before other income (expense)		(55,929	)
Losses on sales of assets		(375,649	)
Change in fair value of financial instruments		(59,716	)
Net income (loss)		(491,294	)
(Income) loss allocated to noncontrolling interests		12,053
Net income (loss) allocable to common shares	$	(479,241	)

24

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 14: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

As of September 30, 2010, we have three properties designated as held for sale. As of December 31, 2009, we had four properties designated as held for sale, including two properties that were sold or deconsolidated during the nine-month period ended September 30, 2010. The following table summarizes the consolidated balance sheet of the real estate properties classified as assets held for sale:

	As of September 30, 2010		As of December 31, 2009
Assets:
Investments in real estate	$	61,245	$	79,790
Cash and cash equivalents		968		1,069
Other assets		2,884		2,410
Deferred financing costs, net		141		161
Total assets held for sale	$	65,238	$	83,430
Liabilities:
Other indebtedness		8,490		18,508
Accrued interest payable		46		62
Accounts payable and accrued expenses		1,322		1,667
Other liabilities		911		766
Total liabilities related to assets held for sale (a)	$	10,769	$	21,003

(a) Liabilities related to assets held for sale exclude $48,114 of first mortgages held by RAIT’s CDO securitizations that are eliminated against the corresponding investment asset in our consolidated balance sheet.

For the three-month and nine-month periods ended September 30, 2010 and 2009, income (loss) from discontinued operations relates to three real estate properties designated as held for sale and four real estate properties sold or deconsolidated since January 1, 2009. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2010			2009			2010			2009
Revenue:
Rental income	$	2,397		$	2,140		$	7,495		$	7,320
Expenses:
Real estate operating expense		1,411			1,597			4,626			4,893
General and administrative expense		—			—			—			19
Depreciation expense		631			848			1,856			2,071
Total expenses		2,042			2,445			6,482			6,983
Income (loss) before interest and other income		355			(305	)		1,013			337
Interest and other income		—			207			2			445
Income (loss) from discontinued operations		355			(98	)		1,015			782
Gain (loss) on sale of assets		(2,911	)		534			(2,645	)		(1,663	)
Total income (loss) from discontinued operations	$	(2,556	)	$	436		$	(1,630	)	$	(881	)

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

25

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 15: COMMITMENTS AND CONTINGENCIES

Riverside National Bank of Florida Litigation

RAIT subsidiary Taberna Capital Management, LLC is one of fifteen defendants in a lawsuit by the Federal Deposit Insurance Corporation, as Receiver for Riverside National Bank of Florida. The lawsuit was originally commenced by Riverside on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, and subsequently discontinued without prejudice and refiled in New York County on November 13, 2009. On April 16, 2010, the Office of the Comptroller of the Currency closed Riverside and named the FDIC as receiver and thus as successor-in-interest to Riverside as plaintiff in the action. On June 3, 2010, the defendants removed the case to the United States District Court for the Southern District of New York. The action, now titled FDIC v. The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., Fitch, Inc., Taberna Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., JPMorgan Chase & Co., J.P. Morgan Securities Inc., Citigroup Global Markets, Credit Suisse Securities (USA) LLC, ABN Amro, Inc., Cohen & Company, and SunTrust Robinson Humphrey, Inc., asserts claims in connection with Riverside’s purchase of certain CDO securities, including securities from the Taberna Preferred Funding II, IV, and V CDOs. Riverside alleges that offering materials issued in connection with the CDOs it purchased did not adequately disclose the process by which the rating agencies rated each of the securities. Riverside also alleges, among other things, that the offering materials should have disclosed an alleged conflict of interest of the rating agencies as well as the role that the rating agencies played in structuring each CDO. Riverside seeks damages in excess of $132 million, rescission of its purchases of the securities at issue, an accounting of certain amounts received by the defendants together with the imposition of a constructive trust, and punitive damages of an unspecified amount.

On June 25, 2010, the federal court directed the parties to refile papers supporting and opposing the defendants’ motions to dismiss, which had been filed in state court but not argued or decided. On August 20, 2010, the court granted the FDIC’s motion for substitution of counsel and to stay the action for 90 days, and on October 28, 2010, it granted an additional 90-day stay at the FDIC’s request. Defendants must refile their motions to dismiss or answer Plaintiff’s complaint by February 23, 2011. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders of RAIT Financial Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Financial Trust and subsidiaries as of September 30, 2010, and the related consolidated statements of operations, comprehensive income (loss) and cash flows for the three and nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 2(m) and 9 to the consolidated financial statements, the Company adopted the new accounting standards classified under FASB ASC Topic 810 “Consolidation” for variable interest entities on January 1, 2010.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year then ended (included in Item 5 of this Quarterly Report), and in our report dated March 1, 2010 (except for Notes 6 and 15, as to which the date is November 5, 2010), we expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

November 5, 2010

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

Overview

We are a vertically integrated commercial real estate company capable of originating, investing in, managing, servicing, trading and advising on commercial real estate-related assets. In 2010, we continue to make progress in adapting RAIT to the current market environment. We are positioning RAIT for future growth in its historical core competency, commercial real estate lending, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

In order to take advantage of market opportunities in the future, and to maximize shareholder value over time, we will continue to focus on:

• expanding RAIT’s commercial real estate revenue by investing in commercial real estate-related assets, managing and servicing investments for our own account or for others, providing property management services and providing our broker-dealer activities, including fixed-income trading and real estate advisory services;

• creating value through investing in our commercial real estate properties and implementing cost savings programs to help maximize property value;

• reducing our leverage while developing new financing sources;

• managing our investment portfolios to reposition non-performing assets, increase our cash flows and ultimately recover the carrying value of our assets; and

• managing the size and cost structure of our business to match our operating environment.

We generated net income allocable to common shares of $68.7 million, or $0.82 per common share-diluted, during the nine-month period ended September 30, 2010. The primary items affecting our operating performance were the following:

• Gains on debt extinguishments. During the nine-month period ended September 30, 2010, we repurchased $102.8 million of our convertible notes and $26.5 million of our CDO notes payable for total consideration of $77.5 million. The consideration was comprised of: cash of $19.4 million, the issuance of a $22.0 million convertible senior note and 18.9 million common shares. These transactions generated $51.3 million in gains on extinguishment of debt. See “Liquidity and Capital Resources-Capitalization” below for more information regarding these transactions.

• Provision for losses. The provision for losses recorded during the nine-month period ended September 30, 2010 was $35.8 million. While we recorded additional provision for losses during the nine-month period ended September 30, 2010, we saw improvement in the performance of our portfolio of commercial real estate loans from prior quarters.

• Change in fair value of financial instruments. For the nine-month period ended September 30, 2010, the net change in fair value of financial instruments increased net income by $35.1 million. Generally, the change in fair value of our financial assets, which are recorded at fair value under FASB ASC Topic 825, “Financial Instruments”, was the primary driver of this improvement with several of our assets improving. This is consistent with the general improvement in asset pricing throughout the financial sector during the first and second quarters of 2010.

We expect to continue to focus our efforts on enhancing our commercial real estate property portfolio and our commercial real estate loan portfolio, which are our primary investment portfolios. We are seeing signs of stabilization in these portfolios, including improved occupancy rates in our commercial real estate property portfolio. Although certain economic conditions are improving, some of our borrowers within our commercial real estate loan portfolio are under financial stress. Where it is likely to enhance our ultimate returns, we will consider restructuring loans or foreclosing on the underlying property. During the nine-month period ended September 30, 2010, we converted seven loans into directly owned real estate. We expect to engage in ongoing workout activity with respect to our commercial real estate loans that may result in the conversion of some of the properties into owned real estate. We may take a non-cash charge to earnings at the time of any loan conversion to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion. The conversion of loans to owned properties is reflected in the growing portion of our revenue derived from rental income as opposed to net interest margin.

28

We are seeking to develop new sources of fee income. As described below under “Securitizations,” in April 2010 we sold or delegated our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations which will reduce our collateral management fees for managing securitizations going forward. We are seeking to enhance our fee income through management fees generated by our property management subsidiaries, Jupiter Communities, LLC and CRP Commercial Services, LLC, and commissions and other fees generated by our broker/dealer subsidiary, RAIT Securities, LLC, as well as other potential new businesses. We may also generate fee income by developing arrangements with third parties to originate commercial real estate investments.

Key Statistics

Set forth below are key statistics relating to our business through September 30, 2010 (dollars in thousands, except per share data):

	As of or For the Three-Month Periods Ended
	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009			September 30, 2009
Financial Statistics:
Recourse debt maturing within 1-year	$	7,919		$	9,919		$	10,905		$	24,390		$	49,494
Assets under management (a)	$	3,901,342		$	4,014,556		$	9,911,824		$	10,126,853		$	10,374,491
Debt to equity		2.6x			2.7x			2.8x			3.0x			3.3x
Total revenue	$	36,484		$	37,137		$	42,689		$	38,475		$	41,425
Earnings per share, diluted	$	0.16		$	0.27		$	0.41		$	0.24		$	(0.38	)
Commercial Real Estate (“CRE”) Loan Portfolio (b):
Reported CRE Loans—unpaid principal	$	1,216,875		$	1,288,466		$	1,305,816		$	1,360,811		$	1,467,806
Non-accrual loans—unpaid principal	$	143,212		$	131,377		$	132,978		$	171,372		$	246,029
Non-accrual loans as a % of reported loans		11.8	%		10.2	%		10.2	%		12.6	%		16.8	%
Reserve for losses	$	73,029		$	70,699		$	68,850		$	78,636		$	77,647
Reserves as a % of non-accrual loans		51.0	%		53.8	%		51.8	%		45.9	%		31.6	%
Provision for losses	$	10,813		$	7,644		$	17,350		$	22,500		$	18,467
CRE Property Portfolio:
Reported investments in real estate	$	823,881		$	803,548		$	795,952		$	738,235		$	645,484
Number of properties owned		47			47			46			39			34
Multifamily units owned		8,231			7,893			7,893			6,967			6,367
Office square feet owned		1,634,997			1,732,626			1,550,401			1,350,177			1,061,244
Retail square feet owned		1,069,588			1,069,588			1,069,652			1,069,643			1,069,643
Average physical occupancy data:
Multifamily properties		84.6	%		83.5	%		78.0	%		77.7	%		78.6	%
Office properties		52.5	%		55.5	%		54.2	%		48.2	%		53.6	%
Retail properties		57.7	%		58.7	%		60.1	%		58.0	%		57.6	%
Total		74.8	%		74.4	%		70.8	%		69.8	%		73.1	%

(a) On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations with $5.9 billion of assets to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced to $4.1 billion.

(b) CRE Loan Portfolio includes commercial mortgages, mezzanine loans, and preferred equity interests only and does not include other loans. See Note 3-“Investments in Loans” in the Notes to Consolidated Financial Statements for information relating to all loans held by RAIT.

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Investors should read the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate lack of liquidity and reduced performance.

Our Investment Portfolio

Our consolidated investment portfolio is currently comprised of the following asset classes:

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We have originated senior long-term mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. Our financing is usually “non-recourse.” Non-recourse financing means we look primarily to the assets securing the payment of the loan, subject to certain standard exceptions. We may also engage in recourse financing by requiring personal guarantees from controlling persons of our borrowers. We also acquire existing commercial real estate loans held by banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of September 30, 2010 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities		Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	710,539		6.7	%		Nov. 2010 to Dec. 2020		44
Mezzanine loans		414,939		9.3	%		Nov. 2010 to Nov. 2038		114
Preferred equity interests		82,014		9.8	%		Nov. 2011 to Aug. 2025		24
Total CRE Loans		1,207,492		7.8	%				182
Other loans		77,003		5.3	%		Nov. 2010 to Oct. 2016		5
Total investments in loans	$	1,284,495		7.6	%				187

Due to current economic conditions, we have limited capacity to originate new investments. However, we expect to focus on this asset class when economic conditions improve and as existing loans are repaid.

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The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of September 30, 2010:

(a) Based on book value.

See “Key Statistics-CRE Loan Portfolio” above for key statistics relating to this portfolio.

Investments in real estate. We generate a return on our real estate investments through rental income and other sources of income from the operations of the real estate underlying our investments. We also benefit from any increase in the value of the real estate in addition to current income. We finance our acquisitions of real estate through a combination of secured mortgage financing provided by financial institutions and existing financing provided by our two CRE loan securitizations. During the nine-month period ended September 30, 2010, we acquired $91.3 million of real estate investments upon conversion of $110.5 million of commercial real estate loans, usually subject to retaining the existing financing provided by our two CRE loan securitizations. Leases for our multi-family properties are generally one-year or less and leases on our office and retail properties are operating leases.

The table below describes certain characteristics of our investments in real estate as of September 30, 2010 (dollars in thousands, except average effective rent):

	Investments in Real Estate (a)		Average Physical Occupancy			Units / Square Feet / Acres		Number of Properties		Average Effective Rent (b)
Multi-family real estate properties (c)	$	560,048		84.6	%		8,231		33	$	713
Office real estate properties (d)		203,858		52.5	%		1,634,997		9		18.87
Retail real estate properties (d)		37,767		57.7	%		1,069,588		2		9.39
Parcels of land		22,208		—			7.3		3		—
Total	$	823,881		74.8	%				47

(a) Investments in real estate include $61.2 million of assets held for sale as of September 30, 2010.

(b) Based on operating performance for the nine-month period ended September 30, 2010.

(c) Average effective rent is rent per unit per month.

(d) Average effective rent is rent per square foot per year.

We expect to continue to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding loans that become subject to increased credit risks.

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The charts below describe the property types and the geographic breakdown of our investments in real estate as of September 30, 2010:

(a) Based on book value.

See “Key Statistics-CRE Property Portfolio” above for key statistics relating to this portfolio.

Investment in debt securities. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of September 30, 2010, we retained a controlling interest in two securitizations—Taberna VIII and Taberna IX, which are consolidated entities. All of the collateral assets for the debt securities and the related non-recourse CDO financing obligations are presented at fair value in our reported results.

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The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of September 30, 2010 (dollars in thousands):

						Issuer Statistics
Industry Sector	Estimated Fair Value		Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	97,148		2.6	%		67.7	%		1.5x
Office		143,849		7.8	%		65.8	%		1.5x
Residential Mortgage		44,252		2.3	%		80.2	%		3.9x
Specialty Finance		70,947		5.0	%		86.1	%		1.9x
Homebuilders		62,309		7.8	%		62.1	%		0.9x
Retail		73,466		3.8	%		82.0	%		1.6x
Hospitality		26,542		6.3	%		77.3	%		0.3x
Storage		24,738		8.0	%		59.9	%		3.9x
Total	$	543,251		5.2	%		72.1	%		1.7x

The chart below describes the equity capitalization of the issuers of the TruPS and subordinated debentures included in our consolidated financial statements as of September 30, 2010:

(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.

(b) Based on estimated fair value.

We have invested, and expect to continue to invest, in CMBS, unsecured REIT notes and other real estate-related debt securities.

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually. These companies are generally rated investment grade by one or more nationally recognized rating agencies.

CMBS generally are multi-class debt or pass-through certificates secured or backed by single loans or pools of mortgage loans on commercial real estate properties. Our CMBS investments may include loans and securities that are rated investment grade at the date of origination by one or more nationally-recognized rating agencies, as well as both unrated and non-investment grade loans and securities.

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The table and the chart below describe certain characteristics of our real estate-related debt securities as of September 30, 2010 (dollars in thousands):

Investment Description	Estimated Fair Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	62,546		6.6	%		7.0	$	61,000
CMBS receivables		72,578		6.0	%		33.3		158,868
Other securities		26,834		3.0	%		32.1		119,407
Total	$	161,958		5.0	%		28.3	$	339,275

(a) S&P Ratings as of September 30, 2010.

Securitization Summary

Overview. We have used securitizations, mainly through CDOs, to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolio for the long-term. To finance our investments in the foreseeable future, management will seek to structure match funded financing through reinvesting asset repayments in our existing securitizations, loan participations, bank lines of credit, joint-venture opportunities and other methods that preserve our capital while making investments that generate an attractive return.

CDO Performance. Our CDOs contain interest coverage and overcollateralization triggers, or OC Triggers, that must be met in order for us to receive our subordinated management fees, return on our lower-rated debt and residual equity returns. If the interest coverage or OC Triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant CDO indenture.

As of the most recent payment information, our Taberna I, Taberna VIII and Taberna IX CDO securitizations that we manage were not passing their required interest coverage or OC Triggers and we received only senior asset management fees. While events of default do not currently exist in the CDO securitizations that we manage, we are unable to predict with certainty which CDOs, in the future, will experience events of default or which, if any, remedies the appropriate note holders may seek to exercise in the future. All applicable interest coverage and OC Triggers continue to be met for our two commercial real estate CDOs, RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these CDOs. In September 2010, we reduced the amount of debt issued by our two commercial real estate securitizations, RAIT I and RAIT II, by cancelling $37.5 million in aggregate principal amount of non-recourse debt issued by those securitizations that we held.

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Set forth below is a summary of the CDO investments in our consolidated securitizations as of the most recent payment information is as follows (dollars in millions):

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $74.7 million is defaulted. The current O/C test is passing at 123.3% with an O/C trigger of 116.2%. We have invested $181.0 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees.

• RAIT II—RAIT II has $814.7 million of total collateral, of which $29.6 million is defaulted. The current O/C test is passing at 114.2% with an O/C trigger of 111.7%. We have invested $224.7 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees.

• Taberna VIII—Taberna VIII has $665.7 million of total collateral, of which $115.8 million is defaulted. The current overcollateralization (O/C) test is failing at 87.5% with an O/C trigger of 103.5%. We have invested $133.0 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $670.0 million of total collateral, of which $189.7 million is defaulted. The current O/C test is failing at 75.5% with an O/C trigger of 105.4%. We have invested $186.5 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

Generally, our investments in the subordinated notes and equity securities in our consolidated CDOs are subordinate in right of payment and in liquidation to the senior notes issued by the CDOs.

Assets Under Management

We use assets under management, or AUM, as a tool to measure our financial and operating performance. The following defines this measure and describes its relevance to our financial and operating performance:

Assets under management represent the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our financial performance. AUM includes our total investment portfolio and assets associated with unconsolidated CDOs for which we derive asset management fees.

The table below summarizes our assets under management as of September 30, 2010 and December 31, 2009 (dollars in thousands):

	Assets Under Management at September 30, 2010		Assets Under Management at December 31, 2009
Commercial real estate portfolio (1)	$	2,002,645	$	2,084,685
European portfolio (2)		—		1,878,601
U.S. TruPS portfolio (3)		1,898,010		6,162,790
Other investments		687		777
Total	$	3,901,342	$	10,126,853

(1) As of September 30, 2010 and December 31, 2009, our commercial real estate portfolio was comprised of $1.1 billion and $1.2 billion, respectively, of assets collateralizing RAIT I and RAIT II, $823.9 million and $738.2 million, respectively, of investments in real estate and $66.8 million and $106.6 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

(2) Our European portfolio as of December 31, 2009 was comprised of assets collateralizing Taberna Europe I and Taberna Europe II. On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced by $5.9 billion.

(3) Our U.S. TruPS portfolio as of December 31, 2009 was comprised of assets collateralizing Taberna I through Taberna IX, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans. On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced by $5.9 billion.

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REIT Taxable Income

To qualify as a REIT, we are required to make annual distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains and with regard to any applicable net operating loss carry-forward. In addition, to avoid certain U.S. federal excise taxes, we are required to make distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year, after applying all net operating losses not utilized in prior years. Because we expect to make distributions based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP.

Our board of trustees monitors RAIT’s REIT taxable income and all available net operating losses not utilized in prior years, and under its policy, will determine dividends when a full year of REIT taxable income is available. The board intends to declare a dividend, if any, in at least the amount necessary to maintain RAIT’s REIT status. The board will also consider the composition of any common dividends declared, including the option of paying a portion in cash and the balance in additional common shares. Generally, dividends payable in stock are not treated as dividends for purposes of the deduction for dividends, or as taxable dividends to the recipient. However, the Internal Revenue Service, in Revenue Procedure 2010-12, has given guidance with respect to certain stock distributions by publicly traded REITS. That Revenue Procedure applies to distributions made on or after January 1, 2008 and declared with respect to a taxable year ending on or before December 31, 2011. It provides that publicly-traded REITs can distribute stock (common shares in our case) to satisfy their REIT distribution requirements if stated conditions are met. These conditions include that at least 10% of the aggregate declared distributions be paid in cash and that the shareholders be permitted to elect whether to receive cash or stock, subject to the limit set by the REIT on the cash to be distributed in the aggregate to all shareholders. The board expects to continue to review and determine the dividends on RAIT’s preferred shares on a quarterly basis.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our shareholders, we believe that presenting the information management uses to calculate our net taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures as determined and reported by other companies.

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The table below reconciles the differences between reported net income (loss) total taxable income (loss) and estimated REIT taxable income (loss) for the three-month and nine-month periods ended September 30, 2010 and 2009 (dollars in thousands):

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2010			2009			2010			2009
Net income (loss), as reported	$	18,248		$	(21,789	)	$	78,077		$	(459,464	)
Add (deduct):
Provision for losses		10,813			18,467			35,807			204,067
Charge-offs on allowance for losses		(8,497	)		(2,757	)		(41,428	)		(122,013	)
Domestic TRS book-to-total taxable income differences:
Income tax (benefit) provision		(627	)		(216	)		(484	)		441
Fees received and deferred in consolidation		(198	)		—			(198	)		—
Stock compensation, forfeitures and other temporary tax differences		—			1,107			98			173
Capital loss carry-forward offsetting capital gains		—			—			(7,938	)		—
Asset impairments		—			—			—			46,015
Capital losses not offsetting capital gains and other temporary tax differences		615			61,841			615			375,649
Change in fair value of financial instruments, net of noncontrolling interests (1)		(14,237	)		3,808			(35,120	)		(10,002	)
Amortization of intangible assets		150			371			673			1,038
CDO investments aggregate book-to-taxable income differences (2)		(11,733	)		(12,202	)		(38,037	)		(49,757	)
Accretion of (premiums) discounts		—			—			—			(211	)
Other book to tax differences		2,386			85			5,019			142
Total taxable income (loss)		(3,080	)		48,715			(2,916	)		(13,922	)
Less: Taxable income attributable to domestic TRS entities		3,576			(473	)		5,422			(7,114	)
Plus: Dividends paid by domestic TRS entities		5,500			13			14,000			5,038
Less: Deductible preferred dividends		(3,406	)		(3,406	)		(10,227	)		(10,227	)
Estimated REIT taxable income (loss)(3)	$	2,590		$	44,849		$	6,279		$	(26,225	)

(1) Change in fair value of financial instruments is reported net of allocation to noncontrolling interests of $(22,258) for the nine-month period ended September 30, 2009.

(2) Amounts reflect the aggregate book-to-taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that Taberna consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between Taberna and its CDO investments.

(3) As of December 31, 2009, RAIT has an estimated tax net operating loss carry-forward of approximately $35.5 million that may be used to offset its REIT taxable income in the future.

Results of Operations

Three-Month Period Ended September 30, 2010 Compared to the Three-Month Period Ended September 30, 2009

Revenue

Investment interest income. Investment interest income decreased $19.1 million, or 33.9%, to $37.3 million for the three-month period ended September 30, 2010 from $56.4 million for the three-month period ended September 30, 2009. This net decrease was primarily attributable to a decrease in interest income of $8.6 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $220.6 million of commercial real estate loans that were converted to owned real estate since September 30, 2009 and $397.8 million in total principal amount of investments on non-accrual status as of September 30, 2010 compared to $363.7 million as of September 30, 2009.

Investment interest expense. Investment interest expense decreased $12.9 million, or 36.5%, to $22.4 million for the three-month period ended September 30, 2010 from $35.3 million for the three-month period ended September 30, 2009. This net decrease was primarily attributable to a decrease in interest expense of $8.0 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to repurchases of $102.8 million of our convertible senior notes since September 30, 2009, net of additional interest cost incurred for the issuance of new debt instruments associated therewith.

Rental income. Rental income increased $6.8 million, or 58.4%, to $18.4 million for the three-month period ended September 30, 2010 from $11.6 million for the three-month period ended September 30, 2009. This increase was primarily attributable to: $3.8 million resulting from 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since

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September 30, 2009, $1.6 million resulting from a full quarter of operations at four properties acquired or consolidated during the three-month period ended September 30, 2009 and $1.4 million resulting from increased occupancy at properties acquired or consolidated prior to July 1, 2009. Occupancy increased 5.4% to 79.2% as of September 30, 2010 from 73.8% as of September 30, 2009 for properties acquired or consolidated prior to July 1, 2009.

Fee and other income. Fee and other income decreased $5.5 million, or 63.3%, to $3.2 million for the three-month period ended September 30, 2010 from $8.7 million for the three-month period ended September 30, 2009. Fee income from our restructuring advisory services decreased $1.8 million for the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009 and asset management fees decreased $2.7 million due to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010.

Expenses

Real estate operating expense. Real estate operating expense increased $5.5 million, or 53.8%, to $15.6 million for the three-month period ended September 30, 2010 from $10.1 million for the three-month period ended September 30, 2009. This increase was primarily attributable to: $2.2 million resulting from 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since September 30, 2009, $2.0 million resulting from a full three months of operations at four properties acquired or consolidated during the three-month period ended September 30, 2009 and $1.3 million of higher operating expenses from properties acquired or consolidated prior to July 1, 2009.

Compensation expense. Compensation expense decreased $1.0 million, or 13.4%, to $6.8 million for the three-month period ended September 30, 2010 from $7.8 million for the three-month period ended September 30, 2009. This decrease is primarily due to lower stock compensation expense of $0.3 million and lower bonus expense of $0.3 million during the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009.

General and administrative expense. General and administrative expense decreased $1.1 million, or 19.3%, to $4.3 million for the three-month period ended September 30, 2010 from $5.4 million for the three-month period ended September 30, 2009. This decrease is primarily due to lower consulting and professional fees of $0.7 million and lower rent expenses of $0.2 million during the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009.

Provision for losses. During the three-month periods ended September 30, 2010 and 2009, the provision for losses related to our investments in our commercial mortgage loan portfolio decreased by $7.7 million, or 41.4%, to $10.8 million for the three-month period ended September 30, 2010 from $18.5 million for the three-month period ended September 30, 2009. Subsequent to September 30, 2009, we transitioned 12 loans to real estate owned properties, with direct real estate investments of $188.5 million, including one property that was sold and one asset held for sale, and realized losses of $32.1 million when these loans were converted from impaired loans to owned real estate. While we believe we have adequately reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Depreciation expense. Depreciation expense increased $2.1 million, or 43.1%, to $7.2 million for the three-month period ended September 30, 2010 from $5.1 million for the three-month period ended September 30, 2009. This increase was primarily attributable to 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since September 30, 2009.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense decreased $0.2 million, or 59.6%, to $0.2 million for the three-month period ended September 30, 2010 from $0.4 million for the three-month period ended September 30, 2009. This decrease resulted from a $6.2 million charge-off to net intangible assets in connection with the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010.

Other Income (Expense)

Gains (losses) on sale of assets. During the three-month period ended September 30, 2009, losses on sale of assets are attributable solely to the disposition of our residential mortgage portfolio. On July 16, 2009, we sold all of our retained interests in our six residential mortgage securitizations and recorded losses on sales of assets of $61.8 million.

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended September 30, 2010 are attributable to the repurchase of $28.3 million in aggregate principal amount of convertible senior notes and $10.0 million in aggregate principal amount of CDO notes payable. The aggregate debt was repurchased from the market for 10,725,000 of our common shares and $4.9 million of cash. As a result of these repurchases, we recorded gains on extinguishment of debt of $14.3 million.

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Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the three-month periods ended September 30, 2010 and 2009, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended September 30,  2010			For the Three-Month Period Ended September 30,  2009
Change in fair value of trading securities and security-related receivables	$	26,004		$	13,300
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		7,555			7,445
Change in fair value of derivatives		(19,322	)		(24,553	)
Change in fair value of financial instruments	$	14,237		$	(3,808	)

Discontinued operations. Income (loss) from discontinued operations decreased $3.0 million to a loss of $2.6 million for the three-month period ended September 30, 2010 compared to income of $0.4 million for the three-month period ended September 30, 2009 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a loss of $2.9 million on a property that was deconsolidated in August 2010 and a gain of $0.5 million on a property that was sold in July 2009.

Nine-Month Period Ended September 30, 2010 Compared to the Nine-Month Period Ended September 30, 2009

Revenue

Investment interest income. Investment interest income decreased $220.1 million, or 65.1%, to $117.8 million for the nine-month period ended September 30, 2010 from $337.9 million for the nine-month period ended September 30, 2009. This net decrease was primarily attributable to decreases in interest income of: $80.9 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $106.5 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $220.6 million of commercial real estate loans that were converted to owned real estate since September 30, 2009, $397.8 million in total principal amount of investments on non-accrual status as of September 30, 2010 compared to $363.7 million as of September 30, 2009, and the reduction in short-term LIBOR of approximately 0.4% during the nine-month period ended September 30, 2010 compared to the nine-month period ended September 30, 2009.

Investment interest expense. Investment interest expense decreased $161.0 million, or 69.9%, to $69.2 million for the nine-month period ended September 30, 2010 from $230.2 million for the nine-month period ended September 30, 2009. This net decrease was primarily attributable to decreases in interest expense of: $43.6 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $98.6 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to repurchases of $102.8 million of our convertible senior notes since September 30, 2009, net of additional interest cost incurred for the issuance of new debt instruments associated therewith, and the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 0.4% during the nine-month period ended September 30, 2010 compared to the nine-month period ended September 30, 2009.

Rental income. Rental income increased $21.0 million, or 67.6%, to $52.2 million for the nine-month period ended September 30, 2010 from $31.2 million for the nine-month period ended September 30, 2009. This increase was primarily attributable to: $8.3 million resulting from 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since September 30, 2009, $9.9 million resulting from a full nine months of operations in 2010 at 20 properties acquired or consolidated during the nine-month period ended September 30, 2009 and $2.8 million resulting from increased occupancy at properties acquired or consolidated prior to January 1, 2009. Occupancy increased 3.5% to 82.9% as of September 30, 2010 from 79.4% as of September 30, 2009 for properties acquired or consolidated prior to January 1, 2009.

Fee and other income. Fee and other income decreased $4.6 million, or 23.1%, to $15.6 million for the nine-month period ended September 30, 2010 from $20.2 million for the nine-month period ended September 30, 2009. Fee income from our restructuring advisory services decreased $2.8 million for the nine-month period ended September 30, 2010 compared to the nine-month period ended September 30, 2009 and asset management fees decreased $3.6 million due to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010. We generated $1.5 million of riskless principal trade income through our broker-dealer during the three-month period ended September 30, 2010.

Expenses

Real estate operating expense. Real estate operating expense increased $14.5 million, or 51.3%, to $42.8 million for the nine-month period ended September 30, 2010 from $28.3 million for the nine-month period ended September 30, 2009. This increase was primarily attributable to: $6.5 million resulting from 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since September 30, 2009, $7.6 million resulting from a full nine months of operations at 20 properties acquired or consolidated during the nine-month period ended September 30, 2009 and $0.4 million of higher operating expenses from properties acquired or consolidated prior to January 1, 2009.

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Compensation expense. Compensation expense increased $2.2 million, or 11.5%, to $21.7 million for the nine-month period ended September 30, 2010 from $19.5 million for the nine-month period ended September 30, 2009. This increase was primarily due to an increase of $1.4 million of compensation costs associated with the property management activities that were acquired in May 2009 and $2.1 million due to the expansion of our broker-dealer and advisory activities offset by $0.8 million of lower bonus expense.

General and administrative expense. General and administrative expense decreased $0.3 million, or 2.1%, to $14.6 million for the nine-month period ended September 30, 2010 from $14.9 million for the nine-month period ended September 30, 2009. This decrease is primarily due to lower rent expenses of $0.4 million during the nine-month period ended September 30, 2010 compared to the nine-month period ended September 30, 2009.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan and residential mortgage portfolios. The provision for losses decreased by $168.3 million, or 82.5%, to $35.8 million for the nine-month period ended September 30, 2010 from $204.1 million for the nine-month period ended September 30, 2009. This decrease was primarily attributable to $96.5 million of provision for losses related to our residential mortgage portfolio during the nine-month period ended September 30, 2009 which was disposed during July 2009. Subsequent to September 30, 2009, we transitioned 12 loans to real estate owned properties, with direct real estate investments of $188.5 million, including one property that was sold and one asset held for sale, and realized losses of $32.1 million when these loans were converted from impaired loans to owned real estate. While we believe we have adequately reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Asset impairments. For the nine-month period ended September 30, 2009, we recorded asset impairments totaling $46.0 million that were associated with certain investments in loans and available-for-sale securities for which we did not elect the fair value option. In making this determination, management considered the estimated fair value of the investments in relation to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value.

Depreciation expense. Depreciation expense increased $6.3 million, or 46.2%, to $19.9 million for the nine-month period ended September 30, 2010 from $13.6 million for the nine-month period ended September 30, 2009. This increase was primarily attributable to 11 new properties, with direct real estate investments of $182.9 million, acquired or consolidated since September 30, 2009 as well as increased depreciation of furniture and fixtures we added since September 30, 2009.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense decreased $0.3 million, or 35.2%, to $0.7 million for the nine-month period ended September 30, 2010 from $1.0 million for the nine-month period ended September 30, 2009. This decrease resulted from a $6.2 million charge-off to net intangible assets in connection with the sale of our collateral management rights in eight Taberna securitizations during April 2010.

Other Income (Expense)

Gains (losses) on sale of assets. Gains on sale of assets were $11.6 million during the nine-month period ended September 30, 2010. The gains on sale of assets are primarily attributable to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16.5 million. These securitizations were not consolidated by us and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. This transaction generated a $7.9 million gain on sale of assets. In addition, we disposed of $11.4 million in total principal amount of unsecured REIT note receivables in our CRE securitizations and recorded a gain of $3.8 million. Losses on sale of assets were $375.6 million during the nine-month period ended September 30, 2009. Losses on sale of assets are primarily attributable to the deconsolidation of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and concluded that we were no longer the primary beneficiary of the securitizations and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation”. We recorded losses on sale of assets of $313.8 million for the nine-month period ended September 30, 2009. During the nine-month period ended September 30, 2009, we sold all of our retained interests in our six residential mortgage securitizations and recorded losses on sales of assets of $61.8 million.

Gains on extinguishment of debt. Gains on extinguishment of debt during the nine-month period ended September 30, 2010 are attributable to the repurchase of $102.8 million in aggregate principal amount of convertible senior notes and $26.5 million in

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aggregate principal amount of CDO notes payable. The aggregate debt was repurchased from the market for 18,915,000 of our common shares, the issuance of a $22.0 million senior secured convertible note and $16.9 million of cash. As a result of these repurchases, we recorded gains on extinguishment of debt of $51.3 million.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the nine-month periods ended September 30, 2010 and 2009, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Nine-Month Period Ended September 30,  2010			For the Nine-Month Period Ended September 30,  2009
Change in fair value of trading securities and security-related receivables	$	109,003		$	(168,736	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(891	)		159,039
Change in fair value of derivatives		(72,992	)		(2,559	)
Change in fair value of financial instruments	$	35,120		$	(12,256	)

Discontinued operations. Income (loss) from discontinued operations decreased $0.7 million to a loss of $1.6 million for the nine-month period ended September 30, 2010 compared to a loss of $0.9 million for the nine-month period ended September 30, 2009 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a loss of $2.9 million on a VIE that was deconsolidated in August 2010 offset by a gain of $0.3 million on a property that was sold in March 2010 compared to a loss of $2.1 million on a property that was deconsolidated in March 2009 offset by a gain of $0.5 million on a property that was sold in July 2009.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. The disruption in the credit markets has reduced our liquidity and capital resources, limited our ability to originate new investments and has generally increased the cost of any new sources of capital over historical levels. Due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced or eliminated. We are seeking to expand our use of secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments to generate attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements.

Our consolidated securitizations collateralized by U.S. commercial real estate loans, RAIT I and RAIT II, continue to perform and make distributions on our retained interests and pay us management fees. In addition, the restricted cash in these securitizations from repayment of underlying loans and other sources can be used to make new investments held by those securitizations, including future funding commitments of existing investments. As we continue to recycle capital obtained from loan sales and loan repayments in these securitizations, we expect to reinvest the proceeds to fund commercial real estate loans. RAIT I and RAIT II are our primary source of cash from our operations. While our consolidated securitizations collateralized by trust preferred securities, or TruPS, Taberna VIII and Taberna IX, are currently failing several of their respective over-collateralization tests, we continue to receive our senior management fees from these securitizations. We continue to explore strategies to generate liquidity from our investments in real estate and our investments in debt securities as we seek to focus on our commercial real estate lending platform.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that our assets could be sold directly to raise additional cash. We may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

• to repay our indebtedness, including repurchasing or retiring our debt before it becomes due;

• to pay our expenses, including compensation to our employees;

• to pay U.S. federal, state, and local taxes of our TRSs; and

• to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

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We intend to meet these liquidity requirements primarily through the following:

• the use of our cash and cash equivalent balances of $25.7 million as of September 30, 2010;

• cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our commercial real estate platform;

• proceeds from the sales of assets;

• proceeds from future borrowings; and

• proceeds from future offerings of our common and preferred shares, including our COD sales agreement, SEDA and DRSPP Plan.

Our two commercial real estate securitized financing arrangements, RAIT I and RAIT II, include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts through the fifth anniversary of each financing in 2011 and 2012. At September 30, 2010, these revolvers are fully utilized and have no additional capacity.

Our restricted cash balance was $196.4 million as of September 30, 2010. We have $72.0 million of restricted cash in RAIT I and RAIT II available to invest in qualifying commercial loans as of September 30, 2010, subject to $51.3 million of future funding commitments, leaving $20.7 million available to lend. Accordingly, this $72.0 million of restricted cash is not available to RAIT’s creditors or for other general trust purposes. As of September 30, 2010, $85.5 million of restricted cash is held by Taberna VIII and Taberna IX. This restricted cash reflects early prepayments of principal, including $33.2 million that occurred during the quarter-ended September 30, 2010, that cannot be used for any other general trust purposes.

Cash Flows

As of September 30, 2010 and 2009, we maintained cash and cash equivalents of approximately $25.7 million and $39.9 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Nine-Month Periods Ended September 30
	2010			2009
Cash flow from operating activities	$	5,467		$	75,518
Cash flow from investing activities		43,038			243,583
Cash flow from financing activities		(47,859	)		(306,658	)
Net change in cash and cash equivalents		646			12,443
Cash and cash equivalents at beginning of period		25,034			27,463
Cash and cash equivalents at end of period	$	25,680		$	39,906

Our principal source of cash flow historically has been from our investing activities. The cash inflow from our investing activities primarily resulted from $79.8 million in principal repayments on loans during the nine-month period ended September 30, 2010 as compared to $264.1 million during the nine-month period ended September 30, 2009. We received $18.0 million during the nine-month period ended September 30, 2010 in proceeds from the sale of other securities and $16.2 million in net proceeds from the sale of collateral management rights. We did not receive any proceeds from these investing activities during the nine-month period ended September 30, 2009. In addition, the increase in our restricted cash of $45.8 million during the nine-month period ended September 30, 2010 was substantially due to loan repayments in our securitizations. The increase in restricted cash for the nine-month period ended September 30, 2009 was $0.8 million.

Our decreased cash inflow from operating activities is primarily due to the disposition of the Taberna III, Taberna IV, Taberna VI, and Taberna VII securitizations in June 2009 and from the disposition of the residential mortgage portfolio in July 2009.

The cash outflow from financing activities was driven by repurchases of convertible notes of $12.4 million, repayments on secured credit facilities and other indebtedness of $14.1 million, and repurchases of CDO notes payable of $17.4 million for the nine-month period ended September 30, 2010. These outflows were offset by proceeds from common share issuances of $6.4 million for the nine-month period ended September 30, 2010. The improvement in our cash flow from financing activities during the nine-month period ended September 30, 2010 is primarily due to a reduction in the repayments on residential mortgage-backed securities. This portfolio was sold in July 2009 and repayments on residential mortgage-backed securities were $223.3 million during the nine-month period ended September 30, 2009.

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Capitalization

We maintain various forms of long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs. The following table summarizes our total recourse and non-recourse indebtedness as of September 30, 2010:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	143,613	$	143,447		6.9	%		Apr. 2027
Secured credit facilities		38,736		38,736		4.7	%		Feb. 2011 to Dec. 2011
Senior secured notes		63,950		63,950		11.7	%		Apr. 2014
Loans payable on real estate		22,432		22,432		5.5	%		Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		4,422		9.2	%		Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		331,883		298,087		7.8	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,370,250		1,370,250		0.7	%		2045 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,172,505		147,473		1.0	%		2037 to 2038
Loans payable on real estate		63,375		63,375		5.8	%		Nov. 2010 to Aug. 2016
Total non-recourse indebtedness		2,606,130		1,581,098		1.0	%
Total indebtedness	$	2,938,013	$	1,879,185		1.8	%

(1) Our convertible senior notes are redeemable, at par at the option of the holder, in April 2012, April 2017, and April 2022.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1.8 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1.3 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2010 was $896.1 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $298.1 million as of September 30, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (such as CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the nine-month period ended September 30, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the nine-month period ended September 30, 2010, we repurchased $102.8 million in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $72.6 million. The purchase price consisted of $12.4 million in cash, the issuance of 18.2 million common shares, and the issuance of a $22.0 million 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $30.0 million, net of deferred financing costs and unamortized discounts that were written off.

Secured credit facilities. As of September 30, 2010, we have borrowed an aggregate amount of $38.7 million under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of September 30, 2010, the first secured credit facility had an unpaid principal balance of $20.6 million which is payable in December 2011 under the current terms of this facility. As of September 30, 2010, the second secured credit facility had an unpaid principal balance of $16.2 million which is payable in October 2011 under the current terms of this facility. As of September 30, 2010, the third secured credit facility had an unpaid principal balance of $2.0 million. We are amortizing this balance with monthly principal repayments of $0.5 million which will result in the full repayment of this credit facility by February 2011.

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Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47.0 million aggregate principal amount of our convertible senior notes for a total consideration of $31.2 million. The purchase price consisted of (a) our issuance of the $22.0 million senior secured convertible note, (b) 1.5 million common shares issued, and (c) $6.0 million in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1.4 million of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1.1 million principal amount of the senior secured convertible note into 0.3 million common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly-owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Junior subordinated notes, at fair value. On October 25, 2010, pursuant to a securities exchange agreement, we exchanged $18.7 million in aggregate principal amount of the junior subordinated notes with an interest rate of 8.7% for $18.7 million of junior subordinated notes with a reduced interest rate and provided $5.0 million of our convertible senior notes as collateral for the new junior subordinated notes. The new junior subordinated notes have a fixed rate of interest of 0.5% through March 30, 2015, thereafter with a floating rate of three-month LIBOR plus 400 basis points, with such floating rate not to exceed 7.0%. The maturity date remains the same at March 30, 2035. At issuance, we elected to record these junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their interest coverage and overcollateralization triggers, or OC Triggers, tests as of September 30, 2010.

During the nine-month period ended September 30, 2010, we repurchased, from the market, a total of $26.5 million in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $4.8 million and we recorded a gain on extinguishment of debt of $21.3 million, net of deferred financing costs that were written off.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC Trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC Trigger test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC Trigger test failures are due to defaulted collateral assets and credit risk securities. During the nine-month period ended September 30, 2010, $12.6 million of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Equity Financing.

Preferred Shares

On January 26, 2010, our board of trustees declared first quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled $3.4 million.

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On April 22, 2010, our board of trustees declared second quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2010 to holders of record on June 1, 2010 and totaled $3.4 million.

On July 27, 2010, our board of trustees declared third quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on September 30, 2010 to holders of record on September 1, 2010 and totaled $3.4 million.

On October 28, 2010, our board of trustees declared fourth quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on December 31, 2010 to holders of record on December 1, 2010.

Common Shares

Share Repurchases:

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares was $0.2 million and was used to purchase 0.2 million common shares, in the aggregate, in March 2010.

Equity Compensation:

On January 26, 2010, the compensation committee awarded 1.5 million phantom units, valued at $1.9 million using our closing stock price of $1.27 on that date, to our executive officers. Half of these awards vested immediately and the remainder vests in one year from the date of grant. On January 26, 2010, the compensation committee awarded 0.5 million phantom units, valued at $0.6 million using our closing stock price of $1.27 on that date, to our non-executive officer employees. These awards generally vest over three-year periods.

During the nine-month period ended September 30, 2010, 0.1 million phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

Share Issuances:

During the nine-month period ended September 30, 2010, we issued 18.9 million common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $102.8 million of our convertible notes.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we have registered and reserved for issuance, in the aggregate, 18.8 million common shares. During the nine-month period ended September 30, 2010, we issued a total of 1.9 million common shares pursuant to the DRSPP at a weighted-average price of $2.29 per share and we received $4.4 million of proceeds. As of September 30, 2010, 11.7 million common shares, in aggregate, remain available for issuance under the DRSPP.

Standby Equity Distribution Agreement (SEDA):

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50.0 million, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12.5 million common shares. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50.0 million worth of common shares under the SEDA. During the period from the effective date of the SEDA through September 30, 2010, 1.2 million common shares were issued pursuant to this arrangement at a weighted average price of $2.17 and we received $2.5 million of proceeds. As of September 30, 2010, 11.3 million common shares, in the aggregate, remain available for issuance under the SEDA.

Capital on Demand™ Sales Agreement:

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 17.5 million of our common shares from

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time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. During the period from the effective date of the COD sales agreement through September 30, 2010, 0.5 million common shares were issued pursuant to this arrangement at a weighted average price of $1.57 and we received $0.9 million of proceeds. In October 2010, 1.6 million common shares were issued pursuant to the COD sales agreement at a weighted average price of $1.74 and we received $2.8 million of proceeds. After reflecting the common shares issued in October 2010, 15.4 million common shares, in the aggregate, remain available for issuance under the COD sales agreement.

Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a discussion of our critical accounting policies. On January 1, 2010 we adopted several new accounting pronouncements and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as of September 30, 2010. Management discusses our critical accounting policies and management’s judgments and estimates with our Audit Committee.

Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements.

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and requires a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This accounting standard update is to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Existing disclosure guidance is amended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses and to disclose credit quality indicators, past due information, and modifications of its financing receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the impact that this accounting standard update may have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and equity prices. In pursuing our business plan, the primary market risks to which we are exposed are interest rate risk and credit risk. Changes in the general level of interest rates prevailing in the financial markets may affect the spread between our yield on invested assets and cost of funds and, in turn, our ability to make distributions or payments to our shareholders. In the event of a significant rising interest rate environment, defaults could increase and result in losses to us which adversely affect our operating results and liquidity. In the current global recession, defaults have increased and resulted in losses to us which have adversely affected, and we expect will continue to adversely affect, our operating results and liquidity.

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There have been no material changes in Quantitative and Qualitative disclosures during the nine-month period ended September 30, 2010 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2009. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three-month period ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Riverside National Bank of Florida Litigation

RAIT subsidiary Taberna Capital Management, LLC is one of fifteen defendants in a lawsuit by the Federal Deposit Insurance Corporation, as Receiver for Riverside National Bank of Florida. The lawsuit was originally commenced by Riverside on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, and subsequently discontinued without prejudice and refiled in New York County on November 13, 2009. On April 16, 2010, the Office of the Comptroller of the Currency closed Riverside and named the FDIC as receiver and thus as successor-in-interest to Riverside as plaintiff in the action. On June 3, 2010, the defendants removed the case to the United States District Court for the Southern District of New York. The action, now titled FDIC v. The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., Fitch, Inc., Taberna Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., JPMorgan Chase & Co., J.P. Morgan Securities Inc., Citigroup Global Markets, Credit Suisse Securities (USA) LLC, ABN Amro, Inc., Cohen & Company, and SunTrust Robinson Humphrey, Inc., asserts claims in connection with Riverside’s purchase of certain CDO securities, including securities from the Taberna Preferred Funding II, IV, and V CDOs. Riverside alleges that offering materials issued in connection with the CDOs it purchased did not adequately disclose the process by which the rating agencies rated each of the securities. Riverside also alleges, among other things, that the offering materials should have disclosed an alleged conflict of interest of the rating agencies as well as the role that the rating agencies played in structuring each CDO. Riverside seeks damages in excess of $132 million, rescission of its purchases of the securities at issue, an accounting of certain amounts received by the defendants together with the imposition of a constructive trust, and punitive damages of an unspecified amount.

On June 25, 2010, the federal court directed the parties to refile papers supporting and opposing the defendants’ motions to dismiss, which had been filed in state court but not argued or decided. On August 20, 2010, the court granted the FDIC’s motion for substitution of counsel and to stay the action for 90 days, and on October 28, 2010, it granted an additional 90-day stay at the FDIC’s request. Defendants must refile their motions to dismiss or answer Plaintiff’s complaint by February 23, 2011. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business

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activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 5. Other Information

(1) The disclosure below is intended to satisfy any obligation of ours to provide disclosure pursuant to clause (e) of Item 5.02- “Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers” of Form 8-K.

As previously reported by RAIT in a current report on Form 8-K filed on September 28, 2010 , on September 22, 2010, Betsy Z. Cohen, RAIT’s Chairman of the Board and a Trustee, advised the Board of Trustees of RAIT (the “Board”) that she planned to retire as Chairman of the Board and as a Trustee of RAIT effective December 31, 2010. On November 4, 2010, Mrs. Cohen delivered formal written notice (the “Termination Notice”) of her termination of her employment agreement with RAIT effective December 31, 2010. In connection with Mrs. Cohen’s planned retirement, on November 4, 2010, RAIT entered into a consulting agreement (the “Consulting Agreement”) with Mrs. Cohen to be in effect from January 1, 2011 through March 31, 2011. Under the Consulting Agreement, Mrs. Cohen agreed to consult with the executive officers and Board of RAIT with respect to such matters as may be reasonably requested by RAIT and RAIT agreed to reimburse her for all reasonable travel and other expenses incurred in the performance of her duties under the Consulting Agreement and provide her with office space and appropriate secretarial services. The foregoing description of the Termination Notice and Consulting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Termination Notice and Consulting Agreement filed as Exhibits 10.7 and 10.8 hereto, respectively, and incorporated herein by reference.

(2) The disclosure below is intended to satisfy any obligation of ours to provide disclosure pursuant to Item 8.01- “Other Events” of Form 8-K.

RAIT Financial Trust (“RAIT”) is re-issuing in an updated format its historical financial statements in connection with FASB ASC Topic 360, “Property, Plant, and Equipment.” During the quarter ended September 30, 2010, RAIT identified three properties as held for sale and, in compliance with this accounting standard, determined that it should report revenue and expenses associated with these properties as discontinued operations for each period presented in its 2009 historical annual and 2010 quarterly reports (including the comparable prior periods). Under SEC requirements, these reclassifications as discontinued operations required by this accounting standard following the identification of a property as held for sale or sold is required for previously issued annual and quarterly financial statements for each of the three years shown in RAIT’s last annual report on Form 10-K and for the interim periods presented in its quarterly reports on Form 10-Q during 2010, if those financials are incorporated by reference in subsequent filings with the SEC made under the Securities Act of 1933, as amended, even though those financial statements relate to periods prior to the date of the sale. This reclassification has no effect on RAIT’s reported net income.

This report on Form 10-Q updates Items 1, 2, 6, 7, and 8 of RAIT’s 2009 Form 10-K and Items 1 and 2 of the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, filed on May 7, 2010 and August 9, 2010, respectively, to reflect the properties reclassified as discontinued operations during the quarter ended September 30, 2010. No attempt has been made to update matters in the Annual Report on Form 10-K or Quarterly Reports referred to above, except to the extent expressly provided above.

Financial statements for the required periods, revised to reflect the reclassifications referred to above, are set forth in Exhibits 99.3 through 99.9 of this report on Form 10-Q. Disclosure for Items 1 and 2 of RAIT’s 2009 Form 10-K, revised to reflect such reclassifications, are set forth in Exhibits 99.1 and 99.2 of this report on Form 10-Q. The Ratio of Earnings to Fixed Charges and Preferred Share Dividends in RAIT’s 2009 Form 10-K, revised to reflect the reclassifications referred to above, are set forth in Exhibit 12.1 of this Report on Form 10-Q.

Item 6. Exhibits

(a) Exhibits

The exhibits filed as part of this quarterly report on Form 10-Q are identified in the exhibit index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RAIT FINANCIAL TRUST (Registrant)
Date: November 5, 2010	By:	/s/    Scott F. Schaeffer
		Scott F. Schaeffer, Chief Executive Officer and President
		(On behalf of the registrant and as its Principal Executive Officer)
Date: November 5, 2010	By:	/s/    Jack E. Salmon
		Jack E. Salmon, Chief Financial Officer and Treasurer
		(On behalf of the registrant and as its Principal Financial Officer)
Date: November 5, 2010	By:	/s/    James J. Sebra
		James J. Sebra, Senior Vice President-Finance and Chief Accounting Officer
		(On behalf of the registrant and as its Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Documents
3.1	Amended and Restated Declaration of Trust. (1)
3.1.1	Articles of Amendment to Amended and Restated Declaration of Trust. (2)
3.1.2	Articles of Amendment to Amended and Restated Declaration of Trust. (3)
3.1.3	Certificate of Correction to the Amended and Restated Declaration of Trust. (4)
3.1.4	Articles of Amendment to Amended and Restated Declaration of Trust. (5)
3.1.5	Articles Supplementary relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Articles Supplementary”). (6)
3.1.6	Certificate of Correction to the Series A Articles Supplementary. (6)
3.1.7	Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (7)
3.1.8	Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
3.2	By-laws. (9)
4.1	Form of Certificate for Common Shares of Beneficial Interest. (5)
4.2	Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest. (10)
4.3	Form of Certificate for 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (7)
4.4	Form of Certificate for 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
4.5	Indenture dated as of April 18, 2007 among RAIT Financial Trust, as issuer, or RAIT, RAIT Partnership, L.P. and RAIT Asset Holdings, LLC, as guarantors, and Wells Fargo Bank, N.A., as trustee. (11)
4.6	Registration Rights Agreement dated as of April 18, 2007 between RAIT and Bear, Stearns & Co. Inc. (11)
10.1	Standby Equity Distribution Agreement dated as of January 13, 2010 by and between YA Global Master SPV Ltd. and RAIT. (12)
10.2	RAIT Financial Trust 2008 Incentive Award Plan Form of Unit Award to Cover Grants to Compensation Committee Officers adopted January 26, 2010. (13)
10.3	Form of Letter Agreement between RAIT and each of its Non-Management Trustees dated as of January 26, 2010. (13)
10.4	Exchange Agreement dated as of March 25, 2010 between RAIT and United Equities Commodities Company. (14)
10.5	10.0% Senior Secured Convertible Note due 2014 dated as of March 25, 2010 issued by RAIT, as payor, to United Equities Commodities Company, as payee. (14)
10.6	Capital on Demand Sales Agreement dated as of August 6, 2010 between RAIT, RAIT Partnership, L.P., a Delaware limited partnership and JonesTrading Institutional Services LLC. (15)
10.7	Termination Notice from Betsy Z. Cohen to RAIT Financial Trust dated as of November 4, 2010.
10.8	Consulting Agreement between RAIT Financial Trust and Betsy Z. Cohen dated as of November 4, 2010.
12.1	Statements regarding computation of ratios.
15.1	Awareness Letter from Independent Registered Public Accounting Firm (Grant Thornton LLP).
23.1	Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).
31.1	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
31.2	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
32.1	Certification Pursuant to 18 U.S.C. Section 1350.
32.2	Certification Pursuant to 18 U.S.C. Section 1350.
99.1	2009 Annual Report Item 1—Business.

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Exhibit Number	Description of Documents
99.2	2009 Annual Report Item 2—Properties.
99.3	2009 Annual Report Item 6—Selected Financial Data.
99.4	2009 Annual Report Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
99.5	2009 Annual Report Item 8—Financial Statements and Supplementary Data.
99.6	First Quarter 2010 Quarterly Report Item 1—Financial Statements.
99.7	First Quarter 2010 Quarterly Report Item 2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
99.8	Second Quarter 2010 Quarterly Report Item 1—Financial Statements.
99.9	Second Quarter 2010 Quarterly Report Item 2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

(1) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077).

(2) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067).

(3) Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518).

(4) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended March 31, 2002 (File No. 1-14760).

(5) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 15, 2006 (File No. 1-14760).

(6) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

(7) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

(8) Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

(9) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 19, 2009 (File No. 1-14760).

(10) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760).

(11) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 18, 2007 (File No. 1-14760).

(12) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 13, 2010 (File No. 1-14760).

(13) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 29, 2010 (File No. 1-14760).

(14) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 25, 2010 (File No. 1-14760).

(15) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2010 (File No. 1-14760).

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EX-10.7

Exhibit 10.7

Betsy Z. Cohen

as of November 4, 2010

Scott F. Schaeffer

Chief Executive Officer and President

RAIT Financial Trust

Cira Centre

2929 Arch Street, 17^th Floor

Philadelphia, Pennsylvania 19104

To the Chief Executive Officer and President:

This letter is formal notification of my retirement effective as of December 31, 2010 from the Board of Trustees (the “Board”) of RAIT Financial Trust (“RAIT”), as Chairman of the Board and from any other positions held by me with RAIT and its subsidiaries. My retirement is not because of any disagreement with RAIT on any matter relating to RAIT’s operations, policies or practices. This letter also serves as the prior written notice of my voluntary termination effective as of December 31, 2010 of the Employment Agreement dated as of December 11, 2006, as amended, between myself and RAIT in accordance with Section 2.2 thereof.

Yours sincerely,

/S/ BETSY Z. COHEN

Betsy Z. Cohen

cc:	Raphael Licht
	Chief Operating Officer and Secretary
	RAIT Financial Trust

EX-10.8

Exhibit 10.8

RAIT Financial Trust

Cira Centre

2929 Arch Street, 17^th Floor

Philadelphia, PA 19104

November 4, 2010

Betsy Z. Cohen

c/o RAIT Financial Trust

Cira Centre

2929 Arch Street, 17^th Floor

Philadelphia, PA 19104

Re: Consulting Agreement

Dear Betsy:

The purpose of this letter is to memorialize our mutual understanding as to the consulting services that you have agreed to perform for RAIT Financial Trust (“RAIT”) following your ceasing to be an employee of RAIT as a result of your retirement as Chairman of the Board of Trustees of RAIT (the “Board”) and as a member of the Board, which retirement is to become effective on December 31, 2010. Specifically, for the period from January 1, 2011 through March 31, 2011 (the “Consulting Period”), you agree to be a consultant for RAIT and perform consulting services for RAIT, which consulting services require you to consult with the executive officers, as well as the Board, with respect to such matters as may be reasonably requested by RAIT (collectively, the “Consulting Services”).

In consideration for these Consulting Services, during the Consulting Period, RAIT will reimburse you for all of your reasonable travel and other expenses incurred by you in connection with the performance of the Consulting Services in accordance with RAIT’s expense reimbursement policies and provide you with office space and appropriate secretarial support. However, as a consultant, you will not be an employee of RAIT and will not be entitled to participate in or receive any benefit or right as a RAIT employee under any RAIT employee benefit plan or pension plan. In addition, you are responsible for all income taxes, employment taxes and workers’ compensation insurance associated with the compensation you receive pursuant to this letter agreement and you agree that RAIT will not withhold or pay any of the foregoing in connection with your services to RAIT.

If the foregoing correctly sets forth your understanding of our agreement relating to the matters set forth in this letter agreement, please so indicate by signing below.

Sincerely,

/S/    SCOTT F. SCHAEFFER

Scott F. Schaeffer

Chief Executive Officer and President

ACCEPTED AND AGREED TO:

/S/    BETSY Z. COHEN

Betsy Z. Cohen

EX-12.1

Exhibit 12.1

RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARE DIVIDENDS

Our ratio of earnings to fixed charges and preferred share dividends for the periods indicated are set forth below. For purposes of calculating the ratios set forth below, earnings represent net income from continuing operations from our consolidated statements of operations, as adjusted for fixed charges; and fixed charges represent interest expense and preferred share dividends from our consolidated statements of operations.

The following table presents our ratio of earnings to fixed charges and preferred share dividends for the five years ended December 31, 2009 (dollars in thousands):

	For the Years Ended December 31
	2009			2008			2007			2006		2005
Net income (loss) from continuing operations	$	(440,141	)	$	(617,130	)	$	(435,991	)	$	74,704	$	75,074
Add back fixed charges:
Interest expense		260,080			489,989			700,460			63,410		13,011
Earnings before fixed charges and preferred share dividends		(180,061	)		(127,141	)		264,469			138,114		88,085
Fixed charges and preferred share dividends:
Interest expense		260,080			489,989			700,460			63,410		13,011
Preferred share dividends		13,641			13,641			11,817			10,079		10,076
Total fixed charges and preferred share dividends	$	273,722		$	503,630		$	712,277		$	73,489	$	23,087
Ratio of earnings to fixed charges		—	(1)		—	(1)		—	(1)		2.2x		6.8x
Ratio of earnings to fixed charges and preferred share dividends		—	(2)		—	(2)		—	(2)		1.9x		3.8x

(1) The dollar amount of the deficiency for the years ended December 31, 2009, 2008 and 2007 is $440.1 million, $617.1 million and $436.0 million, respectively.

(2) The dollar amount of the deficiency for the years ended December 31, 2009, 2008 and 2007 is $453.8 million, $630.8 million and $447.8 million, respectively.

EX-15.1

Exhibit 15.1

RAIT Financial Trust

Cira Centre

2929 Arch Street, 17th Floor

Philadelphia, Pennsylvania 19104

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim consolidated financial information of RAIT Financial Trust and subsidiaries for the three month periods ended March 31, 2010 and 2009, as indicated in our report dated May 7, 2010 (except Notes 5 and 14, as to which the date is November 5, 2010); for the three and six month periods ended June 30, 2010 and 2009, as indicated in our report dated August 6, 2010 (except for Notes 5 and 14, as to which the date is November 5, 2010); and for the three and nine month periods ended September 30, 2010 and 2009, as indicated in our report dated November 5, 2010; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our reports referred to above, which are included in Item 1 for the three and nine month periods ended September 30, 2010 and 2009, and in Item 5 for three month periods ended March 31, 2010 and 2009 and the three and six month periods ended June 30, 2010 and 2009 of your Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 are incorporated by reference in Registration Statements of RAIT Financial Trust on Form S-3 (File No. 333-166065, effective on May 7, 2010; File No. 333-152351, effective on August 6, 2008; File No. 333-149340, effective on March 13, 2008; File No. 333-144603, effective on July 16, 2007 and post effective amendment effective April 25, 2008) and Form S-8 (File No. 333-151627, effective June 13, 2008; File No. 333-125480, effective on June 3, 2005; File No. 333-100766, effective on October 25, 2002; and File No. 333-67452, effective on August 14, 2001).

We also are aware that the aforementioned reports, pursuant to Rule 436(c) under the Securities Act of 1933, are not considered a part of a Registration Statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

November 5, 2010

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 1, 2010 (except for Notes 6 and 15, as to which the date is November 5, 2010) with respect to the 2009 consolidated financial statements and schedules and our report dated March 1, 2010 with respect to internal control over financial reporting as of December 31, 2009, included in Item 5 in this quarterly report of RAIT Financial Trust and subsidiaries on Form 10-Q. We hereby consent to the incorporation by reference of said reports in the Registration Statements of RAIT Financial Trust on Form S-3 (File No. 333-166065 effective on May 7, 2010; File No. 333-152351, effective on August 6, 2008; File No. 333-149340, effective on March 13, 2008; File No. 333-144603, effective on July 16, 2007 and post effective amendment effective April 25, 2008) and Form S-8 (File No. 333-151627, effective June 13, 2008; File No. 333-125480, effective on June 3, 2005; File No. 333-100766, effective on October 25, 2002; and File No. 333-67452, effective on August 14, 2001).

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

November 5, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED

I, Scott F. Schaeffer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RAIT Financial Trust;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2010		/s/    Scott F. Schaeffer
	Name:	Scott F. Schaeffer
	Title:	Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES

EXCHANGE ACT OF 1934, AS AMENDED

I, Jack E. Salmon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RAIT Financial Trust;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2010		/s/    Jack E. Salmon
	Name:	Jack E. Salmon
	Title:	Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RAIT Financial Trust (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott F. Schaeffer, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    Scott F. Schaeffer

Scott F. Schaeffer

Chief Executive Officer and President

Date: November 5, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RAIT Financial Trust (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jack E. Salmon, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    Jack E. Salmon

Jack E. Salmon

Chief Financial Officer and Treasurer

Date: November 5, 2010

EX-99.1

Exhibit 99.1

Item 1. Business

Our Company

RAIT Financial Trust uses its vertically integrated platform to invest in, manage and service real estate-related assets with a focus on commercial real estate. We offer a comprehensive set of debt financing options to the commercial real estate industry along with fixed income trading and advisory services. We also own and manage a portfolio of commercial real estate properties and manage real estate-related assets for third parties. We are a self-managed and self-advised Maryland real estate investment trust, or REIT, formed in August 1997, that commenced operations in January 1998.

Our investments consist primarily of the following asset classes:

• commercial mortgages, mezzanine loans, other loans and preferred equity interests;

• investments in real estate or in entities that own commercial real estate; and

• investments in debt securities issued by real estate companies, including trust preferred securities, or TruPS, and subordinated debentures, mortgage-backed securities, including commercial mortgage-backed securities, or CMBS, unsecured REIT notes and other real estate-related debt.

Our revenue is generated primarily from:

• interest income from our investments, net of any financing costs, or net interest margin;

• rental income from our direct investments in real estate assets; and

• fee income generated from:

• originating, servicing and managing assets,

• fixed income trading services,

• advisory services, and

• other brokerage-related services.

2009 was part of an ongoing transition period for RAIT as we continue to adapt our business to current economic conditions. We engaged in a series of transactions intended to focus RAIT on opportunities in financing and owning commercial real estate by removing non-core assets from our balance sheet. These transactions included selling our equity in securitizations holding our residential mortgage portfolio and a substantial amount of our investments in debt securities issued by real estate companies. For further discussion of these transactions, see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Business Strategy

Our objective is to provide our shareholders with total returns over time while managing the risks associated with our investment strategy. The core components of our business strategy are described in more detail below.

Provide commercial real estate financing. We provide a comprehensive set of debt financing options to the commercial real estate industry, including commercial mortgages, mezzanine loans, other loans and preferred equity interests. We have primarily financed this portfolio through securitizations, in which we have a retained interests, or through lines of credit.

Own commercial real estate. Our ownership of commercial real estate has grown recently as we have restructured loans in response to credit events to take control of properties where we believe we can continue to generate or enhance our risk-adjusted returns. To support our increased ownership of properties and to further vertically integrate our platform, we expanded our property management capabilities by purchasing a majority interest in Jupiter Communities, LLC, or Jupiter Communities, in May 2009. Jupiter Communities is an established property management firm specializing in managing multifamily commercial real estate properties. We have financed this portfolio through secured mortgages held by either third party lenders or our commercial real estate securitizations. See “Financing Strategy” below.

Manage our portfolio of debt securities issued by real estate companies. Included in our assets are debt securities issued by real estate companies. As noted above, we have been reducing the amount of these investments reflected on our balance sheet to focus on commercial real estate loans and properties. We have financed this portfolio through securitizations in which we have retained interests in the subordinated notes and equity. Our retained interests in these securitizations no longer generate cash flow for us; however, we continue to act as collateral manager and receive collateral management fees. See “Generate Fee Income” and “Financing Strategy” below.

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Generate fee income. We manage a portfolio of real estate related assets. As of December 31, 2009, we had $10.1 billion of assets under management. Assets under management are comprised of our consolidated assets and assets we manage but do not consolidate. At December 31, 2009, we served as the collateral manager on thirteen securitizations that are collateralized by U.S. commercial real estate investments, TruPS and European real estate investments. As collateral manager, we seek to maintain and enhance the performance of the investments collateralizing, and the cash flows of, these securitizations. We also service our U.S. commercial real estate investments. We have been added to Standard & Poor’s select servicer list as a commercial mortgage primary servicer. We generate fee income from our asset management efforts, primarily from serving as collateral manager. During the years ended December 31, 2009, 2008 and 2007, we received asset management fee income of $16.1 million, $23.2 million and $26.1 million, respectively, of which we eliminated $7.0 million, $12.2 million and $19.1 million, respectively, upon consolidation of securitizations in our consolidated financial statements.

In 2009, we expanded our fixed income trading services primarily in riskless principal transactions and we initiated an advisory services platform to investors in commercial real estate assets.

Financing Strategy. We have financed a substantial portion of our portfolio investments through borrowing and securitization strategies that seek to match the payment terms, interest rate and maturity dates of our financings with the payment terms, interest rate and maturity dates of those investments. We seek to mitigate interest rate risk through derivative instruments. We own junior debt tranches and equity of a number of the securitizations which we structured to finance a substantial portion of our investment portfolio.

We financed a majority of our commercial real estate loan portfolio through two non-recourse loan securitizations which aggregate $1.85 billion of loan capacity. These financing structures have built-in revolver features that permit us to replace maturing loan collateral with new loans up through the fifth year anniversary of each financing in 2011 and 2012. We retained all of the most junior debt tranche (BB rated) and all of the preferred equity issued by these securitizations.

We finance our acquisitions of real estate through a combination of secured mortgage financing provided by third party financial institutions and existing financing provided by our two CRE loan securitizations. During 2009, we acquired $416.7 million of direct real estate investments upon conversion of $515.5 million of commercial real estate loans, retaining the existing financing provided by our two CRE loan securitizations.

We financed most of our debt securities portfolio in a series of non-recourse collateralized debt obligations, or CDOs, which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of December 31, 2009, we retained a controlling interest in two securitizations—Taberna Preferred Funding VIII, Ltd., or Taberna VIII and Taberna Preferred Funding IX, Ltd., or Taberna IX, which are consolidated entities. All of the debt securities collateral assets and the related non-recourse CDO financing obligations are presented at fair value in our reported results. During 2009, due to the non-recourse nature of these entities and the recent credit performance of the underlying collateral, we received only our senior collateral management fees from these two CDOs.

See Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Securitization Summary” for further discussion of our securitizations.

Our Investment Portfolio

Our consolidated investment portfolio is currently comprised of the following asset classes:

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We have originated senior long-term mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. Our financing is usually “non-recourse.” Non-recourse financing means we look primarily to the assets securing the payment of the loan, subject to certain standard exceptions. We may also engage in recourse financing by requiring personal guarantees from controlling persons of our borrowers. We also acquire existing commercial real estate loans held by banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

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The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2009 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial mortgages	$	825,044		6.9	%	Mar. 2010 to Mar. 2016		55
Mezzanine loans		421,805		9.8	%	Mar. 2010 to Aug. 2021		129
Other loans		123,889		5.2	%	Apr. 2010 to Oct. 2016		9
Preferred equity interests		98,584		10.9	%	Mar. 2010 to Sep. 2021		25
Total	$	1,469,322		7.9	%			218

Due to current economic conditions referred to above, we currently have limited capacity to originate new investments. However, we expect to focus on this asset class when economic conditions improve.

The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of December 31, 2009:

(a) Based on book value.

Investments in real estate. We generate a return on our real estate investments through rental income and other sources of income from the operations of the real estate underlying our investment. We also participate in any increase in the value of the real estate in addition to current income. We finance our acquisitions of real estate through a combination of secured mortgage financing provided by financial institutions and existing financing provided by our two CRE loan securitizations. During 2009, we acquired $416.7 million of real estate investments upon conversion of $515.5 million of commercial real estate loans, usually subject to retaining the existing financing provided by our two CRE loan securitizations.

The table below describes certain characteristics of our investments in real estate as of December 31, 2009 (dollars in thousands, except average effective rent):

	Investments in Real Estate (a)		% of Total Portfolio			Units/ Square Feet/ Acres		Number of Properties		Average Effective Rent (b)
Multi-family real estate properties (c)	$	497,578		67.4	%		6,967		27	$	646
Office real estate properties (d)		178,750		24.2	%		1,324,368		6		23.79
Retail real estate properties (d)		35,437		4.8	%		1,095,452		3		10.84
Parcels of land		26,470		3.6	%		7.3		3		—
Total	$	738,235		100.0	%				39

(a) Investments in real estate include $79.8 million of assets held for sale as of December 31, 2009.

(b) Based on operating performance for the year ended December 31, 2009.

(c) Average effective rent is rent per unit per month.

(d) Average effective rent is rent per square foot per year.

3

We expect this asset category to increase in size as we may find it desirable to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding loans that become subject to increased credit risks.

The charts below describe the property types and the geographic breakdown of our investments in real estate as of December 31, 2009:

(a) Based on book value.

Investment in debt securities. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of December 31, 2009, we retained a controlling interest in two securitizations—Taberna VIII and Taberna IX, which are consolidated entities. All of the collateral assets for the debt securities and the related non-recourse CDO financing obligations are presented at fair value in our reported results. During 2009, due to the non-recourse nature of these entities and the recent credit performance of the underlying collateral, we received only our senior collateral management fees from these two CDOs.

The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of December 31, 2009 (dollars in thousands):

									Issuer Statistics
Industry Sector	Estimated Fair  Value		% of Total			Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	165,625		30.5	%		3.7	%		79.1	%		0.9	x
Office		130,799		24.0	%		7.8	%		63.9	%		1.9	x
Residential Mortgage		71,635		13.2	%		2.5	%		99.2	%		(1.4	)x
Specialty Finance		44,821		8.2	%		5.3	%		118.9	%		1.0	x
Homebuilders		43,198		7.9	%		7.8	%		4.1	%		(0.2	)x
Retail		44,609		8.2	%		4.3	%		185.4	%		2.2	x
Hospitality		24,777		4.5	%		5.8	%		111.6	%		(1.4	)x
Storage		19,291		3.5	%		8.0	%		62.4	%		3.6	x
Total	$	544,755		100.0	%		5.3	%		76.2	%		1.2	x

4

The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of December 31, 2009:

(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.

(b) Based on estimated fair value.

We have invested, and expect to continue to invest, in CMBS, unsecured REIT notes and other real estate-related debt securities.

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually. These companies are generally rated investment grade by one or more nationally recognized rating agencies.

CMBS generally are multi-class debt or pass-through certificates secured or backed by single loans or pools of mortgage loans on commercial real estate properties. Our CMBS investments may include loans and securities that are rated investment grade by one or more nationally-recognized rating agencies, as well as both unrated and non-investment grade loans and securities.

5

The table and the chart below describe certain characteristics of our real estate-related debt securities as of December 31, 2009 (dollars in thousands):

Investment Description	Estimated Fair  Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	65,393		6.6	%		7.8	$	68,049
CMBS receivables		58,894		6.0	%		34.3		158,368
Other securities		25,465		3.2	%		30.1		93,419
Total	$	149,752		5.1	%		27.9	$	319,836

(a) S&P Ratings as of December 31, 2009.

Certain REIT and Investment Company Act Limits On Our Strategies

REIT Limits

We conduct our operations so as to qualify as a REIT. Our subsidiary, Taberna Realty Finance Trust, or Taberna, is also a REIT and we cause Taberna to conduct its operations to qualify as a REIT. For a discussion of the tax implications of our and Taberna’s REIT status to us and our shareholders, see “Material U.S. Federal Income Tax Considerations” contained in Exhibit 99.1 to this Annual Report on Form 10-K. To qualify as a REIT, we and Taberna must continually satisfy various tests regarding sources of income, nature and diversification of assets, amounts distributed to shareholders and the ownership of common shares. In order to satisfy these tests, we and Taberna may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements may hinder our or Taberna’s investment performance. These requirements include the following:

• At least 75% of each of our and Taberna’s total assets and 75% of gross income must be derived from qualifying real estate assets, whether or not such assets would otherwise represent our or Taberna’s best investment alternative. For example, since neither TruPS nor investments in the debt or equity of CDOs are qualifying real estate assets, to the extent that we have historically invested in such assets, or may do so in the future, Taberna (and we, to the extent that we invest in such assets) must hold substantial investments in qualifying real estate assets, including mortgage loans and CMBS, which may have lower yields than such investments. Also, at least 95% of each of our and Taberna’s gross income in each taxable year, excluding gross income from prohibited transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of shares or securities, which need not have any relation to real property.

• A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including any mortgage loans, held in inventory or primarily for sale to customers in the ordinary course of business. The prohibited transaction tax may apply to any sale of assets to a CDO and to any sale of CDO securities, and therefore may limit our and Taberna’s ability to sell assets to or equity in CDOs and other assets.

6

• Overall, no more than 25% of the value of a REIT’s assets may consist of securities of one or more taxable REIT subsidiaries, or TRSs. Taberna Capital LLC, or Taberna Capital, RAIT Securities LLC, or RAIT Securities, Jupiter Communities, RAIT Securities (U.K.) Ltd., or RAIT Securities UK, RAIT Capital Ltd., Taberna Funding LLC, or Taberna Funding, Taberna Equity Funding, Ltd., or Taberna Equity Funding, and Taberna’s non-U.S. corporate subsidiaries are TRSs. Taberna’s ability to invest in CDOs that are structured as TRSs and to grow or expand the fee-generating businesses of Taberna Capital and RAIT Securities, as well as the business of Taberna Funding, RAIT Securities UK, RAIT Capital Ltd. and future TRSs Taberna may form, will be limited by Taberna’s need to meet this 25% test, which may adversely affect distributions Taberna pays to us.

• The REIT provisions of the Internal Revenue Code limit our and Taberna’s ability to hedge mortgage-backed securities, preferred securities and related borrowings. Except to the extent provided by the regulations promulgated by the U.S. Treasury Department, or the Treasury regulations, any income from a hedging transaction we or Taberna enter into in the normal course of business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in the Treasury regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test). To the extent that we or Taberna enter into other types of hedging transactions, the income from those transactions is likely to be treated as non- qualifying income for purposes of both of the gross income tests. As a result, we or Taberna might have to limit use of advantageous hedging techniques or implement those hedges through TRSs. This could increase the cost of our or Taberna’s hedging activities or expose it or us to greater risks associated with changes in interest rates than we or it would otherwise want to bear.

There are other risks arising out of our and Taberna’s need to comply with REIT requirements. See Item 1A—“Risk Factors-Tax Risks” below.

Investment Company Act Limits

We seek to conduct our operations so that we are not required to register as an investment company. Under Section 3(a)(1) of the Investment Company Act, a company is not deemed to be an “investment company” if:

• it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and

• it neither is engaged nor proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis, which we refer to as the 40% test. “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We rely on the 40% test. Because we are a holding company that conducts our businesses through wholly-owned or majority-owned subsidiaries, the securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. In fact, based on the relative value of our investment in Taberna, on the one hand, and our investment in RAIT Partnership, on the other hand, we can comply with the 40% test only if Taberna satisfies the 40% test on which it relies (or another exemption other than Section 3(c)(1) or 3(c)(7)) and RAIT Partnership complies with Section 3(c)(5)(c) or 3(c)(6), the exemptions upon which it relies (or another exemption other than Section 3(c)(1) or 3(c)(7)). This requirement limits the types of businesses in which we may engage through our subsidiaries.

None of RAIT, RAIT Partnership or Taberna has received a no-action letter from the SEC regarding whether it complies with the Investment Company Act or how its investment or financing strategies fit within the exclusions from regulation under the Investment Company Act that it is using. To the extent that the SEC provides more specific or different guidance regarding, for example, the treatment of assets as qualifying real estate assets or real estate-related assets, we may be required to adjust these investment and financing strategies accordingly. See Item 1A—“Risk Factors- Other Regulatory and Legal Risks of Our Business- Loss of our Investment Company Act exemption would affect us adversely.”

7

Competition

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. Competition, particularly in our commercial mortgage and mezzanine loan business, may increase, and other companies and funds with investment objectives similar to ours may be organized in the future. Some of these competitors have, or in the future may have, substantially greater financial resources than we do and generally may be able to accept more risk. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, competition may lead us to pay a greater portion of the origination fees that we expect to collect in our future origination activities to third-party investment banks and brokers that introduce borrowers to us in order to continue to generate new business from these sources.

Employees

As of February 26, 2010, we had 329 employees and believe our relationships with our employees to be good. None of our employees is covered by a collective bargaining agreement.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The internet address of the SEC site is http://www.sec.gov. Our internet address is http://www.raitft.com. We make our SEC filings available free of charge on or through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not incorporating by reference in this report any material from our website.

8

EX-99.2

Exhibit 99.2

Item 2. Properties

Our principal executive office is located in Philadelphia, Pennsylvania. We lease office space pursuant to a lease agreement that expires on March 31, 2011. As of December 31, 2009 the future minimum cash payments due under this lease are $0.5 million for 2010 and $0.1 million for 2011.

We lease office space in New York, New York pursuant to a lease agreement that has a ten year term. This lease expires in March 2016. As of December 31, 2009, the future minimum cash payments due under this lease are as follows by fiscal year: 2010—$0.8 million, 2011 through 2014—$0.9 million per year and $1.1 million for the remaining term of the lease.

For our investments in real estate, the leases for our multi-family properties are generally one-year or less and leases for our office and retail properties are operating leases. The following table represents a ten-year lease expiration schedule for our non-residential properties as of December 31, 2009.

Year of Lease Expiration (December 31,)	Number of Leases Expiring during the Year		Rentable Square Feet Subject to Expiring Leases		Final Annualized Rent under Expiring Leases (in 000’s) (a)		Final Annualized Rent per Square Foot under Expiring Leases		Percentage of Total Final Annualized Base Rent Under Expiring Leases			Cumulative Total
2010		86		374,754	$	3,469	$	9.26		20.3	%		20.3	%
2011		22		93,356		1,301		13.94		7.6	%		27.9	%
2012		24		220,868		3,832		17.35		22.3	%		50.2	%
2013		18		239,184		3,612		15.10		21.1	%		71.3	%
2014		13		70,604		972		13.77		5.7	%		77.0	%
2015		7		150,295		1,223		8.14		7.1	%		84.1	%
2016		2		12,867		308		23.94		1.8	%		85.9	%
2017		1		42,386		791		18.65		4.6	%		90.5	%
2018		2		56,947		1,433		25.17		8.4	%		98.9	%
2019		1		4,038		80		19.81		0.5	%		99.4	%
2020 and thereafter		2		5,314		102		19.28		0.6	%		100.0	%
Total		178		1,270,613	$	17,123	$	13.48		100.0	%

(1) “Final Annualized Rent” for each lease scheduled to expire represents the cash rental rates of the respective tenants for the final month prior to expiration multiplied by 12. For a description of our investments in real estate, see Item 1—“Business—Our Investment Portfolio—Investments in real estate” and Item 8—“Financial Statements and Supplementary Data—Schedule III.”

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EX-99.3

Exhibit 99.3

Item 6. Selected Financial Data

The following selected financial data information should be read in conjunction with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including the notes thereto, included elsewhere herein (dollars in thousands, except share and per share data).

	As of and For the Years Ended December 31
	2009			2008			2007			2006			2005
Operating Data:
Net interest margin	$	126,375		$	206,001		$	194,621		$	76,806		$	73,241
Rental income		44,637			17,425			11,291			12,639			12,164
Total revenue		197,510			244,783			231,637			103,832			92,448
Real estate operating expenses		(41,399	)		(14,781	)		(9,958	)		(9,198	)		(7,229	)
Provision for losses		(226,567	)		(162,783	)		(21,721	)		(2,499	)		—
Asset impairments		(46,015	)		(67,052	)		(517,452	)		—			—
Total expenses		(384,451	)		(319,623	)		(686,660	)		(34,720	)		(17,752	)
Change in fair value of financial instruments		1,563			(552,437	)		—			—			—
Income (loss) from continuing operations		(440,141	)		(617,130	)		(435,991	)		74,704			75,074
Net income (loss) allocable to common shares		(441,203	)		(443,246	)		(379,588	)		67,839			67,951
Earnings (loss) per share from continuing operations
Basic	$	(6.76	)	$	(6.96	)	$	(6.16	)	$	2.11		$	2.48
Diluted	$	(6.76	)	$	(6.96	)	$	(6.16	)	$	2.09		$	2.46
Earnings (loss) per share:
Basic	$	(6.77	)	$	(6.99	)	$	(6.18	)	$	2.31		$	2.59
Diluted	$	(6.77	)	$	(6.99	)	$	(6.18	)	$	2.29		$	2.57
Balance Sheet Data:
Investments in mortgages and loans, net	$	1,380,957		$	5,468,064		$	6,378,050		$	5,922,550		$	714,428
Investments in real estate		738,235			350,487			117,238			61,432			44,958
Investments in securities		694,897			1,920,883			3,827,800			5,138,311			—
Total assets		3,094,976			8,151,450			11,057,580			12,060,506			1,024,585
Total indebtedness		2,077,123			6,102,890			10,040,925			10,452,191			329,859
Total liabilities		2,325,055			6,882,109			10,474,982			10,739,829			414,890
Total equity		769,921			1,269,341			582,598			1,320,677			609,695
	As of and For the Years Ended December 31
	2009			2008			2007			2006			2005
Other Data:
Common shares outstanding, at period end, including unvested restricted share awards		74,420,598			64,842,571			61,018,231			52,151,412			27,899,065
Book value per share	$	8.08		$	14.09		$	6.81		$	20.54		$	17.34
Ratio of earnings to fixed charges and preferred share dividends		—	(1)		—	(1)		—	(1)		1.9x			3.8x
Dividends declared per share	$	—		$	1.27		$	2.56		$	2.70		$	2.43

(1) The ratio of earnings to fixed charges and preferred share dividends for the years ended December 31, 2009, 2008 and 2007 is deficient by $453.8 million, $630.8 million and $447.8 million, respectively.

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EX-99.4

Exhibit 99.4

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a vertically integrated commercial real estate platform with the capability to originate, invest in, manage, service, trade and advise on commercial real estate-related assets. See Item 1—“Business.” The year ended December 31, 2009 was part of an ongoing transition period for RAIT as we continue to adapt our business to current economic conditions. In 2009, we engaged in a series of transactions intended to focus RAIT on opportunities in financing and owning commercial real estate by removing non-core assets from our balance sheet. In order to best position ourselves to be able to take advantage of market opportunities in the future, and to maximize shareholder value over time, we will continue to focus on:

• expanding RAIT’s commercial real estate revenue by investing in commercial real estate-related assets, managing and servicing investments for our own account or for others, providing property management services and providing our broker-dealer activities, including fixed-income trading and real estate advisory services;

• creating value through investing in our commercial real estate properties and implementing cost savings programs to help maximize property value over time;

• reducing our leverage while developing new financing sources;

• managing our investment portfolios to reposition non-performing assets, increase our cash flows and the ultimate recovery value of our assets over time; and

• managing the size and cost structure of our business to match our operating environment.

The current economic recession continues to adversely affect our business. During 2009, we recorded net loss allocable to common shares of $441.2 million, primarily caused by the following events and circumstances:

• Gains(losses) on sales of assets. During the year ended December 31, 2009, we sold all of our equity and a portion of our non-investment grade notes in Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations to a non-affiliated party and all of our interests in our six residential mortgage securitizations. Upon completion of these sales, we removed the associated assets and liabilities from our consolidated balance sheet. The disposition of the Taberna securitizations on June 25, 2009 resulted in a loss of $313.8 million and the disposition of the residential mortgage securitizations on July 16, 2009 resulted in a loss of $61.8 million.

• Provision for losses. The provision for losses recorded during the year ended December 31, 2009 was $226.6 million, which is comprised of $130.1 million associated with our commercial real estate loan portfolio and $96.5 million related to residential mortgages and mortgage-related receivables prior to their disposition in July.

• Asset impairments. We recorded asset impairment charges of $46.0 million during the year ended December 31, 2009. These asset impairments were comprised of investments in securities, primarily our equity investments in our Taberna Europe I and Taberna Europe II securitizations whose carrying values were reduced due to overall credit conditions and increased delinquencies of the underlying collateral.

The disposition transactions described above removed credit risk and reduced non-recourse debt thereby deleveraging our balance sheet. By purchasing $137.8 million of our convertible notes and $55.0 million of our CDO notes payable during 2009, we generated a gain of $115.9 million upon cancellation of our debt. During 2009, we purchased $132.3 million of convertible notes through two transactions as follows:

• In July 2009, we purchased from a noteholder, $98.3 million aggregate principal amount of our convertible notes, for a purchase price of $53.0 million. The purchase price consisted of (a) a $43.0 million 12.5% Senior Secured Note due 2014, or the senior secured note, and (b) $10.0 million in cash plus $2.0 million of accrued and unpaid interest on the convertible senior notes through July 31, 2009.

• In December 2009, we completed a public tender offer with noteholders by repurchasing $34.0 million of convertible notes for a purchase price of $14.0 million. The purchase price consisted of (a) $3.1 million of cash and (b) 8.1 million common shares. At the time of issuance of the common shares, the trading price was $1.34 per common share.

The disposition transactions above substantially changed our consolidated balance sheet. These transactions reduced our total assets by $4.5 billion, or 54.9%, our total liabilities by $4.1 billion, or 59.5% and our total shareholders’ equity by $239.2 million, or 22.1%. As a result of the sales and debt repurchases, our debt to equity ratio improved from 5.4 times at December 31, 2008 to 3.0 times as of December 31, 2009. We expect to continue to seek opportunities to acquire, redeem, restructure, refinance or otherwise enter into transactions to reduce our debt where we believe that is in the long term interest of our shareholders, which may include issuances of debt, and/or equity securities, sales or exchanges of our assets or other methods.

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We expect to continue to focus our efforts on enhancing our commercial real estate loan portfolio and our investments in real estate, which are our primary investment portfolios. Current economic conditions have subjected borrowers under our commercial real estate loans to financial stress. Where it is likely to enhance our ultimate returns, we will consider restructuring loans or foreclosing on the underlying property. During the year ended December 31, 2009, we converted 27 properties that served as collateral on our commercial real estate loans into direct ownership of the real estate collateral. We expect to engage in ongoing workout activity with respect to our commercial real estate loans that may result in the conversion of the property into owned real estate. We may take a non-cash charge to earnings at the time of any loan conversion to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion.

Investing in our new business lines is an important strategy for us as we continue to expand our vertically integrated commercial real estate platform. During 2009, we purchased a majority interest in a multi-family property management company, Jupiter Communities, and we launched a trading and advisory platform in RAIT Securities. We expect that we will continue to make investments in these businesses and expect to see more significant contributions from them during the latter half of 2010.

The following key statistics illustrate the transformation of our business through December 31, 2009 (dollars in thousands):

	For the Years Ended December 31
	2009			2008			2007
Financial Statistics:
Recourse debt maturing within 1-year	$	24,390		$	55,161		$	213,190
Assets under management	$	10,126,853		$	14,181,883		$	14,292,514
Debt to equity		3.0x			5.4x			18.0x
Total revenue	$	197,510		$	244,783		$	231,637
Earnings per share, diluted	$	(6.77	)	$	(6.99	)	$	(6.18	)
Commercial Real Estate (“CRE”) Loan Portfolio:
Reported CRE Loans—unpaid principal	$	1,473,700		$	2,053,752		$	2,356,922
Non-accrual loans—unpaid principal	$	171,372		$	186,040		$	41,858
Non-accrual loans as a % of reported loans		11.6	%		9.1	%		1.8	%
Reserve for losses	$	86,609		$	117,737		$	14,575
Reserves as a % of non-accrual loans		50.5	%		63.3	%		34.8	%
Provision for losses	$	130,080		$	107,360		$	13,187
CRE Property Portfolio:
Reported investments in real estate	$	738,235		$	350,487		$	117,238
Multifamily units owned		6,967			2,959			465
Office square feet owned		1,324,368			933,418			848,418
Retail square feet owned		1,095,452			—			—

Trends That May Affect Our Business

The following trends may affect our business:

Credit, capital markets and liquidity risk. We expect that the credit events that occurred during 2009, which have significantly reduced market liquidity and limited our financing strategies, will continue to significantly impact our ability to finance new investments in our targeted asset classes. We expect that these events may cause covenant defaults, increased delinquencies or missed payments from issuers of TruPS and credit risks in our portfolio of commercial real estate loans. This will likely cause reductions in our net investment income, increases in our provision for loan losses, decreases in the fair value of our assets and may reduce the cash flows we receive from our securitizations.

To finance investments in our commercial loan portfolio in the future, management will seek to structure match funded financing opportunities through the use of restricted cash in, and through the reinvestment of repayment amounts received under, our current loan securitizations and through loan participations, bank lines of credit, joint-venture opportunities, while making investments that generate an attractive return.

Interest rate environment. Interest rates experienced significant volatility during the year ended December 31, 2009. Continued volatility in interest rates may impact the fair value of our investments and/or the net investment income generated by those investments in the future.

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We do not expect that an increase or decrease in interest rates would dramatically impact our net investment income generated by our commercial loan portfolios. We use floating rate line of credit borrowings and long-term floating rate CDO notes payable to finance our investments. To the extent the amount of fixed-rate commercial loans are not directly offset by matching fixed-rate CDO notes payable, we utilize interest rate derivative contracts to convert our floating rate liabilities into fixed-rate liabilities, effectively match funding our assets with our liabilities.

Our investments in debt securities are comprised of TruPS, subordinated debentures, unsecured debt securities and CMBS held by our consolidated CDO entities. These securities bear fixed and floating interest rates. A large portion of these fixed-rate securities are hybrid instruments, which convert to floating rate securities after a five or ten year fixed-rate period. We have financed these securities through the issuance of floating rate and fixed-rate CDO notes payable. A large portion of the CDO notes payable are floating rate instruments, and we use interest rate swaps to effectively convert this floating rate debt into fixed-rate debt during the period in which our investments in securities are paid at a fixed coupon rate. By using this interest rate hedging strategy, we believe we have effectively match-funded our assets with liabilities, and their cash flows, during the fixed-rate period of our investments in securities. An increase or decrease in interest rates will generally not impact our net investment income generated by our investments in securities. However, an increase or decrease in interest rates will affect the fair value of our investments in securities, which will generally be reflected in our financial statements as changes in the fair value of financial instruments.

Prepayment rates. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates on our assets also may be affected by other factors, including, without limitation, conditions in the housing, real estate and financial markets, general economic conditions and the relative interest rates on adjustable-rate and fixed-rate loans. If interest rates begin to fall, triggering an increase in prepayment rates in our commercial loan portfolio and our net investment income may decrease. However, the lack of financing alternatives may cause loans to extend and provide an opportunity to increase the net investment income. While interest rates have decreased substantially during 2009, prepayment rates have not increased due to the lack of mortgage financing in the current economic and credit environments.

Commercial real estate lack of liquidity and reduced performance. The market for financing sources, such as CMBS, for commercial real estate is constrained. This creates an increased risk of defaults upon the maturity of loans due to the lack of sources of refinancing. Due to current economic conditions, the multi-family, office and retail sectors of commercial real estate are seeing increased vacancy levels and reduced rents. We cannot predict the severity of future increases in vacancy levels and reductions of rent.

Critical Accounting Estimates and Policies

We consider the accounting policies discussed below to be critical to an understanding of how we report our financial condition and results of operations because their application places the most significant demands on the judgment of our management.

Our financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition for Investment Income. We recognize interest income from investments in debt and other securities, commercial mortgages and mezzanine loans on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitutes accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management evaluates loans for non-accrual status each reporting period. Payments received for loans on non-accrual status are applied to principal until the loan is removed from non-accrual status. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.” For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred. We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

3

Recognition of Rental Income. We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, we record rental income when due from residents, and recognize it monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, we recognize rental income on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

Recognition of Fees and other income. We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers and (c) providing advisory services to our customers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fees from CDOs while such CDOs are consolidated. During the years ended December 31, 2009, 2008 and 2007, we received $16.1 million, $23.2 million, and $26.0 million, respectively, of earned asset management fees, of which we eliminated $7.0 million, $12.2 million, and $19.1 million, respectively, associated with consolidated CDOs.

Investments in Loans. We invest in commercial mortgages, mezzanine loans, debt securities and other loans. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

Allowance for Losses, Impaired Loans and Non-accrual Status. We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

Investments in Real Estate. Investments in real estate are shown net of accumulated depreciation. We capitalize all costs related to the improvement of the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements—30 years; furniture, fixtures, and equipment—5 to 10 years; and tenant improvements—shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

4

Investments in Securities. We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “k. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

Transfers of Financial Assets. We account for transfers of financial assets under FASB ASC Topic 860 as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

Derivative Instruments. We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives for which we elected the fair value option under FASB ASC Topic 825, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

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Fair Value of Financial Instruments. In accordance with FASB ASC Topic 820, “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category are TruPS and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial institutions have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask

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spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

For further discussion on fair value of our financial instruments, see “Item 8. Financial Statements and Supplementary Data. Note 9: Fair Value of Financial Instruments.”

Recent Accounting Pronouncements. On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 805, “Business Combinations”. Among other things, this standard broadened the scope to include all transactions where an acquirer obtains control of one or more other businesses; retains the guidance to recognize intangible assets separately from goodwill; requires, with limited exceptions, that all assets acquired and liabilities assumed, including certain of those that arise from contractual contingencies, be measured at their acquisition date fair values; requires most acquisition and restructuring-related costs to be expensed as incurred; requires that step acquisitions, once control is acquired, be recorded at the full amounts of the fair values of the identifiable assets, liabilities and the noncontrolling interest in the acquiree; and replaces the reduction of asset values and recognition of negative goodwill with a requirement to recognize a gain in earnings. The adoption of this standard did not have any effect on our historical financial statements. See Note 6 for the application of this standard to transactions that occurred during the year ended December 31, 2009.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 810, “Consolidation”. This standard established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This standard also established disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Upon adoption, we reclassified amounts in our historical balance sheet financial statement caption “minority interests” to the new caption promulgated by this standard, “noncontrolling interests”. The new caption is presented within equity on the consolidated balance sheet. Furthermore, the allocation of any net income to noncontrolling interests is also presented in our consolidated statements of operations, however it is presented below net income. Upon adoption, all prior periods presented were reclassified to be comparable to the current period presentation.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 815 “Derivatives and Hedging”. This standard required enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under this standard, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The adoption of this standard did not have a material effect on our financial statements. See Note 8 for disclosures required by this standard.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 470, “Debt”. This standard clarified the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. This standard requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The equity component is presented in shareholders’ equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. This standard requires retrospective application to the terms of instruments as they existed for all periods presented. Upon adoption, we recorded a discount on our issued and outstanding convertible senior notes of $2.0 million. This discount reflects the fair value of the embedded conversion option within the convertible debt instruments and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in our convertible debt agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the convertible senior notes were issued. The discount will be amortized to interest expense through April 15, 2012, the date at which holders of our convertible senior notes could require repayment. Upon adoption, all prior periods were restated to reflect the retrospective application of this standard to all prior periods. The amortization recorded during the years ended December 31, 2009, 2008 and 2007 was $0.4 million, $0.6 million and $0.2 million, respectively.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”. This standard provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This standard presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction). However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and shall be evaluated separately. The adoption of this standard did not have a material effect on our consolidated financial statements.

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On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 260, “Earnings Per Share”. This standard clarified whether instruments granted in share-based payment transactions should be included in the computation of earnings per share using the two-class method prior to vesting. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. Upon adoption, we classified unvested restricted shares issued under our 2008 Equity Compensation plan as participating securities. These unvested restricted shares participate equally in dividends and earnings with all of our outstanding common shares. Prior to this standard, unvested restricted shares were only included in our diluted earnings per share computation under the treasury stock method.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 320, “Investments—Debt and Equity Securities”. This standard amended the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This standard does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 825, “Financial Instruments”. This standard amended existing guidance to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also amended existing guidance to require those disclosures in summarized financial information at interim reporting periods. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 if a company also elects to early adopt this standard. The adoption of this standard did not have a material effect on our consolidated financial statements. See Note 9 for disclosures required by this standard.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 820, “Fair Value Measurements and Disclosures”. This standard amended existing guidance to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. This standard also provides additional guidance on circumstances that may indicate that a transaction is not orderly. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.

In May 2009, the FASB issued accounting standards classified under FASB ASC Topic 855, “Subsequent Events”. This standard codifies the guidance regarding the disclosure of events occurring subsequent to the balance sheet date. This standard does not change the definition of a subsequent event (i.e. an event or transaction that occurs after the balance sheet date but before the financial statements are issued) but requires disclosure of the date through which subsequent events were evaluated when determining whether adjustment to or disclosure in the financial statements is required. This standard was effective for us for the year ended December 31, 2009. We evaluated subsequent events and have provided the appropriate disclosures on subsequent events identified. The adoption of this standard did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified unders FASB Topic 860 will eliminate the concept of a qualified special purpose entity, or QSPE, change the requirements for derecognizing financial assets, and require additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 will change the determination of when a variable interest entity, or VIE, should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. Both of these accounting standards are effective for fiscal years beginning after November 15, 2009. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard will require new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfer and for Level 3 fair value measurements new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements. This accounting standard will also update existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provide disclosures about the valuation techniques

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and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new disclosures and clarifications on the existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the purchase, sales, issuances, and settlements in the roll forward activity for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact this accounting standard may have on our consolidated financial statements.

Performance Measures

Assets Under Management

We use assets under management, or AUM, as a tool to measure our financial and operating performance. The following defines this measure and describes its relevance to our financial and operating performance:

Assets under management represents the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our financial performance. AUM includes our total investment portfolio and assets associated with unconsolidated CDOs for which we derive asset management fees.

The table below summarizes our assets under management as of December 31, 2009 and December 31, 2008 (dollars in thousands):

	Assets Under Management at December 31, 2009		Assets Under Management at December 31, 2008
Commercial real estate portfolio (1)	$	2,084,685	$	2,162,436
Residential mortgage portfolio (2)		—		3,611,860
European portfolio (3)		1,878,601		1,928,462
U.S. TruPS portfolio (4)		6,162,790		6,478,945
Other investments		777		180
Total	$	10,126,853	$	14,181,883

(1) As of December 31, 2009 and December 31, 2008, our commercial real estate portfolio was comprised of $1.2 billion and $1.5 billion, respectively, of assets collateralizing RAIT I and RAIT II, $738.2 million and $350.5 million, respectively, of investments in real estate and $106.6 million and $254.9 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

(2) On July 16, 2009, we sold our retained interests in the securitizations collateralized by our residential mortgage portfolio.

(3) Our European portfolio is comprised of assets collateralizing Taberna Europe I and Taberna Europe II.

(4) Our U.S. TruPS portfolio is comprised of assets collateralizing Taberna I through Taberna IX, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans.

REIT Taxable Income

To qualify as a REIT, we are required to make annual distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, to avoid certain U.S. federal excise taxes, we are required to make distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year. Because we expect to make distributions based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP.

Our board of trustees decided in January 2010 that its review and determination of dividends on RAIT’s common shares will be made when a full year of REIT taxable income is available. The board will continue to monitor RAIT’s estimated REIT taxable income during the year and intends to declare a dividend, if any, in at least the amount necessary to meet RAIT’s annual distribution requirements. The board will also consider the composition of any common dividends declared, including the option of paying a portion in cash and the balance in additional common shares. Generally, dividends payable in stock are not treated as dividends for purposes of the deduction for dividends, or as taxable dividends to the recipient. However, the Internal Revenue Service, in Revenue Procedure 2010-12, has given guidance with respect to certain stock distributions by publicly traded REITS. That Revenue Procedure applies to distributions made on or after January 1, 2008

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and declared with respect to a taxable year ending on or before December 31, 2011. It provides that publicly-traded REITs can distribute stock (common shares in our case) to satisfy their REIT distribution requirements if stated conditions are met. These conditions include that at least 10% of the aggregate declared distributions be paid in cash and the shareholders be permitted to elect whether to receive cash or stock, subject to the limit set by the REIT on the cash to be distributed in the aggregate to all shareholders. RAIT did not use this Revenue Procedure with respect to any distributions for its 2009 taxable year, but has the option to do so for distributions with respect to 2010 or 2011. The board expects to continue to review and determine the dividends on RAIT’s preferred shares on a quarterly basis.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our shareholders, we believe that presenting the information management uses to calculate REIT net taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures as determined and reported by other companies.

The table below reconciles the differences between reported net income (loss), total taxable income and estimated REIT taxable income for the three years ended December 31, 2009 (dollars in thousands):

	For the Years Ended December 31
	2009			2008			2007
Net income (loss), as reported	$	(440,981	)	$	(619,185	)	$	(437,478	)
Add (deduct):
Provision for losses		226,567			145,584			21,044
Charge-offs on allowance for losses		(136,822	)		—			—
Domestic TRS book-to-total taxable income differences:
Income tax provision (benefit)		(958	)		(2,137	)		(10,784	)
Fees received and deferred in consolidation		—			1,080			26,947
Stock compensation, forfeitures and other temporary tax differences		829			6,060			24,577
Capital losses not offsetting capital gains and other temporary tax differences		—			32,059			1,153
Asset impairments, net of noncontrolling interests of $(85,800) for the year ended December 31, 2007		46,015			67,052			431,652
Capital losses not offsetting capital gains and other temporary tax differences		377,096			—			(17,471	)
Change in fair value of financial instruments, net of noncontrolling interests (1)		(23,822	)		346,401			—
Amortization of intangible assets		1,407			17,077			61,269
CDO investments aggregate book-to-taxable income differences (2)		(69,314	)		111,338			60,318
Accretion of (premiums) discounts		(211	)		(3,562	)		2,515
Other book to tax differences		189			1,118			4,779
Total taxable income (loss)		(20,005	)		102,885			168,521
Less: Taxable income attributable to domestic TRS entities		(4,051	)		(21,278	)		(23,846	)
Plus: Dividends paid by domestic TRS entities		5,013			25,750			16,103
Less: Deductible preferred dividends		—			(13,641	)		(11,817	)
Estimated REIT taxable income (loss)	$	(19,043	)	$	93,716		$	148,961

(1) Change in fair value of financial instruments is reported net of allocation to noncontrolling interests of $(22,259), $(206,036) and $0, for the years ended December 31, 2009, 2008 and 2007, respectively.

(2) Amounts reflect the aggregate book-to-taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that Taberna consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between Taberna and its CDO investments.

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For the year ended December 31, 2009, we paid no common dividends. For tax reporting purposes, the preferred dividends that we paid in 2009 were classified as 100% return of capital for those shareholders who held our preferred shares for the entire year.

For the year ended December 31, 2008, we paid common dividends totaling $108.2 million, or $1.73 per common share, of which $0.46 was declared in 2007 and $1.27 was declared in 2008. For tax reporting purposes, the dividends that we paid in 2008 were classified as 92.0% ($1.5921) ordinary income and 8.0% ($0.1379) return of capital for those shareholders who held our common shares for the entire year.

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenue

Investment interest income. Investment interest income decreased $309.3 million, or 44.7%, to $382.0 million for the year ended December 31, 2009 from $691.3 million for the year ended December 31, 2008. This net decrease was primarily attributable to decreases in interest income of: $111.7 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $109.6 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $304.0 million in total principal amount of investments on non-accrual status as of December 31, 2009, 27 new properties, representing $515.5 million of investments in commercial loans, transitioned from loans to real estate owned since December 31, 2008 and the reduction in short-term LIBOR of approximately 2.2% during the year ended December 31, 2009 compared to the year ended December 31, 2008.

Investment interest expense. Investment interest expense decreased $229.7 million, or 47.3%, to $255.6 million for the year ended December 31, 2009 from $485.3 million for the year ended December 31, 2008. This net decrease was primarily attributable to decreases in interest expense of: $89.1 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $101.5 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to $5.2 million resulting from repurchases of our convertible senior notes and the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 2.2% during the year ended December 31, 2009 compared to the year ended December 31, 2008.

Rental income. Rental income increased $27.2 million to $44.6 million for the year ended December 31, 2009 from $17.4 million for the year ended December 31, 2008. This increase was primarily attributable to 24 new properties, with direct real estate investments of $384.4 million, acquired or consolidated since December 31, 2008.

Fee and other income. Fee and other income increased $5.1 million, or 24.1%, to $26.5 million for the year ended December 31, 2009 from $21.4 million for the year ended December 31, 2008. We received $8.4 million of fee income from our restructuring advisory services, $6.2 million of property management fees and reimbursement income associated with our property management activities that we acquired in May 2009 offset by $7.5 million of lower origination fees from our domestic and European origination activities during the year ended December 31, 2009 as compared to 2008 and $2.0 million of decreased asset management fees resulting from decreased collateral performance in several of our managed CDOs.

Expenses

Real estate operating expense. Real estate operating expense increased $26.6 million to $41.4 million for the year ended December 31, 2009 from $14.8 million for the year ended December 31, 2008. This increase was primarily attributable to 24 new properties, with direct real estate investments of $384.4 million, acquired or consolidated since December 31, 2008.

Compensation expense. Compensation expense decreased $2.2 million, or 7.5%, to $27.6 million for the year ended December 31, 2009 from $29.8 million for the year ended December 31, 2008. This decrease was primarily due to a reduction in salary and bonus compensation costs of $5.3 million during the year ended December 31, 2009 and lower stock-based compensation amortization of $3.4 million resulting from the vesting of certain restricted shares and phantom units subsequent to December 31, 2008 offset by $6.5 million of compensation costs associated with the property management activities that were acquired in May 2009.

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General and administrative expense. General and administrative expense decreased $0.1 million, or 0.7%, to $21.8 million for the year ended December 31, 2009 from $21.9 million for the year ended December 31, 2008. This decrease is primarily due to a $0.5 million decrease in investment monitoring costs due to the termination of a shared services agreement in July 2008 and $1.3 million of lower consulting and professional fees in 2009 as compared to 2008 offset by $1.7 million of higher insurance and rent expenses.

Provision for losses. The provision for losses relates to our investments in our residential mortgages and commercial mortgage loan portfolios. The provision for losses increased by $63.8 million for the year ended December 31, 2009 to $226.6 million as compared to $162.8 million for the year ended December 31, 2008. This increase is due to increased delinquencies in our residential mortgage portfolios during our ownership period and an increase in our impaired loans within our commercial real estate loan portfolio. During the year ended December 31, 2009, we have transitioned 27 loans to real estate owned properties, with direct real estate investments of $416.7 million, including two properties that have been sold and one property held for sale, and realized losses of $98.8 million when these loans were converted from impaired loans to owned real estate. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Asset impairments. For the year ended December 31, 2009, we recorded asset impairments totaling $46.0 million that were associated with certain investments in loans and available-for-sale securities for which we did not elect the fair value option under FASB ASC Topic 825, “Financial Instruments.” In making this determination, management considered the estimated fair value of the investments in relation to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value. For the year ended December 31, 2008, we recorded asset impairments totaling $67.1 million that were associated with certain intangible assets and certain investments in loans, available-for-sale securities and other assets for which we did not elect the fair value option.

Depreciation expense. Depreciation expense increased $13.5 million to $19.7 million for the year ended December 31, 2009 from $6.2 million for the year ended December 31, 2008. This increase was primarily attributable to 24 new properties, with direct real estate investments of $384.4 million, acquired or consolidated since December 31, 2008 as well as increased depreciation of furniture and fixtures we added since December 31, 2008.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense decreased $15.7 million to $1.4 million for the year ended December 31, 2009 from $17.1 million for the year ended December 31, 2008. This decrease resulted from the full amortization of some of the identified intangibles ($59.5 million had a useful life of 18 months or less).

Other Income (Expense)

Interest and other income. Interest and other income increased $4.3 million to $5.6 million for the year ended December 31, 2009 from $1.3 million for the year ended December 31, 2008. This increase is primarily due to higher interest income attributable to cash deposits and non-operating income associated with the 24 new properties that we acquired or consolidated since December 31, 2008.

Gains (losses) on sale of assets. Gains (losses) on sale of assets are primarily attributable to the disposition of four Taberna securitizations and six residential mortgage securitizations. On June 25, 2009, we sold all of our retained interests and a portion of our non-investment grade debt in the four Taberna securitizations. On July 16, 2009, we sold all of our retained interests in our six residential mortgage securitizations. For the year ended December 31, 2009, we recorded losses on sale of assets of $313.8 million associated with the disposition of the Taberna securitizations and $61.8 million associated with the disposition of the residential mortgage portfolio.

Gains on extinguishment of debt. Gains on extinguishment of debt during the year ended December 31, 2009 are primarily attributable to the repurchase of $103.8 million in aggregate principal amount of convertible senior notes and $55.0 million in aggregate principal amount of CDO notes payable. The debt was repurchased from the market for a total purchase price of $60.7 million, including $2.2 million of accrued interest, and we recorded gains on extinguishment of debt of $97.8 million. On December 1, 2009, we completed an exchange offer for $34.0 million aggregate principal amount of convertible senior notes whereby we issued 8,126,000 of our common shares and paid $3.6 million of cash, including $0.5 million of accrued interest, as consideration. As a result of the exchange offer, we recorded gains on extinguishment of debt of $18.1 million.

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Change in fair value of free-standing derivatives. The change in fair value of free-standing derivatives represents the earnings (loss) on (of) our first-dollar risk of loss associated with our warehouse facilities. During the year ended December 31, 2008, our warehouse agreements terminated with the respective financial institutions and we recorded a loss of $32.1 million on our warehouse deposits. We have no further obligations under these warehouse agreements and we have not entered into any new warehouse facilities subsequent to December 31, 2008.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the financial assets, liabilities and derivatives as to which we have elected to record fair value adjustments under FASB ASC Topic 825, “Financial Instruments.” Our election to record these assets at fair value was effective on January 1, 2008, the effective date of the fair value option. Our election impacted the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the years ended December 31, 2009 and 2008, the fair value adjustments we recorded were as follows (dollars in thousands):

	For the Year Ended December 31
Description	2009			2008
Change in fair value of trading securities and security-related receivables	$	(158,273	)	$	(1,737,305	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		153,459			1,579,689
Change in fair value of derivatives		6,377			(394,821	)
Change in fair value of financial instruments	$	1,563		$	(552,437	)

Income tax benefit (provision). We maintain several domestic and foreign TRS entities that are subject to U.S. federal, state and local income taxes and foreign taxes. For the year ended December 31, 2009, the total benefit for income taxes was $1.0 million, a decrease of $1.1 million from a benefit of $2.1 million for the year ended December 31, 2008. The tax benefits were primarily attributable to operating losses at several of our domestic TRS entities during the years ended December 31, 2009 and 2008.

Discontinued operations. Income (loss) from discontinued operations increased $1.3 million to a loss of $0.8 million for the year ended December 31, 2009 compared to a loss of $2.1 million for the year ended December 31, 2008 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a $2.1 million loss on a VIE that was deconsolidated in March 2009 offset by a gain of $0.5 million on a property that was sold in July 2009.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenue

Investment interest income. Investment interest income decreased $201.9 million, or 22.6%, to $691.3 million for the year ended December 31, 2008 from $893.2 million for the year ended December 31, 2007. This net decrease was primarily attributable to: decreases in interest income of $120.1 million on approximately $1.5 billion of investments resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $17.7 million from the sale of other securities subsequent to December 31, 2007 and $25.2 million from approximately $469.7 million in repayments on our residential mortgage loans; these decreases were offset by an increase in interest income of $36.6 million from the closing and consolidation of Taberna VIII in March 2007 and Taberna IX in June 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR of approximately 2.4% during the year ended December 31, 2008 compared to the year ended December 31, 2007 and $879.7 million in total principal amount of investments on non-accrual status as of December 31, 2008 compared to $287.9 million as of December 31, 2007.

Investment interest expense. Investment interest expense decreased $213.5 million, or 30.6%, to $485.3 million for the year ended December 31, 2008 from $698.6 million for the year ended December 31, 2007. This net decrease was primarily attributable to: decreases in interest expense of $97.0 million on approximately $1.5 billion of indebtedness resulting from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007, $42.4 million from reductions in our repurchase agreements and other indebtedness used to finance various investments on a short-term basis, $29.1 million from repayments of our residential mortgage-backed securities used to finance our residential mortgage portfolio and $3.0 million related to the write-off of unamortized deferred financing costs resulting from the termination of a line of credit in April 2007; these decreases were offset by increases in interest expense of $12.8 million from the issuance of CDO notes payable from RAIT II in June 2007, $6.6 million from the closing and consolidation of Taberna IX in June 2007 and $8.2 million from the issuance of convertible senior notes in April 2007. The remaining decrease was primarily related to the reduction in short-term LIBOR of approximately 2.4% during the year ended December 31, 2008 compared to the year ended

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December 31, 2007 and the inclusion of interest cost of hedges as a component of the change in the fair value of financial instruments during the year ended December 31, 2008 due to the adoption of the fair value option, which is now classified under FASB ASC Topic 825, on January 1, 2008.

Rental income. Rental income increased $6.1 million, or 54.0%, to $17.4 million for the year ended December 31, 2008 from $11.3 million for the year ended December 31, 2007. This increase was primarily attributable to eight new properties, with direct real estate investments of $173.5 million, acquired or consolidated since December 31, 2007.

Fee and other income. Fee and other income decreased $4.3 million, or 17.0%, to $21.4 million for the year ended December 31, 2008 from $25.7 million for the year ended December 31, 2007. This decrease was primarily due to a structuring fee of $5.6 million that we received in connection with the completion of Taberna Europe I in January 2007. No structuring fees were earned during the year ended December 31, 2008. We received $2.5 million of lower origination fees from our domestic and European origination activities during the year ended December 31, 2008 compared to 2007 offset by $3.8 million of increased asset management fees resulting primarily from the deconsolidation of our Taberna II and Taberna V CDOs during the latter half of 2007 and the completion of Taberna Europe II in September 2007.

Expenses

Real estate operating expense. Real estate operating expense increased $4.8 million to $14.8 million for the year ended December 31, 2008 from $10.0 million for the year ended December 31, 2007. This increase was primarily attributable to eight new properties, with direct real estate investments of $173.5 million, acquired or consolidated since December 31, 2007.

Compensation expense. Compensation expense decreased $4.9 million, or 14.2%, to $29.8 million for the year ended December 31, 2008 from $34.7 million for the year ended December 31, 2007. This decrease was due to lower stock based compensation amortization of (i) $1.6 million resulting from phantom unit forfeitures from our executives in December 2007 and (ii) $2.3 million from the vesting of certain restricted share awards subsequent to December 31, 2007 and $5.4 million of reduced salary, bonus and other compensation costs offset by a $4.4 million increase associated with lower capitalized costs due to a reduction of commercial loan and domestic TruPS production.

General and administrative expense. General and administrative expense decreased $4.2 million, or 16.0%, to $21.9 million for the year ended December 31, 2008 from $26.1 million for the year ended December 31, 2007. This decrease is primarily due to a $1.0 million fee paid to Eton Park Capital Management for providing a standby commitment to purchase equity in the Taberna Europe I transaction that we closed in January 2007. No such fees were paid during the year ended December 31, 2008. In addition, during 2008, there were $1.3 million less travel and entertainment expenses, $2.5 million of lower costs for deals that will no longer be pursued, $0.6 million less investment monitoring costs and other decreased general and administrative costs offset by $2.6 million of increased legal expenses related to the class action securities lawsuit.

Stock forfeitures. Stock forfeitures resulted in $9.7 million of expense during 2007 due to the forfeiture of 322,000 phantom units by certain of our executive officers in December 2007. In January 2007, the board of trustees awarded these phantom units to our executive officers and had a grant date fair value of $11.8 million. The awards vested over four years. In December 2007, these executive officers voluntarily forfeited the awards which was treated as a capital contribution to us under FASB ASC Topic 718, “Compensation-Stock Compensation.” The unamortized portion of the forfeited awards was charged to stock forfeiture expense and recorded as an increase to additional paid-in capital.

Provision for losses. The provision for losses relates to our investments in residential mortgages and mortgage-related receivables and our commercial mortgage loan portfolio. The provision for losses increased by $141.1 million for the year ended December 31, 2008 to $162.8 million as compared to $21.7 million for the year ended December 31, 2007. After December 31, 2007, delinquencies in our residential mortgage portfolio increased by $184.3 million, including $86.7 million in real estate-owned, bankruptcy or foreclosure property, and by $124.8 million in our commercial loan portfolio. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue or adjust our loan loss reserve as circumstances or conditions change. As of December 31, 2008, $186.0 million of our commercial mortgages and mezzanine loans and $236.0 million of our residential mortgages and mortgage-related receivables were on non-accrual status.

Asset impairments. For the year ended December 31, 2008, we recorded asset impairments totaling $67.1 million that were associated with certain intangible assets and certain investments in loans, available-for-sale securities and other assets for which we did not elect FASB ASC Topic 825. In making this determination, management considered the estimated fair value of the investments in relation to our cost basis, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management

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believed full recovery was not likely and wrote down the investments to their current recovery value, or estimated fair value. Asset impairments were comprised of $8.5 million of impairment in our investments in loans, $22.6 million of other-than-temporary impairment in available-for-sale securities and $6.9 million of other-than-temporary impairment in other assets. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” Due to current market and economic conditions, management evaluated the carrying value of intangible assets and recorded impairment expense of $29.1 million during the year ended December 31, 2008. Asset impairments totaling $517.5 million for the year ended December 31, 2007 were recorded prior to the adoption of the fair value option, which is now classified as FASB ASC Topic 825, and were comprised of other-than-temporary impairment of $428.7 million associated with investments in securities, $13.2 million of impairment expense associated with intangible assets and $75.6 million of impairment associated with goodwill.

Depreciation expense. Depreciation expense increased $0.5 million to $6.2 million for the year ended December 31, 2008 from $5.7 million for the year ended December 31, 2007. This increase was primarily attributable to eight new properties, with direct real estate investments of $173.5 million, acquired or consolidated since December 31, 2007.

Amortization of intangible assets. Amortization expense decreased $44.2 million, or 72.1%, to $17.1 million for the year ended December 31, 2008 from $61.3 million for the year ended December 31, 2007. This decrease resulted from the full amortization or impairment of some of the identified intangibles ($34.8 million had a useful life of one year) recorded subsequent to or during the year ended December 31, 2007.

Other Income (Expense)

Interest and other income. Interest and other income decreased $12.5 million to $1.3 million for the year ended December 31, 2008 from $13.8 million for the year ended December 31, 2007. This decrease is due to reduced average cash and restricted cash balances during the year ended December 31, 2008 as compared to the year ended December 31, 2007 as well as reduced interest rates offered by financial institutions in 2008.

Gains (losses) on sales of assets. Gains on sale of assets were $0.8 million for the year ended December 31, 2008 compared to losses on sale of assets of $109.9 million for the year ended December 31, 2007. The gains on sale of assets during the year ended December 31, 2008 were associated with the sales of investments in securities and other assets. Losses on sales of assets was $109.9 million for the year ended December 31, 2007. The losses on sales of assets during 2007 was comprised of $10.2 million associated with the sales of other securities that we held in our investment portfolio and $99.7 million of losses relating to the sale of the net assets of Taberna II and Taberna V during 2007. In November and December 2007, we sold a portion of our interests in these CDOs such that we were not determined to be the primary beneficiary under accounting standards classified under FASB ASC Topic 810, “Consolidations”, of these VIEs. For accounting purposes, the deconsolidation of these VIEs is treated as a sale of their net assets for no consideration and a resulting gain from deconsolidation of VIEs.

Gains on extinguishment of debt. Gains on extinguishment of debt during the year ended December 31, 2008 are attributable to the repurchase of $40.8 million in aggregate principal amount of convertible senior notes, $25.0 million in principal amount of junior subordinated notes and $3.0 million in principal amount of CDO notes payable. The convertible senior notes were repurchased from the market for a total purchase price of $18.7 million and we recorded a gain on extinguishment of debt of $21.2 million, net of $0.9 million deferred financing costs that were written off associated with these convertible senior notes. The junior subordinated notes were repurchased from the market for a total purchase price of $5.2 million and we recorded a gain on extinguishment of debt of $19.2 million, net of $0.6 million deferred financing costs that were written off associated with these junior subordinated notes. The CDO notes payable were repurchased from the market for a total purchase price of $0.8 million and we recorded a gain on extinguishment of debt of $2.2 million.

Change in fair value of free-standing derivatives. The change in fair value of free-standing derivatives represents the earnings (loss) on (of) our first-dollar risk of loss associated with our warehouse facilities. During the year ended December 31, 2008, our warehouse agreements terminated with the respective financial institutions and we have recorded a loss of $32.1 million on our warehouse deposits. The write-off of these warehouse deposits were our only exposure under these warehouse agreements and we have no further obligations thereunder.

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Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the financial assets, liabilities and derivatives whereby we have elected to record fair value adjustments under the fair value option, which is now classified under FASB Topic 825. Our election to record these assets at fair value was effective on January 1, 2008, the effective date of the fair value option. Our election impacted the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the year ended December 31, 2008, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Year Ended December 31, 2008
Change in fair value of trading securities and security-related receivables	$	(1,737,305	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		1,579,689
Change in fair value of derivatives		(394,821	)
Change in fair value of financial instruments	$	(552,437	)

Equity in income (loss) of equity method investments. Equity in income (loss) of equity method investments increased $1.0 million to income of $0.9 million for the year ended December 31, 2008 compared to loss of $0.1 million for the year ended December 31, 2007. The increase relates to the accretion on an investment in a property that was accounted for under the equity method.

Provision for income taxes. We maintain several domestic and foreign TRS entities that are subject to U.S. federal, state and local income taxes and foreign taxes. For the year ended December 31, 2008, the provision for income taxes was a benefit of $2.1 million, a decrease of $8.7 million from a benefit of $10.8 million for the year ended December 31, 2007. These tax benefits are primarily attributable to operating losses at several of our domestic TRS entities during the years ended December 31, 2008 and 2007.

Discontinued operations. Income (loss) from discontinued operations decreased $0.6 million to a loss of $2.1 million for the year ended December 31, 2008 compared to a loss of $1.5 million for the year ended December 31, 2007 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a loss of $0.4 million on a property that was sold in September 2007.

Securitization Summary

Overview. We have used securitizations, mainly through CDOs, to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolio for the long-term. To finance our investments in the foreseeable future, management will seek to structure match funded financing through reinvesting asset repayments in our existing securitizations, loan participations, bank lines of credit, joint-venture opportunities and other methods that preserve our capital while making investments that generate an attractive return.

A CDO is a securitization structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the CDO liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower than the average yield of the securities backing the CDO. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the CDO are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Unlike typical securitization structures, the underlying assets in our CDO pool may be sold or repaid, subject to certain limitations, without a corresponding pay-down of the CDO debt, provided the proceeds are reinvested in qualifying assets.

We manage 13 CDO securitizations with varying amounts of retained or residual interests held by us. Four of these CDOs are consolidated in our financial statements as follows: Taberna Preferred Funding VIII, Ltd., or Taberna VIII, Taberna Preferred Funding IX, Ltd., or Taberna IX, RAIT CRE CDO I, Ltd., or RAIT I and RAIT Preferred Funding II, Ltd., or RAIT II. In general, we receive senior asset management fees, based on the amount of collateral assets, as a priority ahead of debt service payments. These CDOs contain interest coverage and overcollateralization triggers, or OC Triggers, that must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns.

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If the interest coverage or OC Triggers are not met, in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant CDO indenture.

As of December 31, 2009, all of our CDOs we manage other than RAIT I and RAIT II , totaling $8.0 billion of our assets under management, were not passing their required interest coverage or OC Triggers and we received only senior asset management fees and interest on certain of the more senior-rated debt owned by us related to these CDO transactions. Events of default exist in four unconsolidated CDOs we manage, totaling $2.9 billion of our assets under management, as of February 2010 due to the non-payment of interest to certain non-controlling class note holders. An event of default may be cause for our removal as collateral manager of these CDOs in limited circumstances where an event of default is caused by a breach or default of the collateral manager. However, we do not believe these circumstances exist and do not expect these events of default will restrict our ability to continue to manage these entities and receive the senior asset management fees. We are unable to predict with certainty which CDOs, in the future, will experience events of default or which, if any, remedies the appropriate note holders may seek to exercise in the future. We continue to receive all of our management fees, interest and residual returns on our two commercial real estate CDOs, RAIT I and RAIT II, and all applicable interest coverage and OC Triggers continue to be met for these securitizations.

A summary of the CDO investments in our consolidated securitizations as of the most recent payment information is as follows (dollars in millions):

• Taberna VIII—Taberna VIII has $713.0 million of total collateral, of which $85.1 million is defaulted. The current overcollateralization (O/C) test is failing at 93.6% with an O/C trigger of 103.5%. We have invested $133.0 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $723.5 million of total collateral, of which $91.6 million is defaulted. The current O/C test is failing at 84.6% with an O/C trigger of 105.4%. We have invested $186.5 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $88.1 million is defaulted. The current O/C test is passing at 117.5% with an O/C trigger of 116.2%. We have invested $223.5 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

• RAIT II—RAIT II has $821.8 million of total collateral, of which $24.3 million is defaulted. The current O/C test is passing at 115.2% with an O/C trigger of 111.7%. We have invested $230.7 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

Generally, our investments in the subordinated notes and equity securities in our consolidated CDOs are subordinate in right of payment and in liquidation to the senior notes issued by the CDOs. We may also own common shares, or the non-economic residual interest, in certain of the entities above.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. The disruption in the credit markets has reduced our liquidity and capital resources and has generally increased the cost of any new sources of liquidity over historical levels. Due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced or eliminated and we do not expect to sponsor new securitizations to provide us with long-term financing for the foreseeable future. We are seeking to expand our use of secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments generating attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements.

We expect to continue to receive substantial cash flow from our investment portfolio. Our securitizations RAIT I and RAIT II, collateralized by U.S. commercial real estate loans, continue to perform and make distributions on our retained interests and pay us management fees. While our managed securitizations secured by TruPS or European investments are currently failing several of their respective over-collateralization tests and/or have suffered events of default, we continue to receive our senior management fees from these securitizations. We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that our assets could be sold

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directly to raise additional cash. We may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

• to repay our indebtedness, including repurchasing or retiring our debt before it becomes due;

• to pay our expenses, including compensation to our employees;

• to pay U.S. federal, state, and local taxes of our TRSs;

• to repurchase our common shares; and

• to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through the following:

• the use of our cash and cash equivalent balances of $25.0 million as of December 31, 2009;

• cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our vertically integrated commercial real estate platform;

• proceeds from the sales of assets;

• proceeds from future borrowings; and

• proceeds from future offerings of our common and preferred shares.

Cash Flows

As of December 31, 2009 and 2008, we maintained cash and cash equivalents of $25.0 million and $27.5 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Years Ended December 31
	2009			2008			2007
Cash flows from operating activities	$	65,013		$	141,998		$	183,043
Cash flows from investing activities		253,004			542,525			(1,524,252	)
Cash flows from financing activities		(320,446	)		(785,047	)		1,369,829
Net change in cash and cash equivalents		(2,429	)		(100,524	)		28,620
Cash and cash equivalents at beginning of period		27,463			127,987			99,367
Cash and cash equivalents at end of period	$	25,034		$	27,463		$	127,987

Our principal source of cash flow is from our investing activities. Our cash inflow from investing activities primarily resulted from $269.5 million of principal repayments on loans and investments. The reduction in cash inflow from our investing activities during 2009 as compared to 2008 reflects the lower volume of repayments within our loans and investment portfolios.

The cash outflow from our financing activities during 2009 has declined when compared to 2008 due to a reduction in the amount of debt repayments or repurchases as well as reduction in dividends to common shares to zero during 2009, as compared to $108.1 million in 2008. The reduction in dividends on our common shares occurred because we recorded a loss for REIT taxable income purposes and therefore, we were not required to pay any dividends on our common shares to maintain our REIT status.

Our assets under management have historically been financed on a long-term basis through securitizations and our rights to cash flow from these portfolios are dependent on the terms of the debt and equity securities we hold in these securitizations. Several of our securitizations are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing cash flow, associated with our retained interests, to repay principal on senior debt. See “Securitization Summary” above.

Our two commercial real estate securitized financing arrangements, RAIT I and RAIT II, include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts during the first five years of each facility. At December 31, 2009, these revolvers are fully utilized and have no additional capacity. We have $38.5 million of restricted cash in our two CRE securitizations to invest in commercial loans as of December 31, 2009, subject to future funding commitments and borrowing requirements.

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Capitalization

Debt Financing.

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2009 (dollars in thousands):

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	246,363	$	245,885		6.9	%	Apr. 2027
Secured credit facilities		49,994		49,994		4.8	%	Feb. 2011 to Dec. 2011
Senior secured notes		43,000		43,000		12.5	%	Apr. 2014
Loans payable on real estate		17,500		17,500		4.8	%	Apr. 2010
Junior subordinated notes, at fair value (2)		38,052		17,004		8.7	%	Mar. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%	Apr. 2037
Total recourse indebtedness		420,009		398,483		7.3	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,396,750		1,396,750		0.7	%	2036 to 2045
CDO notes payable, at fair value (2)(3)(5)		1,185,061		146,557		0.9	%	2035 to 2038
Loans payable on real estate		64,461		64,461		5.6	%	Aug. 2010 to Aug. 2016
Trust preferred obligations, at fair value (2)		132,375		70,872		1.9	%	2036
Total non-recourse indebtedness		2,778,647		1,678,640		0.9	%
Total indebtedness	$	3,198,656	$	2,077,123		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825, “Financial Instruments”.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1.8 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1.4 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of December 31, 2009 was $830.2 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (that is, CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the year ended December 31, 2009 is as follows:

Recourse Indebtedness

Convertible senior notes. On April 18, 2007, we issued and sold in a private offering to qualified institutional buyers, $425.0 million aggregate principal amount of 6.875% convertible senior notes due 2027. After deducting the initial purchaser’s discount and the estimated offering expenses, we received approximately $414.3 million of net proceeds. Interest on the convertible notes is paid semi-annually and the convertible notes mature on April 15, 2027.

Prior to April 20, 2012, the senior notes are not redeemable at RAIT’s option, except to preserve RAIT’s status as a REIT. On or after April 20, 2012, RAIT may redeem all or a portion of the convertible notes at a redemption price equal to the principal amount plus accrued and unpaid interest (including additional interest), if any. Convertible note holders may require RAIT to repurchase all or a portion of the convertible notes at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest), if any, on the convertible notes on April 15, 2012, April 15, 2017, and April 15, 2022, or upon the occurrence of certain change in control transactions prior to April 20, 2012.

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Prior to April 15, 2026, upon the occurrence of specified events, the convertible notes will be convertible at the option of the holder at an initial conversion rate of 28.6874 shares per $1,000 principal amount of convertible notes. The initial conversion price of $34.86 represents a 27.5% premium to the per share closing price of $27.34 on the date the offering was priced. Upon conversion of convertible notes by a holder, the holder will receive cash up to the principal amount of such convertible notes and, with respect to the remainder, if any, of the conversion value in excess of such principal amount, at the option of RAIT in cash or RAIT’s common shares. The initial conversion rate is subject to adjustment in certain circumstances. We include the convertible notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 470, “Debt”. Upon adoption, we recorded a retrospective discount on our issued and outstanding convertible notes of $2.0 million. This discount reflects the fair value of the embedded conversion option within the convertible debt instruments and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the convertible notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the convertible notes were issued. The discount will be amortized to interest expense through April 15, 2012, the date at which holders of our convertible notes could require repayment. Upon adoption, all prior periods were revised to reflect the retroactive adoption of the standard and total discount amortization recorded through December 31, 2008 was $0.6 million.

During the year ended December 31, 2009, we repurchased from the market, a total of $103.8 million in aggregate principal amount of convertible notes for a total consideration of $54.5 million, including the issuance of a $43.0 million senior secured note. See “Senior Secured Note” below. During 2009, we also exchanged $34.0 in aggregate principal amount of convertible notes for 8.1 million of our common shares and $3.1 million of cash, for total consideration of $14.0 million based on our closing stock price of $1.34 per share on December 29, 2009, the date our exchange offer was completed. See “Exchange Offer” below. As a result of these transactions, we recorded gains on extinguishment of debt of $64.9 million, net of deferred financing costs and unamortized discounts that were written off.

During the year ended December 31, 2008, we repurchased, from the market, a total of $40.8 million in aggregate principal amount of convertible notes for a total purchase price of $18.7 million. As a result, we recorded gains on extinguishment of debt of $21.2 million, net of deferred financing and unamortized discounts that were written off.

Secured credit facilities. As of December 31, 2009, we have borrowed an aggregate amount of $50.0 million under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of December 31, 2009, the first secured credit facility had an unpaid principal balance of $21.3 million which is payable in December 2011 under the current terms of this facility. As of December 31, 2009, the second secured credit facility had an unpaid principal balance of $22.2 million. This facility terminates in April 2010 and the unpaid principal balance at that time is payable in April 2011. As of December 31, 2009, the third secured credit facility had an unpaid principal balance of $6.5 million. We are amortizing this balance with monthly principal repayments of $0.5 million which will result in the full repayment of this credit facility by February 2011.

Senior secured notes. On July 31, 2009, pursuant to a securities purchase agreement, we purchased from Mr. Marx $98.3 million aggregate principal amount of our convertible notes for a purchase price of $53.0 million. The purchase price consisted of (a) $43.0 million 12.5% Senior Secured Note due 2014 issued by us, or the senior secured note, and (b) $10.0 million in cash. We also paid to Mr. Marx $2.0 million of accrued and unpaid interest on the convertible notes through July 31, 2009.

The senior secured note bears interest at a rate of 12.5% per year and is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The senior secured note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured note is fully and unconditionally guaranteed by two of our wholly owned subsidiaries, or the guarantors: RAIT Asset Holdings II Member, LLC, or RAHM, and RAIT Asset Holdings II, LLC, or RAH2. RAHM is the sole member of RAH2 and has pledged the equity of RAH2 to secure its guarantee. RAH2’s assets consist of $100.0 million in par amount of certain CDO notes payable issued by RAIT’s consolidated securitizations RAIT CRE CDO I, LTD., RAIT Preferred Funding II, LTD., Taberna Preferred Funding VIII, Ltd., and Taberna Preferred Funding IX, Ltd. The senior secured note is not convertible into equity securities of RAIT.

The maturity date of the senior secured note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: our failure to pay any amount of principal or interest on the senior secured note when due; our failure or the failure of any guarantor to perform on any obligation of its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting us or any guarantor.

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Junior subordinated notes, at fair value. On October 16, 2008, we issued $38.1 million principal amount of junior subordinated notes to a third party and received $15.5 million of net cash proceeds. Of the total amount of junior subordinated notes issued, $18.7 million has a fixed interest rate of 8.65% through March 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter and a maturity date of March 30, 2035. The remaining $19.4 million has a fixed interest rate of 9.64% and a maturity date of October 30, 2015. At issuance, we elected to record these junior subordinated notes at fair value under the fair value option, with all subsequent changes in fair value recorded in earnings. As of December 31, 2009, we have $38.1 million unpaid principal associated with this indebtedness. The fair value, or carrying amount, of this indebtedness was $17.0 million as of December 31, 2009.

Junior subordinated notes, at amortized cost. On February 12, 2007, we formed Taberna Funding Capital Trust I which issued $25.0 million of trust preferred securities to investors and $0.1 million of common securities to us. The combined proceeds were used by Taberna Funding Capital Trust I to purchase $25.1 million of junior subordinated notes issued by us. The junior subordinated notes are the sole assets of Taberna Funding Capital Trust I and mature on April 30, 2037, but are callable, at our option, on or after April 30, 2012. Interest on the junior subordinated notes is payable quarterly at a fixed rate of 7.69% through April 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.50%. These junior subordinated notes issued by us are outstanding as of December 31, 2009 and 2008.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their OC Trigger tests as of December 31, 2009.

During the year ended December 31, 2009, we repurchased, from the market, a total of $55.0 million in aggregate principal amount of CDO notes payable issued by RAIT I and RAIT II. The aggregate purchase price was $4.0 million and we recorded gains on extinguishment of debt of $51.0 million.

During 2008, we repurchased from the market a total of $3.0 million in aggregate principal amount of CDO notes payable associated with RAIT I. The total purchase price was $0.8 million and we recorded gains on extinguishment of debt of $2.2 million.

CDO notes payable, at fair value. As of January 1, 2008, we adopted the fair value option, which is now classified under FASB ASC Topic 825, and elected to record CDO notes payable at fair value. These CDO notes payable are collateralized by securities, security-related receivables and loans. At adoption, we decreased the carrying amount of these CDO notes payable by $1.5 billion to reflect these liabilities at fair value in our financial statements. The change in fair value of these CDO notes payable was a decrease of $49.3 million and $1.4 billion for the years ended December 31, 2009 and 2008, respectively, and was included in our consolidated statements of operations.

Both of our Taberna consolidated CDOs are failing OC Triggers which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC Trigger failures are due to defaulted collateral assets and credit risk securities. During the year ended December 31, 2009, $34.5 million of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Loans payable on real estate. As of December 31, 2009 and 2008, we had $81.9 million and $52.3 million, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate and other loans. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheet.

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Trust preferred obligations. Trust preferred obligations finance subordinated debentures acquired by Trust VIEs that are consolidated by us for the portion of the total TruPS that are owned by entities outside of the consolidated group. These trust preferred obligations bear interest at either variable or fixed rates until maturity, generally 30 years from the date of issuance. The Trust VIE has the ability to prepay the trust preferred obligation at any time, without prepayment penalty, after five years. We do not control the timing or ultimate payment of the trust preferred obligations.

As of January 1, 2008, we adopted the fair value option, which is now classified under FASB ASC Topic 825, and elected to record trust preferred obligations at fair value. At adoption, we decreased the carrying amount of the trust preferred obligations by $52.1 million to reflect these liabilities at fair value in our financial statements. The change in fair value of the trust preferred obligations was a decrease of $104.2 million and $145.4 million for the years ended December 31, 2009 and 2008, respectively, and was included in our consolidated statements of operations.

Exchange Offer

On December 29, 2009, we completed our previously announced exchange offer to exchange convertible notes for common shares and cash. Holders of our convertible notes tendered $34.0 million aggregate principal amount of our convertible notes. Pursuant to the terms of the Exchange Offer, we issued 8,126,000 common shares and paid $3.1 million of cash as consideration for the exchanged notes. For each $1,000 principal amount of our convertible notes exchanged, the holder received the following: (i) 239 common shares, (ii) a cash payment of $91.50 and (iii) accrued and unpaid interest on the convertible notes to, but excluding, the settlement date, paid in cash. As a result of the exchange offer, we recorded gains on extinguishment of debt of approximately $18.1 million.

Equity Financing.

Preferred Shares

In 2004, we issued 2,760,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series A Preferred Shares, for net proceeds of $66.6 million. The Series A Preferred Shares accrue cumulative cash dividends at a rate of 7.75% per year on the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A Preferred Shares have no maturity date and we are not required to redeem the Series A Preferred Shares at any time. On or after March 19, 2009, we may, at our option, redeem the Series A Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

In 2004, we issued 2,258,300 shares of our 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series B Preferred Shares, for net proceeds of $54.4 million. The Series B Preferred Shares accrue cumulative cash dividends at a rate of 8.375% per year on the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B Preferred Shares have no maturity date and we are not required to redeem the Series B Preferred Shares at any time. On or after October 5, 2009, we may, at our option, redeem the Series B Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

On July 5, 2007, we issued 1,600,000 shares of our 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, or the Series C Preferred Shares, in a public offering at an offering price of $25.00 per share. After offering costs, including the underwriters’ discount, and expenses of $1.7 million, we received $38.3 million of net proceeds. The Series C Preferred Shares accrue cumulative cash dividends at a rate of 8.875% per year on the $25.00 liquidation preference and are paid on a quarterly basis. The Series C Preferred Shares have no maturity date and we are not required to redeem the Series C Preferred Shares at any time. We may not redeem the Series C Preferred Shares before July 5, 2012, except for the special optional redemption to preserve our tax qualification as a REIT. On or after July 5, 2012, we may, at our option, redeem the Series C Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

On January 27, 2009, our board of trustees declared a first quarter 2009 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2009 to holders of record on March 2, 2009 and totaled $3.4 million.

On April 8, 2009, our board of trustees declared a second quarter 2009 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2009 to holders of record on June 1, 2009 and totaled $3.4 million.

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On July 28, 2009, our board of trustees declared a third quarter 2009 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on September 30, 2009 to holders of record on September 1, 2009 and totaled $3.4 million.

On October 27, 2009, our board of trustees declared a fourth quarter 2009 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on December 31, 2009 to holders of record on December 1, 2009.

On January 26, 2010, our board of trustees declared a first quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on March 31, 2010 to holders of record on March 1, 2010.

Common Shares

- Share Repurchases

On July 24, 2007, our board of trustees adopted a share repurchase plan that authorizes us to purchase up to $75.0 million of RAIT common shares. Under the plan, we may make purchases, from time to time, through open market or privately negotiated transactions. We have not repurchased any common shares under this plan as of December 31, 2009.

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $0.2 million.

-Equity Compensation

On January 24, 2009, 19,020 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

On March 5, 2009, the compensation committee of our board of trustees, or the compensation committee, awarded 484,000 phantom units, valued at $0.3 million using our closing stock price of $0.50 per share, to various non-executive employees. The awards generally vest over three-year periods.

On June 25, 2009, the compensation committee awarded 200,000 phantom units, valued at $0.2 million using our closing stock price of $1.19, to two non-executive employees. The awards generally vest over four-year periods.

On January 26, 2010, the compensation committee awarded 1,500,000 phantom units, valued at $1.9 million using our closing stock price of $1.27, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 500,000 phantom units, valued at $0.6 million using our closing stock price of $1.27, to our non-executive officer employees. These awards generally vest over three-year periods.

-Exchange Offer

On December 29, 2009, we completed our previously announced exchange offer to exchange $34.0 million of our convertible notes for common shares and cash. Pursuant to the terms of the Exchange Offer, we issued 8,126,000 common shares and paid $3.1 million of cash as consideration for the exchanges notes. See “Exchange Offer” above.

-DRSPP

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10,000,000 common shares. During the year ended December 31, 2009, we issued a total of 1.3 million common shares pursuant to the DRSPP at a weighted-average price of $1.52 per share and received $2.0 million of net proceeds. On January 26, 2010, our board approved increasing the number of common shares available for issuance under the DRSPP by 7,248,436 common shares so that, with the 4,751,564

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common shares previously authorized for issuance under the DRSPP that remain available for issuance, 12,000,000 common shares, in the aggregate, would be available for issuance under the DRSPP upon the registration under the Securities Act of 1933, as amended, of the common shares added to the DRSPP.

-SEDA

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50.0 million, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50.0 million worth of common shares under the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12,500,000 common shares.

Subject to the terms and conditions of the SEDA, we may issue notices from time to time to YA Global requiring YA Global to purchase common shares. The maximum portion of the commitment amount RAIT can request YA Global to pay pursuant to a single notice cannot exceed $1.5 million or any other mutually agreed amount. The number of common shares issuable in connection with each notice is computed by dividing the portion of the commitment amount set forth in the notice by the purchase price for the common shares. The purchase price equals 97% of the market price, which is defined as the lowest daily volume weighted average price, or VWAP, of the common shares traded on the New York Stock Exchange during the three consecutive trading days after the date we delivered the notice to YA Global (the “Pricing Period”).

For each notice, we may indicate a minimum acceptable price, or the minimum price. If on any trading day during the pricing period, the VWAP for the common shares is below the minimum price, each, an excluded day, the portion of the commitment amount we have requested YA Global to pay under such notice will be reduced by 33%. In addition, each excluded day will be excluded from the Pricing Period for purposes of determining the market price. If YA Global has sold Common Shares on an Excluded Day, RAIT is obligated to sell, and YA Global is obligated to purchase, such number of Common Shares at a price equal to the Minimum Price; provided, however, that such number of Common Shares is not to exceed the number obtained by dividing the amount by which the Commitment Amount was reduced by the Minimum Price corresponding to such notice.

The portion of the requested Commitment Amount is automatically withdrawn to the extent the related purchases of Common Shares by YA Global would cause the aggregate number of Common Shares beneficially owned by YA Global and its affiliates to exceed 4.99% of the then outstanding Common Shares or exceed the aggregate offering price of Common Shares issuable under the Registration Statement. Upon expiration of the Pricing Period, YA Global will purchase the appropriate number of Common Shares subject to RAIT meeting certain customary conditions. RAIT will pay a placement agent fee to Raymond James & Associates, Inc. in an amount equal to 2% of the gross proceeds to RAIT of any sale of Common Shares pursuant to the SEDA.

After the first closing under the SEDA and thereafter prior to the termination of the SEDA, RAIT may from time to time request YA Global to purchase promissory notes issued by RAIT with a principal amount of up to $10.0 million. After considering each request in good faith, YA Global, in its sole discretion, will decide whether or not to purchase the notes. Any such notes purchased by YA Global will be on mutually acceptable terms and may include a provision that the notes be repaid with the proceeds of amounts delivered pursuant to the SEDA.

Off-Balance Sheet Arrangements and Commitments

As of December 31, 2009 we did not have any off-balance sheet arrangements or commitments.

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Contractual Commitments

The table below summarizes our contractual obligations as of December 31, 2009:

	Payment due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(dollars in thousands)
Recourse indebtedness:
Secured credit facilities	$	49,994	$	6,890	$	43,104	$	—	$	—
Loans payable on real estate		17,500		17,500		—		—		—
Senior secured notes		43,000		—		—		43,000		—
Convertible senior notes (1)		246,363		—		—		—		246,363
Junior subordinated notes		63,152		—		—		—		63,152
Total recourse indebtedness		420,009		24,390		43,104		43,000		309,515
Non-recourse indebtedness:
Loans payable on real estate		64,461		10,071		—		—		54,390
CDO notes payable		2,581,811		—		—		—		2,581,811
Trust preferred obligations		132,375		—		—		—		132,375
Total non-recourse indebtedness		2,778,647		10,071		—		—		2,768,576
Total indebtedness		3,198,656		34,461		43,104		43,000		3,078,091
Interest payable (2)(3)		1,484,108		143,499		262,898		211,156		866,555
Operating lease obligations		7,480		1,667		2,468		2,193		1,152
Funding commitments to borrowers (4)		55,851		24,699		21,652		—		9,500
Total	$	4,746,095	$	204,326	$	330,122	$	256,349	$	3,955,298

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012.

(2) All variable-rate indebtedness assumes a 30-day LIBOR rate of 0.23% (the 30-day LIBOR rate at December 31, 2009).

(3) Interest payable is comprised of interest expense related to our indebtedness and the interest cost of the hedges associated with indebtedness. Interest payments related to recourse indebtedness are due by period as follows: $30.4 million less than one year, $56.7 million one to three years, $51.7 million three to five years and $284.7 million more than five years. Interest payments related to non-recourse indebtedness are due by period as follows: $113.1 million less than one year, $206.2 million one to three years, $159.4 million three to five years and $581.9 million more than five years.

(4) Amounts represent the commitments we have made to fund borrowers in our existing lending arrangements as of December 31, 2009.

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EX-99.5

Exhibit 99.5

Item 8. Financial Statements and Supplementary Data.

RAIT FINANCIAL TRUST

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm	2
Consolidated Balance Sheets as of December 31, 2009 and 2008	4
Consolidated Statements of Operations for the Three Years Ended December 31, 2009	5
Consolidated Statements of Comprehensive Income (Loss) for the Three Years Ended December 31, 2009	6
Consolidated Statements of Equity for the Three Years Ended December 31, 2009	7
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2009	9
Notes to Consolidated Financial Statements	10
Supplemental Schedules:
Schedule II: Valuation and Qualifying Accounts	51
Schedule III: Real Estate and Accumulated Depreciation	52
Schedule IV: Mortgage Loans on Real Estate and Mortgage Related Receivables	55

1

Report of Independent Registered Public Accounting Firm

Board of Trustees

RAIT Financial Trust

We have audited the accompanying consolidated balance sheets of RAIT Financial Trust (a Maryland real estate investment trust) and subsidiaries (collectively RAIT Financial Trust or the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2009. Our audits of the basic financial statements included the financial statement schedules listed in the index appearing under item 8. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RAIT Financial Trust and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures and the fair value option under FASB ASC 825, Financial Instruments, on January 1, 2008.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RAIT Financial Trust’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2010 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

March 1, 2010 (except Notes 6 and 15, as to which the date is November 5,  2010)

2

Report of Independent Registered Public Accounting Firm

Board of Trustees

RAIT Financial Trust

We have audited RAIT Financial Trust (a Maryland real estate investment trust) and subsidiaries’ (collectively RAIT Financial Trust or the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RAIT Financial Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, RAIT Financial Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of RAIT Financial Trust and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 1, 2010 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

March 1, 2010

3

RAIT Financial Trust

Consolidated Balance Sheets

(Dollars in thousands, except share and per share information)

	As of December 31
	2009			2008
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,467,566		$	2,041,112
Residential mortgages and mortgage-related receivables		—			3,598,925
Allowance for losses		(86,609	)		(171,973	)
Total investments in mortgages and loans		1,380,957			5,468,064
Investments in real estate		738,235			350,487
Investments in securities and security-related receivables, at fair value		694,897			1,920,883
Cash and cash equivalents		25,034			27,463
Restricted cash		156,167			197,366
Accrued interest receivable		37,625			99,609
Other assets		28,105			46,716
Deferred financing costs, net of accumulated amortization of $7,290 and $5,781, respectively		23,778			30,875
Intangible assets, net of accumulated amortization of $82,929 and $81,522, respectively		10,178			9,987
Total assets	$	3,094,976		$	8,151,450
Liabilities and Equity
Indebtedness ($234,433 and $755,021 at fair value, respectively)	$	2,077,123		$	6,102,890
Accrued interest payable		17,432			80,035
Accounts payable and accrued expenses		21,889			19,446
Derivative liabilities		186,986			613,852
Deferred taxes, borrowers’ escrows and other liabilities		21,625			65,886
Total liabilities		2,325,055			6,882,109
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.01 par value per share, 200,000,000 shares authorized, 74,420,598 and 64,842,571 issued and outstanding, including 14,159 and 76,690 unvested restricted share awards, respectively		744			648
Additional paid in capital		1,630,428			1,613,853
Accumulated other comprehensive income (loss)		(118,973	)		(231,425	)
Retained earnings (deficit)		(745,262	)		(304,059	)
Total shareholders’ equity		767,004			1,079,084
Noncontrolling interests		2,917			190,257
Total equity		769,921			1,269,341
Total liabilities and equity	$	3,094,976		$	8,151,450

The accompanying notes are an integral part of these consolidated financial statements.

4

RAIT Financial Trust

Consolidated Statements of Operations

(Dollars in thousands, except share and per share information)

	For the Years Ended December 31
	2009			2008			2007
Revenue:
Investment interest income	$	381,979		$	691,287		$	893,212
Investment interest expense		(255,604	)		(485,286	)		(698,591	)
Net interest margin		126,375			206,001			194,621
Rental income		44,637			17,425			11,291
Fee and other income		26,498			21,357			25,725
Total revenue		197,510			244,783			231,637
Expenses:
Real estate operating expense		41,399			14,781			9,958
Compensation expense		27,578			29,804			34,739
General and administrative expense		21,770			21,930			26,099
Provision for losses		226,567			162,783			21,721
Asset impairments		46,015			67,052			517,452
Stock forfeitures		—			—			9,708
Depreciation expense		19,715			6,196			5,714
Amortization of intangible assets		1,407			17,077			61,269
Total expenses		384,451			319,623			686,660
Income (loss) before other income (expense), taxes and discontinued operations		(186,941	)		(74,840	)		(455,023	)
Interest and other income		5,643			1,315			13,811
Gains (losses) on sale of assets		(376,751	)		806			7,269
Gains on extinguishment of debt		115,869			42,572			—
Change in fair value of free-standing derivatives		—			(37,203	)		(4,987	)
Change in fair value of financial instruments		1,563			(552,437	)		—
Unrealized gains (losses) on interest rate hedges		(470	)		(407	)		(7,789	)
Equity in income (loss) of equity method investments		(12	)		927			(56	)
Income (loss) before taxes and discontinued operations		(441,099	)		(619,267	)		(446,775	)
Income tax benefit (provision)		958			2,137			10,784
Income (loss) from continuing operations		(440,141	)		(617,130	)		(435,991	)
Income (loss) from discontinued operations		(840	)		(2,055	)		(1,487	)
Net income (loss)		(440,981	)		(619,185	)		(437,478	)
Income (loss) allocated to preferred shares		(13,641	)		(13,641	)		(11,817	)
Income (loss) allocated to noncontrolling interests		13,419			189,580			69,707
Net income (loss) allocable to common shares	$	(441,203	)	$	(443,246	)	$	(379,588	)
Earnings (loss) per share—Basic:
Continuing operations	$	(6.76	)	$	(6.96	)	$	(6.16	)
Discontinued operations		(0.01	)		(0.03	)		(0.02	)
Total earnings (loss) per share—Basic	$	(6.77	)	$	(6.99	)	$	(6.18	)
Weighted-average shares outstanding—Basic		65,205,233			63,394,447			61,403,986
Earnings (loss) per share—Diluted:
Continuing operations	$	(6.76	)	$	(6.96	)	$	(6.16	)
Discontinued operations		(0.01	)		(0.03	)		(0.02	)
Total earnings (loss) per share—Diluted	$	(6.77	)	$	(6.99	)	$	(6.18	)
Weighted-average shares outstanding—Diluted		65,205,233			63,394,447			61,403,986
Distributions declared per common share	$	—		$	1.27		$	2.56

The accompanying notes are an integral part of these consolidated financial statements.

5

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

	For the Years Ended December 31
	2009			2008			2007
Net income (loss)	$	(440,981	)	$	(619,185	)	$	(437,478	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		6,807			(110,334	)		(201,029	)
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		470			407			7,789
Realized (gains) losses on interest rate hedges reclassified to earnings		45,476			31,307			(4,004	)
Change in fair value of available-for-sale securities		(12,095	)		(42,460	)		(698,793	)
Realized (gains) losses on available-for-sale securities reclassified to earnings		44,275			20,961			348,005
Realized (gains) losses on sales of assets of VIEs		28,196			—			80,722
Total other comprehensive income (loss)		113,129			(100,119	)		(467,310	)
Comprehensive income (loss) before allocation to noncontrolling interests		(327,852	)		(719,304	)		(904,788	)
Allocation to noncontrolling interests		12,742			187,793			100,063
Comprehensive income (loss)	$	(315,110	)	$	(531,511	)	$	(804,725	)

The accompanying notes are an integral part of these consolidated financial statements.

6

RAIT Financial Trust

Consolidated Statements of Equity

(Dollars in thousands, except share information)

	Preferred Shares— Series A		Par Value Preferred Shares— Series A		Preferred Shares— Series B		Par Value Preferred Shares— Series B		Preferred Shares— Series C		Par Value Preferred Shares— Series C		Common Shares			Par Value Common Shares			Additional Paid In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance, January 1, 2007		2,760,000	$	28		2,258,300	$	23		—	$	—		51,720,896		$	517		$	1,218,667		$	(3,085	)	$	(19,746	)	$	1,196,404		$	124,273		$	1,320,677
Net income		—		—		—		—		—		—		—			—			—			—			(367,771	)		(367,771	)		(69,707	)		(437,478	)
Preferred dividends		—		—		—		—		—		—		—			—			—			—			(11,817	)		(11,817	)		—			(11,817	)
Common dividends declared		—		—		—		—		—		—		—			—			—			—			(158,281	)		(158,281	)		—			(158,281	)
Other comprehensive loss, net		—		—		—		—		—		—		—			—			—			(436,954	)		—			(436,954	)		(30,356	)		(467,310	)
Stock options exercised		—		—		—		—		—		—		7,377			—			59			—			—			59			—			59
Stock compensation expense		—		—		—		—		—		—		282,118			2			21,135			—			—			21,137			—			21,137
Acquisition of noncontrolling interests		—		—		—		—		—		—		—			—			—			—			—			—			(19,963	)		(19,963	)
Distributions to noncontrolling interests		—		—		—		—		—		—		—			—			—			—			—			—			(13,083	)		(13,083	)
Deconsolidation of VIEs		—		—		—		—		—		—		—			—			—			—			—			—			10,438			10,438
Preferred shares issued, net		—		—		—		—		1,600,000		16		—			—			38,659			—			—			38,675			—			38,675
Common shares issued, net		—		—		—		—		—		—		11,500,000			115			371,813			—			—			371,928			—			371,928
Issuance of common share conversion options with convertible debt		—		—		—		—		—		—		—			—			1,996			—			—			1,996			—			1,996
Repurchase of common shares, net		—		—		—		—		—		—		(2,717,600	)		(27	)		(74,354	)		—			—			(74,381	)		(74,381	)		(74,381	)
Balance, December 31, 2007		2,760,000		28		2,258,300		23		1,600,000		16		60,792,791			607			1,577,975			(440,039	)		(557,615	)		580,996			1,602			582,598
Adjustment for adoption of the fair value option on January 1, 2008		—		—		—		—		—		—		—			—			—			310,520			776,874			1,087,394			373,357			1,460,751
Net loss		—		—		—		—		—		—		—			—			—			—			(429,605	)		(429,605	)		(189,580	)		(619,185	)
Preferred dividends		—		—		—		—		—		—		—			—			—			—			(13,641	)		(13,641	)		—			(13,641	)
Common dividends declared		—		—		—		—		—		—		—			—			—			—			(80,073	)		(80,073	)		—			(80,073	)

7

	Preferred Shares— Series A		Par Value Preferred Shares— Series A		Preferred Shares— Series B		Par Value Preferred Shares— Series B		Preferred Shares— Series C		Par Value Preferred Shares— Series C		Common Shares		Par Value Common Shares		Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Noncontrolling Interests			Total Equity
Other comprehensive loss, net		—		—		—		—		—		—		—		—		—		(101,906	)		—			(101,906	)		1,787			(100,119	)
Stock compensation expense		—		—		—		—		—		—		306,532		4		7,515		—			—			7,519			—			7,519
Acquisition of noncontrolling interests		—		—		—		—		—		—		—		—		—		—			—			—			3,229			3,229
Distributions to noncontrolling interests		—		—		—		—		—		—		—		—		—		—			—			—			(138	)		(138	)
Common shares issued, net		—		—		—		—		—		—		3,666,558		37		28,363		—			—			28,400			—			28,400
Balance, December 31, 2008		2,760,000		28		2,258,300		23		1,600,000		16		64,765,881		648		1,613,853		(231,425	)		(304,059	)		1,079,084			190,257			1,269,341
Net loss		—		—		—		—		—		—		—		—		—		—			(427,562	)		(427,562	)		(13,419	)		(440,981	)
Preferred dividends		—		—		—		—		—		—		—		—		—		—			(13,641	)		(13,641	)		—			(13,641	)
Other comprehensive loss, net		—		—		—		—		—		—		—		—		—		112,452			—			112,452			677			113,129
Stock compensation expense		—		—		—		—		—		—		214,186		2		3,716		—			—			3,718			—			3,718
Acquisition of noncontrolling interests		—		—		—		—		—		—		—		—		—		—			—			—			433			433
Deconsolidation of VIEs		—		—		—		—		—		—		—		—		—		—			—			—			(175,031	)		(175,031	)
Common shares issued, net		—		—		—		—		—		—		9,440,531		94		12,859		—			—			12,953			—			12,953
Balance, December 31, 2009		2,760,000	$	28		2,258,300	$	23		1,600,000	$	16		74,420,598	$	744	$	1,630,428	$	(118,973	)	$	(745,262	)	$	767,004		$	2,917		$	769,921

The accompanying notes are an integral part of these consolidated financial statements.

8

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Dollars in thousands)

	For the Years Ended December 31
	2009			2008			2007
Operating activities:
Net income (loss)	$	(440,981	)	$	(619,185	)	$	(437,478	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		226,567			162,783			21,721
Share-based compensation expense		3,830			7,206			20,402
Depreciation and amortization		24,015			24,578			67,358
Amortization of deferred financing costs and debt discounts		10,801			15,046			31,703
Accretion of discounts on investments		(5,355	)		(6,448	)		(8,331	)
(Gains) losses on sale of assets		378,414			(806	)		(6,913	)
Gains on extinguishment of debt		(115,869	)		(42,572	)		—
Change in fair value of financial instruments		(1,563	)		552,437			—
Unrealized (gains) losses on interest rate hedges		470			407			7,789
Equity in (income) loss of equity method investments		12			(927	)		56
Asset impairments		46,015			67,052			517,452
Unrealized foreign currency (gains) losses on investments		(398	)		(5	)		(191	)
Changes in assets and liabilities:
Accrued interest receivable		(245	)		10,199			(15,437	)
Other assets		(222	)		30,091			(208,186	)
Accrued interest payable		(56,224	)		14,152			11,495
Accounts payable and accrued expenses		(1,219	)		578			2,377
Deferred taxes, borrowers’ escrows and other liabilities		(3,035	)		(72,588	)		179,226
Cash flow from operating activities		65,013			141,998			183,043
Investing activities:
Purchase and origination of securities for investment		(836	)		(60,375	)		(2,017,760	)
Proceeds from sales of other securities		948			—			914,708
Purchase and origination of loans for investment		(30,990	)		(148,762	)		(1,285,824	)
Principal repayments on loans		269,530			656,916			967,546
Investment in Jupiter Communities		(1,300	)		—			—
Proceeds from sale of residential mortgages		16,204			—			—
Investments in real estate		(11,929	)		4,959			(157,840	)
Proceeds from dispositions of real estate		9,385			28,028			12,372
(Increase) decrease in restricted cash and warehouse deposits		1,992			61,759			42,546
Cash flow from investing activities		253,004			542,525			(1,524,252	)
Financing activities:
Proceeds from repurchase agreements, secured credit facilities and other indebtedness		—			68,251			1,215,728
Repayments on repurchase agreements, secured credit facilities and other indebtedness		(28,064	)		(184,098	)		(2,185,542	)
Proceeds from issuance of residential mortgage-backed securities		—			—			616,542
Repayments on residential mortgage-backed securities		(223,335	)		(448,154	)		(525,187	)
Proceeds from issuance of CDO notes payable		—			80,007			1,878,034
Repayments and repurchase of CDO notes payable		(38,532	)		(188,151	)		(120,323	)
Proceeds from issuance of convertible senior notes		—			—			425,000
Repayments and repurchase of convertible senior notes		(28,988	)		(18,664	)		—
Acquisition of and distributions to noncontrolling interests in CDOs		—			(208	)		(33,046	)
Payments for deferred costs		(839	)		(989	)		(54,514	)
Proceeds from cash flow hedges		—			—			2,280
Preferred share issuance, net of costs incurred		—			—			38,675
Common share issuance, net of costs incurred		12,953			28,741			367,511
Repurchase of common shares		—			—			(74,381	)
Distributions paid to preferred shares		(13,641	)		(13,641	)		(11,817	)
Distributions paid to common shares		—			(108,141	)		(169,131	)
Cash flow from financing activities		(320,446	)		(785,047	)		1,369,829
Net change in cash and cash equivalents		(2,429	)		(100,524	)		28,620
Cash and cash equivalents at the beginning of the period		27,463			127,987			99,367
Cash and cash equivalents at the end of the period	$	25,034		$	27,463		$	127,987
Supplemental cash flow information:
Cash paid for interest	$	248,226		$	409,400		$	637,615
Cash paid (refunds received) for taxes		(975	)		2,721			12,428
Non-cash decrease in trust preferred obligations		(227,084	)		(91,166	)		(92,044	)
Non-cash increase in investments in real estate from the conversion of loans		416,751			237,439			82,708
Non-cash decrease in convertible senior notes from extinguishment of debt		(69,398	)		(22,168	)		—
Non-cash decrease in other indebtedness from extinguishment of debt		—			(19,750	)		—
Non-cash increase in net assets from deconsolidation of VIEs		—			—			99,537
Non-cash decrease in goodwill		—			—			(56,753	)
Distributions payable		—			—			28,068

The accompanying notes are an integral part of these consolidated financial statements.

9

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of December 31, 2009

(Dollars in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We conduct our business through our subsidiaries, RAIT Partnership, L.P. and Taberna Realty Finance Trust, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. Taberna is also a Maryland REIT.

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments, and to mitigate interest rate risk through derivative instruments.

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations, equity and cash flows are included. Certain prior period amounts have been reclassified to conform with the current period presentation.

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”, or SFAS No. 168. SFAS No. 168 established the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The intent of the FASB ASC was to restructure the various sources of GAAP literature into a single source of authoritative literature. It was not intended to, and did not, change current GAAP. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 resulted in all references to historical GAAP literature being presented in accordance with the FASB ASC.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and those accounts of our majority-owned and/or controlled subsidiaries and those entities for which we are determined to be the primary beneficiary in accordance with FASB ASC Topic 810, “Consolidation.” The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. We allocate income (loss) to noncontrolling interests based on their respective ownership of our underlying subsidiaries. Losses are allocated to noncontrolling interests to the extent their capital accounts can absorb their allocated losses, any excess losses over their capital accounts are allocated to us. All intercompany accounts and transactions have been eliminated in consolidation.

When we obtain an explicit or implicit interest in an entity, we evaluate the entity to determine if the entity is a variable interest entity, or VIE, and, if so, whether or not we are deemed to be the primary beneficiary of the VIE, in accordance with FASB ASC Topic 810. Generally, we consolidate VIEs that we are deemed to be the primary beneficiary of or non-VIEs which we control. The primary beneficiary of a VIE is the variable interest holder that absorbs the majority of the variability in the expected losses or the residual returns of the VIE. When determining the primary beneficiary of a VIE, we consider our aggregate explicit and implicit variable interests as a single variable interest. If our single variable interest absorbs the majority of the variability in the expected losses or the residual returns of the VIE, we are considered the primary beneficiary of the VIE. In the case of non-VIEs or VIEs where we are not deemed to be the primary beneficiary and we do not control the entity, but we have the ability to exercise significant influence over the entity, we account for our investment under the equity method. We reconsider our determination of whether an entity is a VIE and whether we are the primary beneficiary of such VIE if certain events occur.

10

We have determined that certain special purpose trusts formed by issuers of trust preferred securities, or TruPS, to issue such securities are VIEs, or Trust VIEs, and that the holder of the majority of the TruPS issued by the Trust VIEs would be the primary beneficiary. In most instances, we are the primary beneficiary of the Trust VIEs because it holds, either explicitly or implicitly, the majority of the TruPS issued by the Trust VIEs. Certain TruPS issued by Trust VIEs are initially financed directly by CDOs or through our warehouse facilities. Under the warehouse agreements, we deposit cash collateral with a bank and bear the first dollar risk of loss, up to our collateral deposit, if an investment held under the warehouse facility is liquidated at a loss. This arrangement causes us to hold an implicit interest in the Trust VIEs that issued TruPS held by warehouse providers. The primary assets of the Trust VIEs are subordinated debentures issued by the sponsors of the Trust VIEs in exchange for the TruPS proceeds. These subordinated debentures have terms that mirror the TruPS issued by the Trust VIEs. Upon consolidation of the Trust VIEs, these subordinated debentures, which are assets of the Trust VIEs, are included in our financial statements and the related TruPS are eliminated. Pursuant to FASB ASC Topic 505, “Equity,” subordinated debentures issued to Trust VIEs as payment for common equity securities issued by Trust VIEs are recorded net of the common equity securities issued. We consolidate various CDO entities that are VIE entities when we are determined to be the primary beneficiary. The following CDO entities are consolidated as of December 31, 2009: Taberna Preferred Funding VIII, Ltd., or Taberna VIII, Taberna Preferred Funding IX, Ltd., or Taberna IX, RAIT CRE CDO I, Ltd., or RAIT I, and RAIT Preferred Funding II, Ltd., or RAIT II. We have determined that we are the primary beneficiary of these entities.

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

d. Cash and Cash Equivalents

Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased.

e. Restricted Cash

Restricted cash consists primarily of proceeds from the issuance of CDO notes payable by CDO securitization entities that are restricted for the purpose of funding additional investments in securities subsequent to the balance sheet date. As of December 31, 2009 and 2008, we had $117,673 and $126,638, respectively, of restrictive cash held by CDO securitization entities.

Restricted cash also includes tenant escrows and borrowers’ funds held by us to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans. As of December 31, 2009 and 2008, we had $38,494 and $70,728, respectively, of tenant escrows and borrowers’ funds.

f. Investments in Loans

We invest in commercial mortgages, mezzanine loans, debt securities and other loans. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

g. Allowance for Losses, Impaired Loans and Non-accrual Status

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.”

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Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

h. Investments in Real Estate

Investments in real estate are shown net of accumulated depreciation. We capitalize all costs related to the improvement of the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements – 30 years; furniture, fixtures, and equipment – 5 to 10 years; and tenant improvements – shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

i. Investments in Securities

We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “n. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

j. Transfers of Financial Assets

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the

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transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

k. Revenue Recognition

1) Investment interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible.

For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

2) Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) property management services to third parties, and (d) providing fixed income trading and advisory services to our customers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fees from CDOs while such CDOs are consolidated. During the years ended December 31, 2009, 2008 and 2007, we received $16,114, $23,228, and $26,036, respectively, of earned asset management fees, of which we eliminated $7,011, $12,158, and $19,069, respectively, associated with consolidated CDOs.

4) Structuring fees—We receive structuring fees for services rendered in connection with the formation of CDO securitization entities. The structuring fee is a contractual fee paid when the related services are completed. The structuring fee is a negotiated fee with the investment bank acting as placement agent for the CDO securities and is capitalized by the securitization entity as a deferred financing cost. We may decide to invest in the debt or equity securities issued by securitization entities. We evaluate our investment in these entities to determine whether the entity is a VIE, and, if so, whether or not we are the primary beneficiary. If we are determined to be the primary beneficiary, we will consolidate the accounts of the securitization entity and, upon consolidation, we eliminate intercompany transactions, specifically the structuring fees and deferred financing costs paid. During the year ended December 31, 2007, structuring fees totaling $11,413 were eliminated upon consolidation of securitization entities.

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l. Off-Balance Sheet Arrangements

We previously held warehouse financing arrangements with various investment banks and engage in CDO securitizations. Prior to the completion of a CDO securitization, our warehouse providers acquired investments in accordance with the terms of the warehouse facilities. We were paid the difference between the interest earned on the investments and the interest charged by the warehouse providers from the dates on which the respective investments were acquired. We bore the first dollar risk of loss, up to our warehouse deposit amount, if (i) an investment funded through the warehouse facility became impaired or (ii) a CDO was not completed by the end of the warehouse period, and in either case, the warehouse provider was required to liquidate the securities at a loss. These off-balance sheet arrangements were not consolidated because our risk of loss was generally limited to the cash collateral held by the warehouse providers and our warehouse facilities were not special purpose vehicles. These warehouse facilities were considered free-standing derivatives and were recorded at fair value in our financial statements. Changes in fair value were reflected in earnings in the respective period.

m. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

n. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category are trust preferred securities, or TruPS, and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist.

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The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

o. Income Taxes

RAIT and Taberna have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our shareholders. Management believes that all of the criteria to maintain RAIT’s and Taberna’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

From time to time, our TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the CDO entities. Certain CDO entities may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

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Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us.

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and as new information becomes available, the balances are adjusted as appropriate.

Certain TRS entities are currently subject to ongoing tax examinations and assessments in various jurisdictions. The IRS has completed its examination of Taberna Funding LLC’s federal income tax returns for the 2007 tax year. No adjustments were made by the IRS. The IRS is currently examining Taberna Capital Management LLC’s, or TCM’s, federal income tax returns for the 2006 and 2007 tax year. TCM, a wholly owned subsidiary, engaged the services of Taberna Capital (Bermuda), Ltd., or TCB, to provide various sub-advisory services in connection with TCM’s management of various CDOs. Pursuant to a transfer pricing study prepared by an international accounting firm, TCM deducted the costs paid to TCB for their services from its income for federal income tax purposes. In connection with an audit of TCM, the IRS has challenged the transfer pricing methodology applied by TCM. If the IRS disallows any portion of TCM’s deductions for 2006 and 2007, it is likely that the IRS could make similar claims for years subsequent to 2007. The amount deducted by TCM under this transfer pricing methodology during the years ended December 31, 2006 and December 31, 2007 was $8,182 and $19,122, respectively. Management believes it has complied with the requirements outlined in the Internal Revenue Code and believes that its position will be sustained based on its technical merits.

p. Share-Based Compensation

We account for our share-based compensation in accordance with FASB ASC Topic 718, “Compensation-Stock Compensation.” We measure the cost of employee and trustee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and record compensation expense over the related vesting period.

q. Deferred Financing Costs, Intangible Assets and Goodwill

Costs incurred in connection with debt financing are capitalized as deferred financing costs and charged to interest expense over the terms of the related debt agreements, under the effective interest method.

Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” Due to market and economic conditions during 2008 and 2007, management evaluated the carrying value of our intangible assets. Based upon that evaluation, management concluded certain intangible assets were impaired and recorded asset impairment expense of $29,059 and $13,180 during the years ended December 31, 2008 and 2007, respectively. This charge was included in asset impairment expense in the accompanying consolidated statements of operations. We expect to record amortization expense of intangible assets of $1,485 each fiscal year for the period from 2010 through 2014 and $2,753 thereafter.

Goodwill on our consolidated balance sheet represented the amounts paid in excess of the fair value of the net assets acquired from business acquisitions accounted for under FASB ASC Topic 805, “Business Combinations.” Pursuant to FASB ASC Topic 350, “Intangibles-Goodwill and Other”, goodwill is not amortized to expense but rather is analyzed for impairment. We evaluate goodwill for impairment on an annual basis and as events and circumstances change, in accordance with FASB ASC Topic 350. As of December 31, 2007, management concluded goodwill was impaired and charged all of the goodwill balance to asset impairment expense.

r. Recent Accounting Pronouncements

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 805, “Business Combinations”. Among other things, this standard broadened the scope to include all transactions where an acquirer obtains control of one or more other businesses; retains the guidance to recognize intangible assets separately from goodwill; requires, with limited exceptions, that all assets acquired and liabilities assumed, including certain of those that arise from

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contractual contingencies, be measured at their acquisition date fair values; requires most acquisition and restructuring-related costs to be expensed as incurred; requires that step acquisitions, once control is acquired, be recorded at the full amounts of the fair values of the identifiable assets, liabilities and the noncontrolling interest in the acquiree; and replaces the reduction of asset values and recognition of negative goodwill with a requirement to recognize a gain in earnings. The adoption of this standard did not have any effect on our historical financial statements. See Note 6 for the application of this standard to transactions that occurred during the year ended December 31, 2009.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 810, “Consolidation”. This standard established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This standard also established disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Upon adoption, we reclassified amounts in our historical balance sheet financial statement caption “minority interests” to the new caption promulgated by this standard, “noncontrolling interests”. The new caption is presented within equity on the consolidated balance sheet. Furthermore, the allocation of any net income to noncontrolling interests is also presented in our consolidated statements of operations, however it is presented below net income. Upon adoption, all prior periods presented were reclassified to be comparable to the current period presentation.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 815 “Derivatives and Hedging”. This standard required enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under this standard, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The adoption of this standard did not have a material effect on our financial statements. See Note 8 for disclosures required by this standard.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 470, “Debt”. This standard clarified the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. This standard requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The equity component is presented in shareholders’ equity and the accretion of the resulting discount on the debt is recognized as part of interest expense in the consolidated statement of operations. This standard requires retrospective application to the terms of instruments as they existed for all periods presented. Upon adoption, we recorded a discount on our issued and outstanding convertible senior notes of $1,996. This discount reflects the fair value of the embedded conversion option within the convertible debt instruments and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in our convertible debt agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the convertible senior notes were issued. The discount will be amortized to interest expense through April 15, 2012, the date at which holders of our convertible senior notes could require repayment. Upon adoption, all prior periods were restated to reflect the retrospective application of this standard to all prior periods. The amortization recorded during the years ended December 31, 2009, 2008 and 2007 was $390, $607 and $244, respectively.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”. This standard provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This standard presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction). However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and shall be evaluated separately. The adoption of this standard did not have a material effect on our consolidated financial statements.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 260, “Earnings Per Share”. This standard clarified whether instruments granted in share-based payment transactions should be included in the computation of earnings per share using the two-class method prior to vesting. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. Upon adoption, we classified unvested restricted shares issued under our 2008 Equity Compensation plan as participating securities. These unvested restricted shares participate equally in dividends and earnings with all of our outstanding common shares. Prior to this standard, unvested restricted shares were only included in our diluted earnings per share computation under the treasury stock method.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 320, “Investments—Debt and Equity Securities”. This standard amended the other-than-temporary impairment guidance in U.S. GAAP for debt securities

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to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This standard does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 825, “Financial Instruments”. This standard amended existing guidance to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also amended existing guidance to require those disclosures in summarized financial information at interim reporting periods. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 if a company also elects to early adopt this standard. The adoption of this standard did not have a material effect on our consolidated financial statements. See Note 9 for disclosures required by this standard.

In April 2009, the FASB issued accounting standards classified under FASB ASC Topic 820, “Fair Value Measurements and Disclosures”. This standard amended existing guidance to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. This standard also provides additional guidance on circumstances that may indicate that a transaction is not orderly. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.

In May 2009, the FASB issued accounting standards classified under FASB ASC Topic 855, “Subsequent Events”. This standard codifies the guidance regarding the disclosure of events occurring subsequent to the balance sheet date. This standard does not change the definition of a subsequent event (i.e. an event or transaction that occurs after the balance sheet date but before the financial statements are issued) but requires disclosure of the date through which subsequent events were evaluated when determining whether adjustment to or disclosure in the financial statements is required. This standard was effective for us for the year ended December 31, 2009 and we evaluated subsequent events and provided the appropriate disclosures on subsequent events identified. The adoption of this standard did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified unders FASB Topic 860 will eliminate the concept of a QSPE, change the requirements for derecognizing financial assets, and require additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 will change the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. Both of these accounting standards are effective for fiscal years beginning after November 15, 2009. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard will require new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfer and for Level 3 fair value measurements new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements. This accounting standard will also update existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new disclosures and clarifications on the existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the purchase, sales, issuances, and settlements in the roll forward activity for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact this accounting standard may have on our consolidated financial statements.

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NOTE 3: ASSET DISPOSITIONS

During 2009, we have disposed of our investments in six residential mortgage portfolios and four Taberna CDOs. All assets sold and related liabilities were removed from our consolidated balance sheet on the date of sale, with any gains or losses on dispositions recorded in our accompanying statements of operations under gains (losses) on sale of assets.

Investments in Residential Mortgages and Mortgage-Related Receivables

On July 16, 2009, we sold our residential mortgage portfolio to an affiliate of Angelo, Gordon & Co., L.P., pursuant to a Purchase and Sale Agreement, dated as of July 15, 2009 between our subsidiary, Taberna Loan Holdings I, LLC, and AG Park Lane I Corp. We sold all of our notes and equity interests, or the retained interests, together with any principal or interest payable thereon, issued by the following six securitizations of residential mortgage loans: Bear Stearns ARM Trust 2005-7, Bear Stearns ARM Trust 2005-9, Citigroup Mortgage Loan Trust 2005-1, CWABS Trust 2005 HYB9, Merrill Lynch Mortgage Investors Trust, Series 2005-A9 and Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2. The purchase price paid by the buyer was $15,800, plus accrued interest and we recorded a $61,841 loss on sale of assets. We used a portion of the proceeds to repay $7,731 of term loan indebtedness.

The following tables summarize the balance sheet and statement of operations effects of the residential mortgage portfolio as of the date of sale on July 16, 2009 and and for the years ended December 31, 2009, 2008 and 2007. The statements of operations components for the residential mortgage portfolio were included in our consolidated statement of operations through July 16, 2009 whereas the assets and liabilities of the residential mortgage portfolio have been removed from our consolidated balance sheet as of July 16, 2009. The following table also describes the non-cash changes in our assets and liabilities during 2009 caused by the deconsolidation of these VIEs.

	As of July 16, 2009
ASSETS:
Investments in residential mortgages and mortgage-related receivables	$	3,354,233
Allowance for losses		(127,657	)
Accrued interest receivable		22,066
Deferred financing costs, net		763
Total assets	$	3,249,405
LIABILITIES:
Mortgage-backed securities issued	$	3,146,080
Accrued interest payable		20,395
Accounts payable and accrued expenses		1,346
Other liabilities		16,204
Total liabilities		3,184,025
Accumulated other comprehensive income (loss)		3,539
Total liabilities and accumulated other comprehensive income (loss)		3,187,564
Loss on sale of assets	$	61,841

	For the Years Ended December 31
	2009			2008			2007
Revenue:
Investment interest income	$	106,499		$	216,080		$	227,262
Investment interest expense		(99,100	)		(200,507	)		(211,946	)
Net interest margin		7,399			15,573			15,316
Provision for losses		96,701			54,135			8,238
Income before other income (expense)		(89,302	)		(38,562	)		7,079
Losses on sales of assets		(61,841	)		—			—
Net income (loss) allocable to common shares	$	(151,143	)	$	(38,562	)	$	7,079

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Investments in Securities through Taberna CDOs

Previously we consolidated Taberna III, Taberna IV, Taberna VI and Taberna VII, four securitizations in which we were determined to be the primary beneficiary primarily due to our majority ownership of the equity interests issued by the securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and determined that we are no longer the primary beneficiary and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation.” We recorded losses on the sales of assets related to these VIEs of $313,808 in June 2009.

The following tables summarize the balance sheet and statement of operations effects of the deconsolidated VIEs as of the dates of their respective deconsolidation on June 25, 2009 and for the years ended December 31, 2009, 2008 and 2007. The statements of operations components for the respective VIEs were included in our consolidated statement of operations through June 25, 2009 whereas the assets and liabilities have been removed from our consolidated balance sheet as of June 25, 2009. The following table also describes the non-cash changes in our assets and liabilities during 2009 caused by the deconsolidation of these VIEs.

	As of June 25, 2009
ASSETS:
Investments in securities, at fair value	$	1,141,400
Investments in loans, net		45,172
Accrued interest receivable		33,973
Restricted cash		6,777
Other assets		35
Total assets	$	1,227,357
LIABILITIES:
Indebtedness, at fair value	$	420,749
Accounts payable and accrued expenses		273
Accrued interest payable		54,514
Derivative liabilities, at fair value		291,881
Other liabilities		38
Total liabilities		767,455
Accumulated other comprehensive income (loss)		(28,195	)
Noncontrolling interests		174,289
Total liabilities, accumulated other comprehensive income (loss) and noncontrolling interests		913,549
Loss on sale of assets	$	313,808

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	For the Years Ended December 31
	2009			2008			2007
Revenue:
Investment interest income	$	70,281		$	168,511		$	208,188
Investment interest expense		(30,799	)		(101,229	)		(156,359	)
Net interest margin		39,482			67,282			51,829
Fee and other income		—			1,237			—
Total revenue		39,482			68,519			51,829
General and administrative expense		830			2,346			1,887
Provision for losses		5,279			5,049			—
Asset impairments		—			—			184,246
Income before other income (expense)		33,373			61,124			(134,304	)
Losses on sales of assets		(313,808	)		—			—
Change in fair value of financial instruments		(59,716	)		(538,529	)		—
Unrealized losses on interest rate hedges		—			—			(5,756	)
Net income (loss)		(340,151	)		(477,405	)		(140,061	)
(Income) loss allocated to noncontrolling interests		12,053			189,387			34,164
Net income (loss) allocable to common shares	$	(328,098	)	$	(288,018	)	$	(105,897	)

We previously consolidated Taberna II and Taberna V, two CDOs in which we were determined to be the primary beneficiary primarily due to our majority ownership of the preferred shares issued by the CDOs. During the year ended December 31, 2007, we sold a portion of the preferred shares and non-investment grade debt that we retained in these two CDOs and concluded that we were no longer the primary beneficiary of these two CDOs. We deconsolidated the CDOs and treated the deconsolidation of the CDOs as sales of the net assets of the entities and recorded losses on sales of assets of $99,537. Additionally, the losses we recorded on the sales of the net assets were in excess of our cost basis and we recorded gains on deconsolidation of VIEs of $117,158. The losses on the sales of the net assets of the VIEs was in excess of our cost basis due to other-than-temporary impairments we recorded on investments in securities held by these CDOs.

The following tables summarize the statement of operations of the deconsolidated VIEs for the year ended December 31, 2007. The statements of operations for the respective VIEs were included in our consolidated statement of operations during 2007.

	For the Year Ended December 31, 2007
Revenue:
Investment interest income	$	120,084
Investment interest expense		(94,143	)
Net investment income		25,941
General and administrative expense		853
Income before other income (expense)		25,088
Losses on sales of assets		(99,537	)
Gains on deconsolidation of VIEs		117,158
Unrealized gains (losses) on interest rate hedges		(552	)
Asset impairments		(156,873	)
Net income (loss)	$	(114,716	)
Allocation to noncontrolling interests		35,613
Net income (loss) allocable to common shareholders	$	(79,103	)

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NOTE 4: INVESTMENTS IN LOANS

Our investments in mortgages and loans are accounted for at amortized cost.

Investments in Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity Interests

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2009:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon(1)			Range of Maturity Dates
Commercial mortgages	$	825,044		$	—		$	825,044			55		6.9	%		Mar. 2010 to Mar. 2016
Mezzanine loans		424,183			(2,378	)		421,805			129		9.8	%		Mar. 2010 to Nov. 2038
Other loans		125,889			(2,000	)		123,889			9		5.2	%		Mar. 2010 to Oct. 2016
Preferred equity interests		98,584			—			98,584			25		10.9	%		May 2010 to Sept. 2021
Total		1,473,700			(4,378	)		1,469,322			218		7.9	%
Deferred fees		(1,756	)		—			(1,756	)
Total	$	1,471,944		$	(4,378	)	$	1,467,566

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2008:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon(1)			Range of Maturity Dates
Commercial mortgages	$	1,246,446		$	—		$	1,246,446			95		7.7	%		Mar. 2009 to Dec. 2013
Mezzanine loans		455,222			(2,850	)		452,372			136		10.1	%		Mar. 2009 to Aug. 2021
Other loans		178,696			(2,669	)		176,027			12		5.9	%		Apr. 2010 to Oct. 2016
Preferred equity interests		173,388			—			173,388			37		11.9	%		Mar. 2009 to Sept. 2021
Total		2,053,752			(5,519	)		2,048,233			280		8.5	%
Deferred fees		(7,121	)		—			(7,121	)
Total	$	2,046,631		$	(5,519	)	$	2,041,112

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

During the year ended December 31, 2009, we completed the conversion of 27 commercial real estate loans to real estate owned properties, under which we acquired $416,751 of direct real estate investments upon conversion of $515,517 of commercial real estate loans.

The following table summarizes the delinquency statistics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2009 and 2008:

Delinquency Status	As of December 31, 2009		As of December 31, 2008
30 to 59 days	$	20,760	$	610
60 to 89 days		82,685		8,360
90 days or more		44,310		95,523
In foreclosure or bankruptcy proceedings		47,625		101,054
Total	$	195,380	$	205,547

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As of December 31, 2009 and 2008, approximately $171,372 and $186,040, respectively, of our commercial mortgages and mezzanine loans were on non-accrual status and had a weighted-average interest rate of 9.7% and 12.1%, respectively.

The following table displays the maturities of our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests by year:

2010	$	584,328
2011		252,047
2012		113,304
2013		56,452
2014		37,776
Thereafter		429,793
Total	$	1,473,700

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for the year ended December 31, 2009, 2008 and 2007:

	For the Year Ended December 31, 2009									For the Year Ended December 31, 2008									For the Year Ended December 31, 2007
Type of Derivative	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage- Related Receivables			Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage- Related Receivables			Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage- Related Receivables			Total
Beginning balance	$	117,737		$	54,236		$	171,973		$	14,575		$	11,814		$	26,389		$	1,726		$	3,619		$	5,345
Provision		130,080			96,487			226,567			107,360			55,423			162,783			13,187			8,534			21,721
Charge-offs, net of recoveries		(161,208	)		(23,066	)		(184,274	)		(4,198	)		(13,001	)		(17,199	)		(338	)		(339	)		(677	)
Sale of residential mortgages and mortgage-related receivables		—			(127,657	)		(127,657	)		—			—			—			—			—			—
Ending balance	$	86,609		$	—		$	86,609		$	117,737		$	54,236		$	171,973		$	14,575		$	11,814		$	26,389

During the year ended December 31, 2009, the charge-offs contained $98,766 related to the conversion of commercial real estate loans to real estate owned properties.

As of December 31, 2009 and December 31, 2008, we identified 31 and 26, respectively, commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $189,961 and $211,068, respectively, as impaired. As of December 31, 2009 and December 31, 2008, we had allowance for losses of $86,609 and $117,737, respectively, associated with our commercial mortgages, mezzanine loans and other loans.

The average commercial mortgages, mezzanine loans and other loans unpaid principal balance of total impaired loans was $207,042 and $131,619 during the year ended December 31, 2009 and 2008, respectively. We recorded interest income from impaired loans of $3,203, $7,895 and $221 for the years ended December 31, 2009, 2008 and 2007, respectively.

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Asset Impairments

For the year ended December 31, 2008, we recorded asset impairments of $8,509 associated with certain investments in commercial and residential loans. In making this determination, management considered the estimated fair value of the investments to our cost basis, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their estimated fair value.

NOTE 5: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. During 2009, we sold our residual interests in four CDOs and deconsolidated $1,141,400 of investments in securities. See Note 3—Asset Dispositions. The following table summarizes our investments in securities as of December 31, 2009:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon(1)			Weighted Average Years to Maturity
Trading securities
TruPS and subordinated debentures	$	900,145	$	(429,039	)	$	471,106		4.5	%		24.7
Other securities		10,000		(9,700	)		300		4.8	%		42.9
Total trading securities		910,145		(438,739	)		471,406		4.5	%		24.9
Available-for-sale securities		3,600		(3,510	)		90		2.4	%		32.9
Security-related receivables
TruPS and subordinated debenture receivables		113,918		(40,269	)		73,649		6.8	%		12.6
Unsecured REIT note receivables		68,049		(2,656	)		65,393		6.6	%		7.8
CMBS receivables (2)		158,368		(99,474	)		58,894		6.0	%		34.3
Other securities		93,419		(67,954	)		25,465		3.2	%		30.1
Total security-related receivables		433,754		(210,353	)		223,401		5.7	%		23.4
Total investments in securities	$	1,347,499	$	(652,602	)	$	694,897		4.9	%		24.5

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

(2) CMBS receivables include securities with a fair value totaling $7,179 that are rated “BBB+” and “BB-” by Standard & Poor’s and securities with a fair value totaling $51,715 that are rated between “AAA” and “A-” by Standard & Poor’s.

A substantial portion of our gross unrealized losses is greater than 12 months.

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The following table summarizes our investments in securities as of December 31, 2008:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon			Weighted Average Years to Maturity
Trading securities (1)
TruPS and subordinated debentures	$	3,026,321	$	(1,553,710	)	$	1,472,611		6.6	%		25.9
Other securities		10,000		(9,300	)		700		8.0	%		43.9
Total trading securities		3,036,321		(1,563,010	)		1,473,311		6.6	%		25.9
Available-for-sale securities		48,285		(32,488	)		15,797		8.4	%		33.0
Security-related receivables (2)
TruPS and subordinated debenture receivables		369,734		(197,679	)		172,055		7.6	%		21.4
Unsecured REIT note receivables		372,688		(154,804	)		217,884		6.0	%		7.9
CMBS receivables (3)		224,434		(184,447	)		39,987		5.9	%		34.8
Other securities		43,493		(41,644	)		1,849		5.4	%		41.2
Total security-related receivables		1,010,349		(578,574	)		431,775		6.6	%		15.9
Total investments in securities	$	4,094,955	$	(2,174,072	)	$	1,920,883		6.6	%		23.7

(1) On January 1, 2008, we adopted the fair value option and transferred certain of our investments in securities from available-for-sale to trading in accordance with FASB ASC Topic 320. Subsequent to January 1, 2008, all changes in fair value associated with our trading securities are recorded in earnings as part of our change in fair value of financial instruments. See note 9.

(2) Our investments in security-related receivables represent securities owned by CDO entities that we account for as financings under FASB ASC Topic 860. We elected to record security-related receivables at fair value in accordance with the fair value option on January 1, 2008. All changes in fair value of our security related receivables were recorded in earnings as part of the change in fair value of financial instruments. See notes 2 and 9.

(3) CMBS receivables include securities with a fair value totaling $22,464 that are rated “BBB+” and “BB-” by Standard & Poor’s and securities with a fair value totaling $17,523 that are rated between “AAA” and “A-” by Standard & Poor’s.

A substantial portion of our gross unrealized losses are greater than 12 months.

TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to FASB ASC Topic 860, “Transfers and Servicing.” Subordinated debentures included above represent the primary assets of VIEs that we consolidate pursuant to FASB ASC Topic 810, “Consolidation.”

As of December 31, 2009 and December 31, 2008, $108,125 and $413,625, respectively, in principal amount of TruPS, subordinated debentures and subordinated debenture receivables were on non-accrual status and had a weighted-average coupon of 4.9% and 7.0%, respectively, and a fair value of $26,400 and $16,589, respectively. As of December 31, 2009 and December 31, 2008, $24,500 and $43,982, respectively, in par amount of other securities were on non-accrual status and had a weighted average coupon of 3.1% and 7.0%, respectively, and a fair value of $370 and $308, respectively.

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Some of our investments in securities collateralize debt issued through CDO entities. Our TruPS CDO entities are static pools and prohibit, in most cases, the sale of such securities until the auction call period, typically 10 years from the CDO entity’s inception. At or subsequent to the auction call date, the remaining securities will be offered for sale and the proceeds will be used to repay outstanding indebtedness and liquidate the CDO entity. The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of December 31, 2009 and December 31, 2008, investment in securities of $888,681 and $3,204,360, respectively, in principal amount of TruPS and subordinated debentures, and $230,768 and $605,445, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities. Some of these investments were eliminated upon the consolidation of various VIEs that we consolidate and the corresponding subordinated debentures of the VIEs are included as assets in our consolidated balance sheets.

Asset Impairments

Management evaluates investments in securities for impairment as events and circumstances warrant and concluded that certain of these securities were other than temporarily impaired as management does not expect full recovery of our investment. Asset impairment expense of $46,015 and $28,234 was recorded for the year ended December 31, 2009 and 2008, respectively, related to available-for-sale securities and was included in asset impairments in our consolidated statements of operations. This impairment reduced the amortized cost basis of these available-for-sale securities. Asset impairment expense of $428,653 was recorded for the year ended December 31, 2007 related to investments in securities and was included in asset impairment expense in our consolidated statements of operations. This impairment reduced the amortized cost basis of these available-for-sale securities and security-related receivables by $354,347 and $74,306, respectively.

NOTE 6: INVESTMENTS IN REAL ESTATE

As of December 31, 2009, we maintained investments in 36 consolidated real estate properties and three parcels of land. As of December 31, 2008, we maintained investments in 13 consolidated real estate properties and two parcels of land.

The table below summarizes the book value amounts included in our financial statements for our investments in real estate:

	As of December 31, 2009			As of December 31, 2008
Multi-family real estate properties	$	508,942		$	225,054
Office real estate properties		190,874			131,285
Retail real estate properties		40,584			—
Parcels of land		22,208			614
Subtotal		762,608			356,953
Plus: Escrows and reserves		1,175			4,091
Less: Accumulated depreciation and amortization		(25,548	)		(10,557	)
Investments in real estate	$	738,235		$	350,487

As of December 31, 2009 and 2008, our investments in real estate was comprised of land of $159,317 and $62,162, respectively, and buildings and improvements of $603,291 and $294,791, respectively.

As of December 31, 2009, we have identified four properties as assets held for sale. The carrying amount of these assets is $83,430 and liabilities related to these assets is $21,003. These amounts are included in the investments in real estate and indebtedness, accrued interest payable, accounts payable and accrued expenses, and deferred taxes, borrowers’ escrows and other liabilities financial statement captions. Liabilities related to assets held for sale exclude $51,547 of first mortgages held by RAIT I and RAIT II that are eliminated in our consolidated balance sheet. See Note 15—Assets Held For Sale and Discontinued Operations.

During the year ended December 31, 2009, we completed the conversion of 27 commercial real estate loans to real estate owned properties, under which we acquired $416,751 of real estate investments upon conversion of $515,517 of commercial real estate loans. The 27 real estate properties are comprised of the following: 19 multi-family properties, two retail properties, four office properties, one parcel of land and a vacant building. We previously held bridge or mezzanine loans with respect to these real estate properties.

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On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 805, “Business Combinations” and defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors. All entities constituting a business (as defined) are subject to FASB ASC Topic 805, “Business Combinations”, including real estate acquisitions (generally limited to acquisitions of rental properties with tenants in place, not vacant land or owner-occupied property). Of the 27 commercial real estate loans that were converted to real estate owned properties, we determined that 25 properties met the criteria of a business as defined by FASB ASC Topic 805, “Business Combinations.” These 25 properties are comprised of the 19 multi-family properties, two retail properties and four office properties. The parcel of land and vacant building did not meet the criteria of a business as defined under FASB ASC Topic 805, “Business Combinations.” We accounted for the conversion of these two properties in accordance with FASB ASC Topic 360, “Property, Plant and Equipment.”

Real estate accounted for under FASB ASC Topic 805, “Business Combinations”

The following table summarizes the aggregate estimated fair value of the net assets acquired and liabilities assumed during the year ended December 31, 2009, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	379,656
Cash and cash equivalents		1,701
Restricted cash		4,620
Other assets		1,185
Goodwill		—
Total assets acquired		387,162
Liabilities assumed:
Accounts payable and accrued expenses		(3,732	)
Other liabilities		(986	)
Total liabilities assumed		(4,718	)
Estimated fair value of net assets acquired	$	382,444

The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective conversion date:

Description	Estimated Fair Value
Fair value of consideration transferred:
Commercial real estate loans	$	386,126
Other considerations		(3,528	)
Total fair value of consideration transferred	$	382,598

During the year ended December 31, 2009, these investments contributed revenue of $18,327 and a net loss allocable to common shares of $3,416. During the year ended December 31, 2009, we incurred $154 of third-party acquisition-related costs, which are included in general and administrative expenses in our consolidated statement of operations.

Unaudited pro forma information relating to the acquisition of these real estate properties is presented below as if the conversion occurred on January 1, 2008 and 2009, respectively. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008
Total revenue, as reported	$	197,510		$	244,783
Pro forma revenue		214,197			288,568
Net income (loss) allocable to common shares, as reported		(441,203	)		(443,246	)
Pro forma net income (loss) allocable to common shares		(441,444	)		(441,496	)

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These amounts have been calculated after adjusting the results of the acquired businesses to reflect the additional depreciation that would have been charged assuming the fair value adjustments to our investments in real estate had been applied from January 1, 2008 and 2009, respectively, together with the consequential tax effects.

We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.

Real estate accounted for under FASB ASC Topic 360, “Property, Plant and Equipment”

During the year ended December 31, 2009, we completed the conversion of loans related to one parcel of land and one vacant building to real estate owned properties. We previously held bridge loans with respect to these real estate properties. We accounted for these conversions in accordance with FASB ASC Topic 360, “Property, Plant and Equipment.” On the respective date of each conversion, the parcel of land had a fair value of $21,595 and the vacant building had a fair value of $15,500. During the year ended December 31, 2009, we sold the vacant building and reported its operations and gain on sale from this entity as a component of discontinued operations for the year ended December 31, 2009.

During the year ended December 31, 2008, we entered into two joint ventures with unaffiliated real estate management companies for the purpose of acquiring and redeveloping certain multi-family real estate properties located primarily in southern U.S. submarkets. During July 2008, and in return for 80% of the Class A interests and 100% of the Class B interests in the first joint venture, we converted certain secured loans into preferred equity interests and contributed our interest in a multi-family real estate property, which has a carrying value of $28,872 as of December 31, 2008. During October 2008, and in return for a 95% interest in the second joint venture, we converted certain secured loans into preferred equity interests and contributed our interest in eight multi-family real estate properties, which has a carrying value of $196,983 as of December 31, 2008.

NOTE 7: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations.

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2009:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	246,363	$	245,885		6.9	%		Apr. 2027
Secured credit facilities		49,994		49,994		4.8	%		Dec. 2009 to Apr. 2011
Senior secured notes		43,000		43,000		12.5	%		Apr. 2014
Loans payable on real estate		17,500		17,500		4.8	%		Apr. 2010
Junior subordinated notes, at fair value (2)		38,052		17,004		8.7	%		Mar. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		420,009		398,483		7.3	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,396,750		1,396,750		0.7	%		2036 to 2045
CDO notes payable, at fair value (2)(3)(5)		1,185,061		146,557		0.9	%		2035 to 2038
Loans payable on real estate		64,461		64,461		5.6	%		Aug. 2010 to Aug. 2016
Trust preferred obligations, at fair value (2)		132,375		70,872		1.9	%		2036
Total non-recourse indebtedness		2,778,647		1,678,640		0.9	%
Total indebtedness	$	3,198,656	$	2,077,123		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holders, in April 2012.

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(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1,787,563 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1,444,033 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of December 31, 2009 was $830,161. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2008:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	384,168	$	382,779		6.9	%		2027
Secured credit facilities		53,494		53,494		2.4	%		Jun. 2009 to Jan. 2010
Loans payable on real estate		22,500		22,500		4.8	%		Apr. 2010
Junior subordinated notes, at fair value (2)		38,052		15,221		8.7	%		2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		2037
Term loan indebtedness		18,981		18,344		13.0	%		May 2009 to Aug. 2010
Total recourse indebtedness		542,295		517,438		6.7	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,451,750		1,451,750		1.0	%		2036 to 2045
CDO notes payable, at fair value (2)(3)(5)		3,605,428		577,750		3.6	%		2035 to 2038
Loans payable on real estate		29,751		29,751		5.6	%		Aug. 2010 to Sep. 2015
Mortgage-backed securities issued (3)(6)(7)		3,388,199		3,364,151		5.1	%		2035
Trust preferred obligations, at fair value (2)		359,459		162,050		5.9	%		2035
Total non-recourse indebtedness		8,834,587		5,585,452		3.8	%
Total indebtedness	$	9,376,882	$	6,102,890		4.0	%

(1) Our convertible senior notes are redeemable, at the option of the holders, in April 2012.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes mortgage-backed securities and CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1,733,822 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $4,158,407 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of December 31, 2008 was $2,037,374. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6) Collateralized by $3,611,860 principal amount of residential mortgages and mortgage-related receivables. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7) Rates generally follow the terms of the underlying mortgages, which are fixed for a period of time and variable thereafter.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $398,483 as of December 31, 2009. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs and other securitization vehicles) and the loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

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The current status or activity in our financing arrangements occurring as of or during the year ended December 31, 2009 is as follows:

Recourse Indebtedness

Convertible senior notes. On April 18, 2007, we issued and sold in a private offering to qualified institutional buyers, $425,000 aggregate principal amount of 6.875% convertible senior notes due 2027, or the convertible notes. After deducting the initial purchaser’s discount and the estimated offering expenses, we received approximately $414,250 of net proceeds. Interest on the convertible notes is paid semi-annually and the convertible notes mature on April 15, 2027.

Prior to April 20, 2012, the convertible notes will not be redeemable at RAIT’s option, except to preserve RAIT’s status as a REIT. On or after April 20, 2012, RAIT may redeem all or a portion of the convertible notes at a redemption price equal to the principal amount plus accrued and unpaid interest (including additional interest), if any. Convertible note holders may require RAIT to repurchase all or a portion of the convertible notes at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest), if any, on the convertible notes on April 15, 2012, April 15, 2017, and April 15, 2022, or upon the occurrence of certain change in control transactions prior to April 20, 2012.

Prior to April 15, 2026, upon the occurrence of specified events, the convertible notes will be convertible at the option of the holder at an initial conversion rate of 28.6874 shares per $1,000 principal amount of convertible notes. The initial conversion price of $34.86 represents a 27.5% premium to the per share closing price of $27.34 on the date the offering was priced. Upon conversion of convertible notes by a holder, the holder will receive cash up to the principal amount of such convertible notes and, with respect to the remainder, if any, of the conversion value in excess of such principal amount, at the option of RAIT in cash or RAIT’s common shares. The initial conversion rate is subject to adjustment in certain circumstances. We include the convertible notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

On January 1, 2009, we adopted accounting standards classified under FASB ASC Topic 470, “Debt”. Upon adoption, we recorded a retrospective discount on our issued and outstanding convertible notes of $1,996. This discount reflects the fair value of the embedded conversion option within the convertible debt instruments and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the convertible notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the convertible notes were issued. The discount will be amortized to interest expense through April 15, 2012, the date at which holders of our convertible notes could require repayment. Upon adoption, all prior periods were restated to reflect the retroactive adoption of the standard and total discount amortization recorded through December 31, 2008 was $607.

During the year ended December 31, 2009, we repurchased from the market, a total of $103,805 in aggregate principal amount of convertible notes for a total consideration of $54,519, including the issuance of a $43,000 senior secured note. See “Senior Secured Note” below. During 2009, we also exchanged $34,000 in aggregate principal amount of convertible notes for 8,126,000 common shares and $3,111 of cash, for total consideration of $13,999 based on our closing stock price of $1.34 per share on December 29, 2009, the date our exchange offer was completed. See “Exchange Offer” below. As a result of these transactions, we recorded gains on extinguishment of debt of $64,898, net of deferred financing costs and unamortized discounts that were written off.

During the year ended December 31, 2008, we repurchased, from the market, a total of $40,832 in aggregate principal amount of convertible notes for a total purchase price of $18,664. As a result, we recorded gains on extinguishment of debt of $21,181, net of deferred financing and unamortized discounts that were written off.

Secured credit facilities. As of December 31, 2009, we have borrowed an aggregate amount of $49,994 under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of December 31, 2009, the first secured credit facility had an unpaid principal balance of $21,314 which is payable in December 2011 under the current terms of this facility. As of December 31, 2009, the second secured credit facility had an unpaid principal balance of $22,180. This facility terminates in April 2010 and the unpaid principal balance at that time is payable in April 2011. As of December 31, 2009, the third secured credit facility had an unpaid principal balance of $6,500. We are amortizing this balance with monthly principal repayments of $500 which will result in the full repayment of this credit facility by February 2011.

Senior secured notes. On July 31, 2009, pursuant to a securities purchase agreement, we purchased from Mr. Marx $98,280 aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a purchase price of $53,000. The purchase price consisted of (a) $43,000 12.5% Senior Secured Note due 2014 issued by us, or the senior secured note, and (b) $10,000 in cash. We also paid to Mr. Marx $1,989 of accrued and unpaid interest on the convertible notes through July 31, 2009.

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The senior secured note bears interest at a rate of 12.5% per year and is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The senior secured note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured note is fully and unconditionally guaranteed by two of our wholly owned subsidiaries, or the guarantors: RAIT Asset Holdings II Member, LLC, or RAHM, and RAIT Asset Holdings II, LLC, or RAH2. RAHM is the sole member of RAH2 and has pledged the equity of RAH2 to secure its guarantee. RAH2’s assets consist of $100,000 in par amount of certain CDO notes payable issued by RAIT’s consolidated securitizations RAIT CRE CDO I, LTD., RAIT Preferred Funding II, LTD., Taberna Preferred Funding VIII, Ltd., and Taberna Preferred Funding IX, Ltd. The senior secured note is not convertible into equity securities of RAIT.

The maturity date of the senior secured note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: our failure to pay any amount of principal or interest on the senior secured note when due; our failure or the failure of any guarantor to perform on any obligation of its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting us or any guarantor.

Junior subordinates notes, at fair value. On October 16, 2008, we issued $38,052 principal amount of junior subordinated notes to a third party and received $15,459 of net cash proceeds. Of the total amount of junior subordinated notes issued, $18,671 has a fixed interest rate of 8.65% through March 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter and a maturity date of March 30, 2035. The remaining $19,380 has a fixed interest rate of 9.64% and a maturity date of October 30, 2015. At issuance, we elected to record these junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. As of December 31, 2009, we have $38,052 unpaid principal associated with this indebtedness. The fair value, or carrying amount, of this indebtedness was $17,004 as of December 31, 2009.

Junior subordinated notes, at amortized cost. On February 12, 2007, we formed Taberna Funding Capital Trust I which issued $25,000 of trust preferred securities to investors and $100 of common securities to us. The combined proceeds were used by Taberna Funding Capital Trust I to purchase $25,100 of junior subordinated notes issued by us. The junior subordinated notes are the sole assets of Taberna Funding Capital Trust I and mature on April 30, 2037, but are callable, at our option, on or after April 30, 2012. Interest on the junior subordinated notes is payable quarterly at a fixed rate of 7.69% through April 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.50%. These of junior subordinated notes issued by us are outstanding as of December 31, 2009 and 2008.

On July 12, 2007, we formed Taberna Funding Capital Trust II which issued $25,000 of trust preferred securities to investors and $100 of common securities to us. The combined proceeds were used by Taberna Funding Capital Trust II to purchase $25,100 of junior subordinated notes issued by us. The junior subordinated notes are the sole assets of Taberna Funding Capital Trust II and mature on July 30, 2037, but are callable, at our option, on or after July 30, 2012. Interest on the junior subordinated notes is payable quarterly at a fixed rate of 8.06% through July 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.50%. On October 21, 2008, we repurchased, from the market, all of these trust preferred securities for a purchase price of $5,250. As a result, we recorded gains on extinguishment of debt of $19,150, net of $600 deferred financing costs that were written off associated with the junior subordinated issued by us.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their OC and IC trigger tests as of December 31, 2009.

During the year ended December 31, 2009, we repurchased, from the market, a total of $55,000 in aggregate principal amount of CDO notes payable issued by RAIT I and RAIT II. The aggregate purchase price was $4,029 and we recorded gains on extinguishment of debt of $50,971.

During 2008, we repurchased from the market a total of $3,000 in aggregate principal amount of CDO notes payable associated with RAIT I. The total purchase price was $759 and we recorded gains on extinguishment of debt of $2,241.

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CDO notes payable, at fair value. As of January 1, 2008, we adopted the fair value option, which is now classified under FASB ASC Topic 825, and elected to record CDO notes payable at fair value. These CDO notes payable are collateralized by trading securities, security-related receivables and loans. At adoption, we decreased the carrying amount of these CDO notes payable by $1,520,616 to reflect these liabilities at fair value in our financial statements. The change in fair value of these CDO notes payable was a decrease of $49,280 and $1,434,175 for the years ended December 31, 2009 and 2008, respectively, and was included in our consolidated statements of operations.

Both of our Taberna consolidated CDOs are failing overcollateralization, or OC, trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the year ended December 31, 2009, $34,499 of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Loans payable on real estate. As of December 31, 2009 and 2008, we had $81,908 and $52,251, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate and other loans. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheet.

Trust preferred obligations. Trust preferred obligations finance subordinated debentures acquired by Trust VIEs that are consolidated by us for the portion of the total TruPS that are owned by entities outside of the consolidated group. These trust preferred obligations bear interest at either variable or fixed rates until maturity, generally 30 years from the date of issuance. The Trust VIE has the ability to prepay the trust preferred obligation at any time, without prepayment penalty, after five years. We do not control the timing or ultimate payment of the trust preferred obligations.

As of January 1, 2008, we adopted the fair value option, which is now classified under FASB ASC Topic 825, and elected to record trust preferred obligations at fair value. At adoption, we decreased the carrying amount of the trust preferred obligations by $52,070 to reflect these liabilities at fair value in our financial statements. The change in fair value of the trust preferred obligations was a decrease of $104,179 and $145,339 for the years ended December 31, 2009 and 2008, respectively, and was included in our consolidated statements of operations.

Exchange Offer

On December 29, 2009, we completed our previously announced exchange offer to exchange convertible senior notes for common shares and cash. Holders of our convertible senior notes tendered $34,000 aggregate principal amount of our convertible senior notes. Pursuant to the terms of the Exchange Offer, we issued 8,126,000 common shares and paid $3,111 of cash as consideration for the exchanges notes. For each $1,000 principal amount of our convertible senior notes exchanged, the holder received the following: (i) 239 common shares, (ii) a cash payment of $91.50 and (iii) accrued and unpaid interest on the convertible senior notes to, but excluding, the settlement date, paid in cash. As a result of the exchange offer, we recorded gains on extinguishment of debt of approximately $18,120.

Maturity of Indebtedness

Generally, the majority of our indebtedness is payable in full upon the maturity or termination date of the underlying indebtedness. The following table displays the aggregate contractual maturities of our indebtedness by year:

2010	$	34,461
2011		43,104
2012		—
2013		—
2014		43,000
Thereafter		3,078,091
Total	$	3,198,656

NOTE 8: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

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Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of December 31, 2009, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

Foreign Currency Derivatives

In 2008, we entered into various foreign currency derivatives to hedge our exposure to changes in the value of a U.S. dollar as compared to foreign currencies, primarily the Euro. Our foreign currency derivatives are recorded at fair value in our financial statements, with changes in fair value recorded in earnings. These foreign currency derivatives have expired and we have not entered into any new foreign currency derivatives during 2009.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of December 31, 2009 and December 31, 2008:

	As of December 31, 2009					As of December 31, 2008
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,826,167	$	(186,986	)	$	3,685,692	$	(613,852	)
Interest rate caps		36,000		1,335			51,000		863
Basis swaps		—		—			50,000		—
Foreign currency derivatives:
Currency options		—		—			2,127		21
Net fair value	$	1,862,167	$	(185,651	)	$	3,788,819	$	(612,968	)

The following table summarizes the effect on income by derivative instrument type for the following periods:

	For the Year Ended December 31, 2009						For the Year Ended December 31, 2008						For the Year Ended December 31, 2007
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)			Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)			Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)		Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)
Interest rate swaps	$	(2,088	)	$	(449	)	$	(9,849	)	$	(432	)	$	3,975	$	(7,490	)
Interest rate caps		—			—			—			—			—		(191	)
Basis swaps		—			—			—			—			29		(123	)
Currency options		—			(21	)		—			25			—		15
Total	$	(2,088	)	$	(470	)	$	(9,849	)	$	(407	)	$	4,004	$	(7,789	)

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. As of December 31, 2009, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $1,010,276 and had a liability balance with a fair value of $105,352. During the years ended December 31, 2009 and 2008, the change in value of these hedges was an increase of $6,377 and a decrease of $394,112, respectively. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

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During the year ended December 31, 2009, cash flow hedges with a notional value of $1,801,445 and a liability fair value of $291,881 were removed from our consolidated financial statements due to the deconsolidation of VIEs. See Note 5: “Investments in Securities” for further disclosure.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in investment interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

Free-Standing Derivatives

We have maintained warehouse arrangements with various investment banks through 2008. These warehouse arrangements were free-standing derivatives under FASB ASC Topic 815, “Derivatives and Hedging”. As such, our investment, or first-dollar risk of loss, was recorded at fair value each period with the change in fair value recorded in earnings.

During the year ended December 31, 2008, our remaining two warehouse facilities terminated. As such, we did not expect that we would recover our warehouse deposits. As a result, as of December 31, 2008, we fully accrued for the contingency of losing our $32,059 of warehouse deposits in other liabilities. The accrual was charged to earnings through the change in fair value of free-standing derivatives. Subsequent to December 31, 2008, we did not recover our warehouse deposit and charged off our deposits accordingly.

In addition, the option we provided a warehouse provider for us to provide credit default protection on two reference securities was terminated in May 2008 and we have no further obligation thereunder.

NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents information about the eligible instruments for which we elected the fair value option and for which adjustments were recorded as of January 1, 2008:

	Carrying Amount as of December 31, 2007			Effect from adoption of the fair value option			Carrying Amount as of January 1, 2008 (After adoption of the fair value option)
Assets:
Trading securities (1)	$	2,721,360		$	—		$	2,721,360
Security-related receivables		1,050,967			(99,991	)		950,976
Deferred financing costs, net of accumulated amortization		18,047			(18,047	)		—
Liabilities:
Trust preferred obligations		(450,625	)		52,070			(398,555	)
CDO notes payable		(3,695,858	)		1,520,616			(2,175,242	)
Derivative liabilities		(155,080	)		—			(155,080	)
Deferred taxes and other liabilities		(6,103	)		6,103			—
Fair value adjustments before allocation to noncontrolling interests					1,460,751
Allocation of fair value adjustments to noncontrolling interests		—			(373,357	)		(373,357	)
Cumulative effect on shareholders’ equity from adoption of the fair value option (2)				$	1,087,394

(1) Prior to January 1, 2008, trading securities were classified as available-for-sale and carried at fair value. Accordingly, the election of the fair value option for trading securities did not change their carrying value and resulted in a reclassification of $310,520 from accumulated other comprehensive income (loss) to retained earnings (deficit) on January 1, 2008.

(2) The $1,087,394 cumulative effect on shareholders’ equity from the adoption of the fair value option on January 1, 2008 was comprised of a $310,520 increase to accumulated other comprehensive income (loss) and a $776,874 increase to retained earnings (deficit).

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, trust preferred obligations, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and

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liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, senior secured notes, loans payable on real estate and other indebtedness approximates cost due to the nature of these instruments.

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2009:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,467,566	$	1,401,393
Investments in securities and security-related receivables		694,897		694,897
Cash and cash equivalents		25,034		25,034
Restricted cash		156,167		156,167
Derivative assets		1,335		1,335
Liabilities
Recourse indebtedness:
Convertible senior notes		245,885		100,987
Secured credit facilities		49,994		49,994
Senior secured notes		43,000		43,000
Junior subordinated notes, at fair value		17,004		17,004
Junior subordinated notes, at amortized cost		25,100		11,185
Loans payable on real estate		17,500		17,500
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,396,750		592,555
CDO notes payable, at fair value		146,557		146,557
Loans payable on real estate		64,461		64,461
Trust preferred obligations, at fair value		70,872		70,872
Derivative liabilities		186,986		186,986

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Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2009
Trading securities
TruPS and subordinated debentures	$	—	$	—	$	471,106	$	471,106
Other securities		—		300		—		300
Available-for-sale securities		—		90		—		90
Security-related receivables
TruPS and subordinated debenture receivables		—		—		73,649		73,649
Unsecured REIT note receivables		—		65,393		—		65,393
CMBS receivables		—		58,894		—		58,894
Other securities		—		25,465		—		25,465
Derivative assets		—		1,335		—		1,335
Total assets	$	—	$	151,477	$	544,755	$	696,232
Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2009
Junior subordinated notes, at fair value	$	—	$	17,004	$	—	$	17,004
Trust preferred obligations		—		—		70,872		70,872
CDO notes payable, at fair value		—		—		146,557		146,557
Derivative liabilities		—		186,986		—		186,986
Total liabilities	$	—	$	203,990	$	217,429	$	421,419

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the year ended December 31, 2009:

Assets	Trading Securities—TruPS and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2008	$	1,472,611		$	172,055		$	1,644,666
Change in fair value of financial instruments		(121,064	)		(16,525	)		(137,589	)
Purchases and sales, net		14,133			(4,772	)		9,361
Deconsolidation of VIEs		(894,574	)		(77,109	)		(971,683	)
Balance, as of December 31, 2009	$	471,106		$	73,649		$	544,755

Liabilities	Trust Preferred Obligations			CDO Notes Payable, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2008	$	162,050		$	577,750		$	739,800
Change in fair value of financial instruments		(104,179	)		(56,973	)		(161,152	)
Purchases and sales, net		88,119			(26,864	)		61,255
Deconsolidation of VIEs		(75,118	)		(347,356	)		(422,474	)
Balance, as of December 31, 2009	$	70,872		$	146,557		$	217,429

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Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option within FASB ASC Topic 825, “Financial Instruments” as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

Description	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008
Change in fair value of trading securities and security-related receivables	$	(158,273	)	$	(1,737,305	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		153,459			1,579,689
Change in fair value of derivatives		6,377			(394,821	)
Change in fair value of financial instruments	$	1,563		$	(552,437	)

The changes in the fair value for the investment in securities, CDO notes payable, trust preferred obligations, and other liabilities for which the fair value option was elected for the years ended December 31, 2009 and 2008 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives for which the fair value option was elected for the years ended December 31, 2009 and 2008 was mainly due to changes in interest rates.

NOTE 10: SHAREHOLDERS’ EQUITY

Preferred Shares

In 2004, we issued 2,760,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series A Preferred Shares, for net proceeds of $66,600. The Series A Preferred Shares accrue cumulative cash dividends at a rate of 7.75% per year of the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A Preferred Shares have no maturity date and we are not required to redeem the Series A Preferred Shares at any time. On or after March 19, 2009, we may, at our option, redeem the Series A Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

In 2004, we issued 2,258,300 shares of our 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series B Preferred Shares, for net proceeds of $54,400. The Series B Preferred Shares accrue cumulative cash dividends at a rate of 8.375% per year of the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B Preferred Shares have no maturity date and we are not required to redeem the Series B Preferred Shares at any time. On or after October 5, 2009, we may, at our option, redeem the Series B Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

On July 5, 2007, we issued 1,600,000 shares of our 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, or the Series C Preferred Shares, in a public offering at an offering price of $25.00 per share. After offering costs, including the underwriters’ discount, and expenses of $1,660, we received $38,340 of net proceeds. The Series C Preferred Shares accrue cumulative cash dividends at a rate of 8.875% per year of the $25.00 liquidation preference and are paid on a quarterly basis. The Series C Preferred Shares have no maturity date and we are not required to redeem the Series C Preferred Shares at any time. We may not redeem the Series C Preferred Shares before July 5, 2012, except for the special optional redemption to preserve our tax qualification as a REIT. On or after July 5, 2012, we may, at our option, redeem the Series C Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

Common Shares

Share Repurchases:

On July 24, 2007, our board of trustees adopted a share repurchase plan that authorizes us to purchase up to $75,000 of RAIT common shares. Under the plan, we may make purchases, from time to time, through open market or privately negotiated transactions. We have not repurchased any common shares under this plan as of December 31, 2009.

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Share Issuances:

Exchange Offer. On December 29, 2009, we completed our previously announced exchange offer to exchange $34,000 of our convertible senior notes for common shares and cash. Pursuant to the terms of the Exchange Offer, we issued 8,126,000 common shares and paid $3,111 of cash as consideration for the exchanges notes. See Note 7—”Indebtedness—Exchange Offer” above.

Dividend reinvestment and share purchase plan (DRSPP). We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10,000,000 common shares. During the year ended December 31, 2009, we issued a total of 1,314,529 common shares pursuant to the DRSPP at a weighted-average price of $1.52 per share and we received $2,000 of net proceeds. On January 26, 2010, our board approved increasing the number of common shares available for issuance under the DRSPP by 7,248,436 common shares so that, with the 4,751,564 common shares previously authorized for issuance under the DRSPP that remain available for issuance, 12,000,000 common shares, in the aggregate, would be available for issuance under the DRSPP upon the registration under the Securities Act of 1933, as amended, of the common shares added to the DRSPP.

Standby Equity Distribution Agreement (SEDA). On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50,000, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50,000 worth of common shares under the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12,500,000 common shares.

Subject to the terms and conditions of the SEDA, we may issue notices from time to time to YA Global requiring YA Global to purchase common shares. The maximum portion of the commitment amount RAIT can request YA Global to pay pursuant to a single notice cannot exceed $1,500 or any other mutually agreed amount. The number of common shares issuable in connection with each notice is computed by dividing the portion of the commitment amount set forth in the notice by the purchase price for the common shares. The purchase price equals 97% of the market price, which is defined as the lowest daily volume weighted average price, or VWAP, of the common shares traded on the New York Stock Exchange during the three consecutive trading days after the date we delivered the notice to YA Global (the “Pricing Period”).

For each notice, we may indicate a minimum acceptable price, or the minimum price. If on any trading day during the pricing period, the VWAP for the common shares is below the minimum price, each, an excluded day, the portion of the commitment amount we have requested YA Global to pay under such notice will be reduced by 33%. In addition, each excluded day will be excluded from the Pricing Period for purposes of determining the market price. If YA Global has sold Common Shares on an Excluded Day, RAIT is obligated to sell, and YA Global is obligated to purchase, such number of Common Shares at a price equal to the Minimum Price; provided, however, that such number of Common Shares is not to exceed the number obtained by dividing the amount by which the Commitment Amount was reduced by the Minimum Price corresponding to such notice.

The portion of the requested Commitment Amount is automatically withdrawn to the extent the related purchases of Common Shares by YA Global would cause the aggregate number of Common Shares beneficially owned by YA Global and its affiliates to exceed 4.99% of the then outstanding Common Shares or exceed the aggregate offering price of Common Shares issuable under the Registration Statement. Upon expiration of the Pricing Period, YA Global will purchase the appropriate number of Common Shares subject to RAIT meeting certain customary conditions. RAIT will pay a placement agent fee to Raymond James & Associates, Inc. in an amount equal to 2% of the gross proceeds to RAIT of any sale of Common Shares pursuant to the SEDA.

After the first closing under the SEDA and thereafter prior to the termination of the SEDA, RAIT may from time to time request YA Global to purchase promissory notes issued by RAIT with a principal amount of up to $10,000. After considering each request in good faith, YA Global, in its sole discretion, will decide whether or not to purchase the notes. Any such notes purchased by YA Global will be on mutually acceptable terms and may include a provision that the notes be repaid with the proceeds of amounts delivered pursuant to the SEDA.

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The following tables summarize the dividends we declared or paid during the years ended December 31, 2009 and 2008:

	March 31, 2009		June 30, 2009		September 30, 2009		December 31, 2009		For the Year Ended December 31, 2009
Series A Preferred Shares
Date declared		1/27/09		4/8/09		7/28/09		10/27/09
Record date		3/2/09		6/1/09		9/1/09		12/1/09
Date paid		3/31/09		6/30/09		9/30/09		12/31/09
Total dividend amount	$	1,337	$	1,337	$	1,337	$	1,337	$	5,348
Series B Preferred Shares
Date declared		1/27/09		4/8/09		7/28/09		10/27/09
Record date		3/2/09		6/1/09		9/1/09		12/1/09
Date paid		3/31/09		6/30/09		9/30/09		12/31/09
Total dividend amount	$	1,182	$	1,182	$	1,182	$	1,182	$	4,728
Series C Preferred Shares
Date declared		1/27/09		4/8/09		7/28/09		10/27/09
Record date		3/2/09		6/1/09		9/1/09		12/1/09
Date paid		3/31/09		6/30/09		9/30/09		12/31/09
Total dividend amount	$	888	$	888	$	888	$	888	$	3,552
Common shares
Date declared		—		—		—		—		—
Record date		—		—		—		—		—
Date paid		—		—		—		—		—
Dividend per share		—		—		—		—		—
Total dividend declared		—		—		—		—		—

	March 31, 2008		June 30, 2008		September 30, 2008		December 31, 2008		For the Year Ended December 31, 2008
Series A Preferred Shares
Date declared		1/29/08		4/17/08		7/29/08		10/22/08
Record date		3/3/08		6/2/08		9/2/08		12/1/08
Date paid		3/31/08		6/30/08		9/30/08		12/31/08
Total dividend amount	$	1,337	$	1,337	$	1,337	$	1,337	$	5,348
Series B Preferred Shares
Date declared		1/29/08		4/17/08		7/29/08		10/22/08
Record date		3/3/08		6/2/08		9/2/08		12/1/08
Date paid		3/31/08		6/30/08		9/30/08		12/31/08
Total dividend amount	$	1,182	$	1,182	$	1,182	$	1,182	$	4,728
Series C Preferred Shares
Date declared		1/29/08		4/17/08		7/29/08		10/22/08
Record date		3/3/08		6/2/08		9/2/08		12/1/08
Date paid		3/31/08		6/30/08		9/30/08		12/31/08
Total dividend amount	$	888	$	888	$	888	$	888	$	3,552
Common shares
Date declared		3/25/08		6/30/08		—		10/10/08
Record date		4/4/08		7/16/08		—		10/31/08
Date paid		5/15/08		8/12/08		—		12/5/08
Dividend per share	$	0.46	$	0.46	$	—	$	0.35	$	1.27
Total dividend declared	$	28,083	$	29,350	$	—	$	22,675	$	80,108

On January 26, 2010, our board of trustees declared a first quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on March 31, 2010 to holders of record on March 1, 2010.

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NOTE 11: STOCK BASED COMPENSATION AND EMPLOYEE BENEFITS

We maintain the RAIT Financial Trust 2008 Incentive Award Plan (the “Incentive Award Plan”). The maximum aggregate number of common shares that may be issued pursuant to the Incentive Award Plan is 4,500,000. As of December 31, 2009, 2,464,061 common shares are available for issuance under this plan.

We have granted to our officers, trustees and employees phantom shares pursuant to the RAIT Investment Trust Phantom Share Plan and phantom units pursuant to the Incentive Award Plan. Both phantom shares and phantom units are redeemable for common shares issued under the Incentive Award Plan. Redemption occurs after a period of time of vesting set by the compensation committee of our board of trustees (“Compensation Committee”). All outstanding phantom shares issued to non-management trustees, vested immediately, have dividend equivalent rights and will be redeemed upon separation from service from us. In December 2008, the Compensation Committee amended the redemption terms of the remaining 3,688 phantom shares outstanding to provide that they would be redeemed on January 27, 2009. Phantom units granted to non-management trustees vest immediately, have dividend equivalent rights and will be redeemed upon the earliest to occur of (i) the first anniversary of the date of grant, or (ii) a trustee’s termination of service with us. Phantom units granted to officers and employees vest in varying percentages set by the Compensation Committee over four years, have dividend equivalent rights and will be redeemed between one to two years after vesting as set by the Compensation Committee.

On January 23, 2007, the Compensation Committee awarded 408,517 phantom units, valued at $14,997 using our closing stock price of $36.71, to various employees and trustees. The awards generally vest over four year periods for employees and immediately for trustees. On May 22, 2007, the Compensation Committee awarded 33,510 phantom units, valued at $965 using our closing stock price of $28.81, to various employees. The awards vest over four year periods. On July 24, 2007, the Compensation Committee awarded our trustees 9,562 phantom units, valued at $175. The awards vested immediately.

On December 7, 2007, ten of our executive officers voluntarily forfeited 322,000 phantom units awards that were granted to them on January 23, 2007 under the Incentive Award Plan. The equity incentive awards were subject to vesting periods of four or five years beginning in January 2008. The aggregate value of these awards when granted was $11,821, of which $2,113 was expensed through September 30, 2007. In accordance with accounting standards classified under FASB ASC Topic 718, we expensed the remaining $9,708 as non-cash compensation expense during the quarter ended December 31, 2007. If these awards had remained outstanding in accordance with their terms, we would have expensed this remaining amount over the remaining vesting periods of these awards.

On January 8, 2008, the Compensation Committee awarded 324,200 phantom units, valued at $2,448 using our closing stock price of $7.55, to various non-executive employees. The awards generally vest over four year periods. On March 5, 2008, the Compensation Committee awarded 26,712 phantom units, valued at $175 using our closing stock price of $6.55, to trustees. These awards vested immediately. On August 7, 2008, the Compensation Committee awarded 24,927 phantom units, valued at $175 using our closing stock price of $7.02, to trustees. These awards vested immediately.

On March 5, 2009, the compensation committee of our board of trustees, or the compensation committee, awarded 484,000 phantom units, valued at $242 using our closing stock price of $0.50 per share, to various non-executive employees. The awards generally vest over three-year periods.

On June 25, 2009, the compensation committee awarded 200,000 phantom units, valued at $238 using our closing stock price of $1.19, to two non-executive employees. The awards generally vest over four-year periods.

During the years ended December 31, 2009 and 2008, there were 21,805 and 29,943, respectively, phantom units redeemed for common shares and 37,000 and 60,152 phantom units forfeited, respectively, including 322,000 phantom units forfeited by our executive officers discussed above. At December 31, 2009 and 2008, there were 1,080,882 and 455,687, respectively, phantom units outstanding.

As part of the acquisition of Taberna on December 11, 2006, or the Taberna acquisition, we assumed 481,785 unvested restricted shares in exchange for the unvested restricted shares of Taberna’s employees that did not vest on the date of acquisition. The unvested restricted shares were accounted for under FASB ASC Topic 718, and the grant date fair value on December 11, 2006 of $16,559 (based on the closing price of $34.37 at December 11, 2006 of our common shares) will be expensed over the remaining vesting provisions of the original awards. During the years ended December 31, 2009 and 2008, unvested restricted shares totaling 62,338 and 126,613, respectively, vested and were issued to the respective employees.

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During the year ended December 31, 2008, there were 22,237 unvested restricted shares forfeited. There were no unvested restricted shares forfeited during 2009. As of December 31, 2009 and 2008, there were 14,159 and 76,690, respectively, unvested restricted shares outstanding.

As of December 31, 2009 and 2008, the deferred compensation cost relating to unvested awards was $2,642 and $5,898, respectively, relating to phantom units and restricted stock that had a weighted average remaining vesting period of 1.6 years and 1.1 years, respectively.

On January 26, 2010, the compensation committee awarded 1,500,000 phantom units, valued at $1,905 using our closing stock price of $1.27, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 500,000 phantom units, valued at $635 using our closing stock price of $1.27, to our non-executive officer employees. These awards generally vest over three-year periods.

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $240.

Stock Options

We have granted to our officers, trustees and employees options to acquire common shares. The vesting period is determined by the Compensation Committee and the option term is generally ten years after the date of grant. As of December 31, 2009 and 2008, there were 168,800 and 178,800 options outstanding, respectively.

A summary of the options activity of the Incentive Award Plan is presented below.

	2009					2008					2007
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, January 1,		178,800		$	21.84		215,300		$	20.68		225,842		$	20.49
Expired		(10,000	)		10.75		(36,500	)		15.00		—			—
Exercised		—			—		—			—		(10,542	)		16.53
Outstanding, December 31,		168,800		$	22.50		178,800		$	21.84		215,300		$	20.68
Options exercisable at December 31,		168,800					178,800					180,300

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2009		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Outstanding at December 31, 2009		Weighted Average Exercise Price
$13.65		7,000		1.1 years	$	13.65		7,000	$	13.65
$19.21 - 19.85		20,000		2.4 years	$	19.50		20,000	$	19.50
$21.81 - 26.40		141,800		3.7 years	$	23.36		141,800	$	23.36
		168,800		3.5 years	$	22.50		168,800	$	22.50

We did not grant options during the three years ended December 31, 2009.

During the years ended December 31, 2009, 2008 and 2007, we recorded compensation expense of $3,830, $7,206, and $20,891, respectively, associated with our stock based compensation. Stock-based compensation expense for the year ended December 31, 2007 includes $9,708 of stock forfeitures discussed above.

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Employee Benefits

401(k) Profit Sharing Plan

During 2007, we maintained the RAIT Investment Trust 401(k) profit sharing plan, or the former RAIT 401(k) plan, for our employees and assumed the Taberna Capital Management LLC 401(k) profit sharing plan in connection with the Taberna acquisition because we wish to encourage our employees to save some percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. Effective January 1, 2008, the former RAIT 401(k) plan and Taberna 401(k) plan were combined into the RAIT Financial Trust 401(k) profit sharing plan, or the RAIT 401(k) plan, in order to provide consistent benefits to all employees.

The former RAIT 401(k) plan offered eligible employees the opportunity to make long-term investments on a regular basis through salary contributions, which we supplemented with matching contributions. Any matching contribution made by RAIT pursuant to this plan vests 20% per year of service. Until August 2006, matching contributions were made in RAIT common shares.

The Taberna 401(k) plan also offered eligible employees the opportunity to make long-term investments on a regular basis through salary contributions, which are supplemented by our matching cash contributions and potential profit sharing payments. During 2007, RAIT provided a 4% cash match of the employee contributions and paid an additional 2% of eligible compensation as discretionary cash profit sharing payments. Any matching contribution made by RAIT pursuant to the Taberna 401(k) plan vests 33% per year of service. No common shares were issued pursuant to the Taberna 401(k) plan.

The RAIT 401(k) plan offers eligible employees the opportunity to make long-term investments on a regular basis through salary contributions, which are supplemented by our matching cash contributions and potential profit sharing payments. Since January 1, 2008, RAIT provides a 4% cash match of the employee contributions and may pay an additional 2% of eligible compensation as discretionary cash profit sharing payments. Any matching contribution made by RAIT pursuant to the RAIT 401(k) plan vests 33% per year of service, provided that amounts carried over from the former RAIT 401(k) plan retain the vesting schedule of that plan. No common shares are issued pursuant to the RAIT 401(k) plan.

During the years ended December 31, 2009, 2008 and 2007, we recorded $296, $642 and $277 of contributions which is included in compensation expense on the accompanying statement of operations.

Deferred Compensation

In June 2002, we established a supplemental executive retirement plan, or SERP, providing for retirement benefits to Betsy Z. Cohen, our Chairman, as required by her employment agreement with us. We amended this SERP plan on December 11, 2006 in connection with the acquisition of Taberna. Under the terms of the SERP Plan, Mrs. Cohen’s benefit consists of two components, a share component and a cash component. On July 1, 2007, the share component was distributed to Mrs. Cohen in the form of 158,101 common shares in a single lump sum. The cash component commenced distribution to Mrs. Cohen in a 50% joint and survivor annuity on July 1, 2007. We established a trust to serve as the funding vehicle for the SERP benefit. During the year ended December 31, 2008, $433 of the cash component was distributed to Mrs. Cohen through monthly payments. During the period from July 1, 2007 to December 31, 2007, $216 of the cash component was distributed to Mrs. Cohen through monthly payments. The remaining cash benefit obligation of $4,390 was eligible for a lump-sum distribution and was paid to Mrs. Cohen in January 2009. We recognized SERP compensation expense (benefit) of $798, and $(621) for the years ended December 31, 2008 and 2007, respectively.

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NOTE 12: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three years ended December 31, 2009:

	For the Years Ended December 31
	2009			2008			2007
Income (loss) from continuing operations	$	(440,141	)	$	(617,130	)	$	(435,991	)
Income allocated to preferred shares		(13,641	)		(13,641	)		(11,817	)
Income allocated to noncontrolling interests		13,419			189,580			69,707
Income (loss) from continuing operations allocable to common shares		(440,363	)		(441,191	)		(378,101	)
Income (loss) from discontinued operations		(840	)		(2,055	)		(1,487	)
Net income (loss) allocable to common shares	$	(441,203	)	$	(443,246	)	$	(379,588	)
Weighted-average shares outstanding—Basic		65,205,233			63,394,447			61,403,986
Weighted-average shares outstanding—Diluted		65,205,233			63,394,447			61,403,986
Earnings (loss) per share—Basic:
Continuing operations	$	(6.76	)	$	(6.96	)	$	(6.16	)
Discontinued operations		(0.01	)		(0.03	)		(0.02	)
Total earnings (loss) per share—Basic	$	(6.77	)	$	(6.99	)	$	(6.18	)
Earnings (loss) per share—Diluted:
Continuing operations	$	(6.76	)	$	(6.96	)	$	(6.16	)
Discontinued operations		(0.01	)		(0.03	)		(0.02	)
Total earnings (loss) per share—Diluted	$	(6.77	)	$	(6.99	)	$	(6.18	)

For the years ended December 31, 2009, 2008 and 2007, securities convertible into 15,612,224, 13,109,658, and 8,834,726 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 13: INCOME TAXES

RAIT and Taberna have elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. To maintain qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to shareholders. We generally will not be subject to U.S. federal income tax on taxable income that is distributed to our shareholders. If RAIT or Taberna fails to qualify as a REIT in any taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates, and we will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants relief under certain statutory provisions. Such an event could materially adversely affect our net income and cash available for distributions to shareholders. However, we believe that both RAIT and Taberna will be organized and operated in such a manner as to qualify for treatment as a REIT, and both intend to operate in the foreseeable future in a manner so that both will qualify as a REIT. We may be subject to certain state and local taxes.

Our TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred costs by the CDO entities. In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are expensed and are paid by the TRSs in the year in which the revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

The components of the provision for income taxes as it relates to our taxable income from domestic TRSs during the years ended December 31, 2009, 2008 and 2007 includes the effects of our performance of a portion of its TRS services in a foreign jurisdiction that does not incur income taxes.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our income on a current basis as SubPart F income, whether or not distributed. Upon distribution of any previously included SubPart F income by these entities, no incremental U.S. federal, state, or local income taxes would be payable by us. Accordingly, no provision for income taxes has been recorded for these foreign TRS entities for the years ended December 31, 2009, 2008 and 2007.

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The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the year ended December 31, 2009 were as follows:

	For the Year Ended December 31, 2009
	Federal		State and Local		Foreign			Total
Current benefit (provision)	$	1,085	$	—	$	(1,210	)	$	(125	)
Deferred benefit (provision)		450		58		575			1,083
Income tax benefit (provision)	$	1,535	$	58	$	(635	)	$	958

The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the year ended December 31, 2008 were as follows:

	For the Year Ended December 31, 2008
	Federal			State and Local			Foreign			Total
Current benefit (provision)	$	4,126		$	231		$	(982	)	$	3,375
Deferred benefit (provision)		(1,004	)		(234	)		—			(1,238	)
Income tax benefit (provision)	$	3,122		$	(3	)	$	(982	)	$	2,137

The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the year ended December 31, 2007 were as follows:

	For the Year Ended December 31, 2007
	Federal			State and Local			Foreign			Total
Current benefit (provision)	$	(2,708	)	$	(1,239	)	$	(1,104	)	$	(5,051	)
Deferred benefit (provision)		12,699			3,089			—			15,788
Income tax benefit (provision)	$	9,991		$	1,850		$	(1,104	)	$	10,737

A reconciliation of the statutory tax rates to the effective rates is as follows for the years ended December 31, 2009, 2008 and 2007:

	For the Years Ended December 31
	2009			2008			2007
Federal statutory rate		35.0	%		35.0	%		35.0	%
State statutory, net of federal benefit		4.7	%		—			6.6	%
Change in valuation allowance		(150.8	)%		(40.0	)%		(16.8	)%
Permanent items		(33.6	)%		(1.9	)%		(10.9	)%
Foreign tax effects		221.6	%		11.6	%		17.6	%
Effective tax rate for domestic TRSs		76.9	%		4.7	%		31.5	%

Significant components of our deferred tax assets (liabilities), at our TRSs, are as follows as of December 31, 2009 and 2008:

Deferred tax assets (liabilities):	As of December 31, 2009			As of December 31, 2008
Net operating losses, at TRSs	$	11,984		$	10,356
Capital losses		6,705			6,144
Unrealized losses		13,296			12,651
Other		371			318
Total deferred tax assets (liabilities)		32,356			29,469
Valuation allowance		(31,273	)		(29,469	)
Net deferred tax assets (liabilities)	$	1,083		$	—

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As of December 31, 2009, we had $65,460 of federal and state net operating losses, $2,052 of foreign net operating losses and $17,324 of capital losses. The federal net operating losses will begin to expire in 2028, the state net operating losses will begin to expire in 2017 and the foreign operating losses have an indefinite carryforward period. The capital losses will expire in 2012. We have concluded that it is more likely than not that $64,287 of federal and state net operating losses and all of the capital losses will not be utilized during their respective carry forward periods; and as such, we have established a valuation allowance against these deferred tax assets.

NOTE 14: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities described below. All of these relationships and transactions were approved or ratified by a majority of our independent trustees as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

Our Chairman, Betsy Z. Cohen, is the Chief Executive Officer and a director of The Bancorp, Inc., or Bancorp, and Chairman of the Board and Chief Executive Officer of its wholly-owned subsidiary, The Bancorp Bank, a commercial bank. Daniel G. Cohen was our chief executive officer from the date of the Taberna acquisition until his resignation from that position on February 22, 2009. Mr. Cohen was a trustee of RAIT from the date of the Taberna acquisition until his resignation from that position on February 26, 2010. Mr. Cohen is the Chairman of the Board of Bancorp and Vice-Chairman of the Board of Bancorp Bank. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of December 31, 2009 and December 31, 2008, we had $410 and $1,985, respectively, of cash and cash equivalents and $1,601 and $7,287, respectively, of restricted cash on deposit at Bancorp. During the years ended December 31, 2009, 2008 and 2007, we received $11, $123 and $801, respectively, of interest income from Bancorp. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp at an annual rental expense based upon the amount of square footage occupied. We have signed a sublease agreement with a third party for the remaining term of our sublease. Rent expense incurred to Bancorp was $300, $340 and $445 for the years ended December 31, 2009, 2008 and 2007, respectively. Rent expense has been included in general and administrative expense in the accompanying consolidated statements of operations. During the year ended December 31, 2007, we paid fees of $72 to Bancorp for information system technical support services.

c). Participation Interests—We funded a $54,000 commercial mortgage during January 2008. At closing, Bancorp purchased a participation interest in this loan for a total commitment of $24,300. We also funded a $70,000 commercial mortgage during January 2008. At closing, Bancorp purchased a participation interest in this loan for a total commitment of $26,500, of which $22,500 was funded at closing. In November 2008, RAIT CRE CDO I, Ltd. purchased $19,268 of the outstanding loan balance of the second loan from Bancorp and RAIT Preferred Funding II, Ltd. purchased the remaining $3,232 outstanding from Bancorp. We paid Bancorp fees of $321 for its services in connection with the closing of these loans.

Mr. Cohen holds controlling positions in various companies with which we conduct business. Mr. Cohen serves as the Chairman of the board of directors and Chief Executive Officer of Cohen & Company Inc. or, Cohen & Company, and as the Chairman of the board of managers, Chief Executive Officer and Chief Investment Officer of Cohen Brothers, LLC, or Cohen Brothers, a majority owned subsidiary of Cohen & Company. Each transaction between us and Cohen & Company is described below:

a). Office Leases—We maintain sub-lease agreements for shared office space and facilities with Cohen & Company. Rent expense during the years ended December 31, 2009, 2008 and 2007 relating to these leases was $50, $50 and $76, respectively. Rent expense has been included in general and administrative expense in the accompanying consolidated statements of operations. Future minimum lease payments due over the remaining term of the lease are $308.

b). Shared Services—We previously paid Cohen & Company for services relating to structuring and managing our investments in CMBS and RMBS. The agreement with Cohen & Company for these services terminated on July 1, 2008 and we did not renew or extend this agreement. During the years ended December 31, 2008 and 2007, we incurred total shared service expenses of $519 and $1,138, respectively. These shared service expenses have been included in general and administrative expense in the accompanying consolidated statements of operations.

c). Non-Competition Agreement—As part of the spin-off of Taberna from Cohen & Company in April 2005 and before our acquisition of Taberna in December 2006, Taberna and Cohen & Company entered into a three-year non-competition agreement that ended in April 2008. As part of our acquisition of Taberna, we valued this non-competition agreement as an amortizing intangible asset and the intangible asset has been fully amortized.

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d). Common Shares—As of December 31, 2009 and December 31, 2008, Cohen & Company and its affiliate entities owned 510,434 of our common shares.

e). CDO Notes Payable—During the year ended December 31, 2009, we repurchased $14,000 of our RAIT CRE CDO I notes payable rated BBB and $300 of CMBS receivables from a third party using the broker-dealer services of Cohen & Company. Cohen & Company received $113 of total principal transaction income in connection with these transactions. During the year ended December 31, 2009, Cohen & Company purchased $6,000 of Taberna VII notes payable rated AAA from third parties using the broker-dealer services of RAIT Securities LLC, for which we received $15 in principal transaction income. During the year ended December 31, 2007, we sold $20,000 of our Taberna VIII notes payable rated AAA to third parties using the broker-dealer services of Cohen & Company, for which Cohen & Company received $183 in principal transaction income. During the year ended December 31, 2007, we sold $12,750 of our RAIT Preferred Funding II CDO notes payable rated AA to a third party using the broker-dealer services of Cohen & Company. Cohen & Company did not receive any principal transaction income or loss in connection with this transaction. During the year ended December 31, 2007, we sold $15,000 of our Taberna Preferred Funding VIII CDO notes payable rated AA to an affiliate of Cohen & Company. Cohen & Company did not receive any principal transaction income in connection with this transaction.

f). EuroDekania—EuroDekania is an affiliate of Cohen & Company. In September 2007, EuroDekania purchased approximately €10,000 ($13,892) of the subordinated notes and all of the €32,250 ($44,802) BBB-rated debt securities in Taberna Europe CDO II. We invested €17,500 ($24,311) in the total subordinated notes and earn management fees of 35 basis points on the collateral assets owned by this entity. EuroDekania receives a fee equal to 3.5 basis points of our subordinated collateral management fee which is payable to EuroDekania only if we collect our subordinated management fee and EuroDekania retains an investment in the subordinated notes. During the years ended December 31, 2009, 2008 and 2007, we recorded a collateral management fee expense of $0, $376 and $152, respectively, payable to EuroDekania.

g). Star Asia—Star Asia is an affiliate of Cohen & Company. In March 2009, Star Asia issued debt securities to a third party, upon which a subsequent exchange offer was entered into with Taberna Preferred Funding III, Ltd., or Taberna III, for $22,425 and Taberna Preferred Funding IV, Ltd., or Taberna IV, for $19,434. Taberna Capital Management is the collateral manager for Taberna III and Taberna IV. We received an opinion from an independent third party concluding that the transaction was fair from Taberna III and IV’s financial viewpoint. There were no fees earned by Taberna Capital Management or Star Asia.

h). Trust Preferred Securities—In October 2008, we re-purchased $25,000 principal amount of our TruPS that we issued from a third party using the broker-dealer services of Cohen & Company, for which Cohen & Company received $70 in principal transaction income.

i). Fees—Cohen & Company provided origination services for our investments and placement and structuring services for certain debt and equity securities issued by our CDO securitizations. For these services, during the year ended December 31, 2007, Cohen & Company received approximately $6,486 in origination, structuring and placement fees.

j). Strategos Capital Management—Strategos Capital Management, or Strategos, is an affiliate of Cohen & Company. In October 2006, Taberna engaged Strategos to create and manage a $1.0 billion high-grade asset backed CDO. During 2007, we decided not to complete this securitization and terminated this agreement in July 2007 at no cost to us.

k). Kleros Preferred Funding VIII, Ltd.—Kleros Preferred Funding VIII, Ltd., or Kleros VIII, is a securitization managed by Cohen & Company. In June 2007, we purchased approximately $26,400 in par amount of bonds rated A through BBB issued by Kleros VIII, for a purchase price of approximately $23,997. As of December 31, 2009, the bonds have a current fair value of $0 and have been placed on non-accrual status.

Edward E. Cohen, the spouse of Betsy Z. Cohen and father of Daniel G. Cohen, is the Chairman of Resource America, Inc, or Resource America. Jonathan Z. Cohen, the son of Betsy Z. Cohen and brother of Daniel G. Cohen, is the Chief Executive Officer of Resource America. During the year ended December 31, 2009, we repurchased $3,500 of our RAIT CRE CDO I notes payable rated BBB from a third party using the broker-dealer services of a subsidiary of Resource America. The Resource America subsidiary received $7 principal transaction income in connection with this transaction.

Brandywine Construction & Management, Inc., or Brandywine, is an affiliate of Edward E. Cohen. Brandywine provided real estate management services to two properties, three properties and three properties underlying our real estate during the years ended December 31, 2009, 2008 and 2007, respectively. Management fees of $94, $123 and $145 were paid

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to Brandywine during the years ended December 31, 2009, 2008 and 2007, respectively, relating to those interests. We believe that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties.

We had a $3,369 first mortgage loan secured by Pennsview Apartments that has junior lien against it that is held by an entity controlled by Daniel G. Cohen. Our loan bore interest at a fixed rate of 8.0%, was to mature on March 29, 2008 and was paying in accordance with its terms. In March 2008, we transferred our first mortgage loan to another entity controlled by Mr. Cohen for $3,500, representing the outstanding principal balance of, and accrued interest on, the loan and an exit fee.

Eton Park Fund, L.P. and its affiliates—In connection with our sponsorship of Taberna Euro CDO I during January 2007, we paid Eton Park Fund L.P., or Eton Park, a standby equity commitment fee of $1,000. In exchange for this fee, they agreed to purchase up to €5,500 of the Class F subordinated notes issued by Taberna Euro CDO I. Eton Park owned approximately 6.4% of our common shares when the commitment fee was paid.

Mercury Real Estate Advisors LLC—In March 2007, we purchased approximately $9,000 in par amount of preference shares issued by various CDOs sponsored by Taberna from Mercury Real Estate Advisors LLC, or Mercury, for a purchase price of approximately $8,685. Mercury and its affiliates owned approximately 6.9% of our common shares when we purchased the preference shares.

NOTE 15: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

As of December 31, 2009, we had four properties designated as held for sale. As of December 31, 2008, we had three properties designated as held for sale, including one that was deconsolidated during the year ended December 31, 2009. The following table summarizes the consolidated balance sheet of the real estate properties classified as assets held for sale:

	As of December 31, 2009		As of December 31, 2008
Assets:
Investments in real estate	$	79,790	$	82,524
Cash and cash equivalents		1,069		730
Other assets		2,410		529
Deferred financing costs, net		161		—
Total assets held for sale	$	83,430	$	83,783
Liabilities:
Other indebtedness	$	18,508	$	24,385
Accrued interest payable		62		111
Accounts payable and accrued expenses		1,667		2,358
Other liabilities		766		337
Total liabilities related to assets held for sale (a)	$	21,003	$	27,191

(a) Liabilities related to assets held for sale exclude $51,547 of first mortgages held by RAIT’s CDO securitizations that are eliminated in our consolidated balance sheet.

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For the years ended December 31, 2009, 2008 and 2007, income (loss) from discontinued operations relates to four real estate properties designated as held for sale and three real estate properties sold or deconsolidated since January 1, 2007. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Years Ended December 31
	2009			2008			2007
Rental income	$	9,471		$	3,983		$	2,234
Expenses:
Real estate operating expenses		6,695			4,797			2,837
General and administrative expense		19			—			—
Depreciation expense		2,893			1,305			528
Total expenses		9,607			6,102			3,365
Income (loss) before interest and other income		(136	)		(2,119	)		(1,131	)
Interest and other income		959			64			—
Income (loss) from discontinued operations		823			(2,055	)		(1,131	)
Gain (loss) from discontinued operations		(1,663	)		—			(356	)
Total income (loss) from discontinued operations	$	(840	)	$	(2,055	)	$	(1,487	)

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table summarizes our quarterly financial data which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations:

	For the Three-Month Periods Ended
	March 31			June 30			September 30			December 31
2009:
Total revenue	$	59,779		$	57,831		$	41,425		$	38,475
Change in fair value of financial instruments		(99,805	)		91,357			(3,808	)		13,819
Net income (loss)		(148,414	)		(289,261	)		(21,789	)		18,483
Net income (loss) allocable to common shares		(144,232	)		(287,867	)		(24,692	)		15,588
Total earnings (loss) per share—Basic (a)	$	(2.22	)	$	(4.43	)	$	(0.38	)	$	0.24
Total earnings (loss) per share—Diluted (a)	$	(2.22	)	$	(4.43	)	$	(0.38	)	$	0.24
2008:
Total revenue	$	62,847		$	65,343		$	61,343		$	55,250
Change in fair value of financial instruments		255,850			97,056			(302,245	)		(603,098	)
Net income (loss)		237,493			113,062			(293,212	)		(676,528	)
Net income (loss) allocable to common shares		130,028			114,359			(181,781	)		(505,852	)
Total earnings (loss) per share—Basic (a)	$	2.12		$	1.82		$	(2.82	)	$	(7.78	)
Total earnings (loss) per share—Diluted (a)	$	2.12		$	1.82		$	(2.82	)	$	(7.78	)

(a) The summation of quarterly per share amounts do not equal the full year amounts.

During the three months ended December 31, 2009, we completed our previously announced exchange offer to exchange convertible senior notes for common shares and cash. As a result of the exchange offer, we recorded gains on extinguishment of debt of approximately $18,120. See Note 7: Indebtedness—Exchange Offer.

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NOTE 17: OTHER DISCLOSURES

Segments

We have identified that we have one operating segment; accordingly we have determined that it has one reportable segment. As a group, our executive officers act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results to make decisions about all investments and resources and to assess performance for the entire company. Our portfolio consists of one reportable segment, investments in real estate through the mechanism of lending and/or ownership. The CODM manages and reviews our operations as one unit. Resources are allocated without regard to the underlying structure of any investment, but rather after evaluating such economic characteristics as returns on investment, leverage ratios, current portfolio mix, degrees of risk, income tax consequences and opportunities for growth. We have no single customer that accounts for 10% or more of revenue.

Commitments and Contingencies

Unfunded Loan Commitments

Certain of our commercial mortgages and mezzanine loan agreements contain provisions whereby we are required to advance additional funds to our borrowers for capital improvements and upon the achievement of certain property operating hurdles. As of December 31, 2009, our incremental loan commitments are $55,851, which will be funded from either restricted cash held on deposit or revolving debt capacity dedicated for these purposes.

Employment Agreements

We are party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Putative Consolidated Class Action Securities Lawsuit

RAIT, certain of our executive officers and trustees and the lead underwriters involved in our public offering of common shares in January 2007 were named defendants in one or more of nine putative class action securities lawsuits filed in August and September 2007 in the United States District Court for the Eastern District of Pennsylvania. By Order dated November 17, 2007, the court consolidated these cases under the caption In re RAIT Financial Trust Securities Litigation (No. 2:07-cv-03148), and appointed a lead plaintiff and lead counsel. On January 4, 2008, lead plaintiff filed a consolidated class action complaint, or the complaint, on behalf of a putative class of purchasers of our securities between June 8, 2006 and August 3, 2007. The complaint named as defendants RAIT, eleven current and former officers and trustees of RAIT, ten underwriters who participated in certain of our securities offerings in 2007 and our independent accounting firm. The complaint alleged, among other things, that certain defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by making materially false and misleading statements and material omissions in registration statements and prospectuses about our credit underwriting, our exposure to certain issuers through investments in debt securities, and our loan loss reserves and other financial items. The complaint further alleged that certain defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, by making materially false and misleading statements and material omissions during the putative class period about our credit underwriting, our exposure to certain issuers through investments in debt securities, and our loan loss reserves and other financial items. The complaint sought unspecified compensatory damages, the right to rescind the purchases of securities in the public offerings, interest, and plaintiffs’ reasonable costs and expenses, including attorneys’ fees and expert fees.

On July 15, 2009, the defendants entered into a Stipulation and Agreement of Settlement (the “Stipulation”) with the lead plaintiff for the settlement of the action. On December 10, 2009, the United States District Court for the Eastern District of Pennsylvania granted final court approval of the settlement of the action . Under the terms of the settlement, the lawsuit was dismissed with prejudice and RAIT and all the other defendants received a full release of all claims asserted against them in the lawsuit in exchange for a cash payment of $32 million. The settlement payment is within the limits of RAIT’s directors and officers liability insurance, and the settlement has been funded by RAIT’s insurers. In connection with the settlement, RAIT and the other defendants have at all times denied and continue to deny wrongdoing of any kind.

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Riverside National Bank of Florida Litigation

RAIT subsidiary Taberna Capital Management, LLC (“Taberna”) is named as one of fifteen defendants in a lawsuit filed by Riverside National Bank of Florida (“Riverside”) on November 13, 2009 in the Supreme Court of the State of New York, County of New York. (A substantially similar action was filed by Riverside on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, and subsequently discontinued without prejudice and refiled in New York County.) The action, titled Riverside National Bank of Florida v. The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., Fitch, Inc., Taberna Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., JPMorgan Chase & Co., J.P. Morgan Securities Inc., Citigroup Global Markets, Credits Suisse Securities (USA) LLC, ABN Amro, Inc., Cohen & Company, and SunTrust Robinson Humphrey, Inc., asserts claims for common law fraud, negligent misrepresentation, breach of fiduciary duty, and breach of contract in connection with Riverside’s purchase of certain CDO securities, including securities from the Taberna Preferred Funding II, IV, and V CDOs. Riverside alleges that offering materials issued in connection with the CDOs it purchased did not adequately disclose the process by which the rating agencies rated each of the securities. Riverside also alleges, among other things, that the offering materials should have disclosed an alleged conflict of interest of the rating agencies as well as the role that the rating agencies played in structuring each CDO. Riverside seeks damages in excess of $132 million, rescission of its purchases of the securities at issue, an accounting of certain amounts received by the defendants together with the imposition of a constructive trust, and punitive damages of an unspecified amount. On December 11, 2009, the defendants moved to dismiss all of Riverside’s claims. Riverside filed an opposition to the defendants’ motion on February 19, 2010, voluntarily dismissing its contract causes of action and opposing the remainder of defendants’ motion to dismiss. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Lease Obligations

We lease office space in Philadelphia, New York City, and other locations. The annual minimum rent due pursuant to the leases for each of the next five years and thereafter is estimated to be as follows as of December 31, 2009:

2010	$	1,667
2011		1,334
2012		1,133
2013		1,097
2014		1,097
Thereafter		1,152
Total	$	7,480

Rent expense was $2,990, $1,977, and $2,271 for the years ended December 31, 2009, 2008, and 2007, respectively, and has been included in general and administrative expense in the accompanying consolidated statements of operations.

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RAIT Financial Trust

Schedule II

Valuation and Qualifying Accounts

For the Three Years Ended December 31, 2009

(Dollars in thousands)

	Balance, Beginning of  Period		Additions(a)		Deductions(b)			Balance, End of  Period
For the year ended December 31, 2009	$	171,973	$	226,567	$	(311,931	)	$	86,609
For the year ended December 31, 2008	$	26,389	$	162,783	$	(17,199	)	$	171,973
For the year ended December 31, 2007	$	5,345	$	21,721	$	(677	)	$	26,389

(a) For the year ended December 31, 2009, additions include $96,487 associated with our residential mortgage portfolio.

(b) For the year ended December 31, 2009, deductions include $150,723 associated with our residential mortgage portfolio.

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RAIT Financial Trust

Schedule III

Real Estate and Accumulated Depreciation

As of December 31, 2009

(Dollars in thousands)

Property Name	Description	Location	Initial Cost				Cost of Improvements, net of Retirements						Gross Carrying Amount				Accumulated Depreciation- Building			Encumbrances (Unpaid Principal)			Year of Acquisition		Life of Depreciation
			Land		Building		Land			Building			Land(1)		Building(1)
Willow Grove	Land	Willow Grove, PA	$	307	$	—	$	—		$	—		$	307	$	—	$	—		$	—			2001		N/A
Cherry Hill	Land	Cherry Hill, NJ		307		—		—			—			307		—		—			—			2001		N/A
Reuss	Office	Milwaukee, WI		4,080		36,720		10			12,262			4,090		48,982		(7,691	)		(31,192	) (3)		2004		30
McDowell	Office	Scottsdale, AZ		9,803		55,523		5			278			9,808		55,801		(3,826	)		(64,865	) (2)		2007		30
Northpoint	Office	Roswell, GA		2,715		10,859		(69	)		83			2,646		10,942		(544	)		(10,018	)		2008		30
Stonecrest	Multi-Family	Birmingham, AL		5,858		23,433		(31	)		(125	)		5,827		23,308		(1,323	)		(26,625	) (4)		2008		30
Crestmont	Multi-Family	Marietta, GA		3,207		12,828		47			202			3,254		13,030		(589	)		(13,396	) (2)		2008		30
Copper Mill	Multi-Family	Austin, TX		3,420		13,681		52			219			3,472		13,900		(632	)		(14,609	) (2)		2008		30
Cumberland	Multi-Family	Smyrna, GA		3,194		12,776		85			347			3,279		13,123		(591	)		(13,369	) (2)		2008		30
Heritage Trace	Multi-Family	Newport News, VA		2,642		10,568		77			132			2,719		10,700		(487	)		(10,864	) (2)		2008		30
Mandalay Bay	Multi-Family	Austin, TX		5,363		21,453		99			418			5,462		21,871		(989	)		(21,810	) (2)		2008		30
Oyster Point	Multi-Family	Newport News, VA		3,920		15,680		47			200			3,967		15,880		(720	)		(16,691	) (2)		2008		30
Tuscany Bay	Multi-Family	Orlando, FL		7,002		28,009		122			520			7,124		28,529		(1,289	)		(29,343	) (2)		2008		30
Autumn Grove	Multi-Family	Downers Grove, IL		10,166		40,665		184			798			10,350		41,463		(1,817	)		(41,701	) (2)		2008		30
Colonial Parc	Multi-Family	Little Rock, AR		910		3,639		—			419			910		4,058		(111	)		(9,172	) (2)		2009		30
Corey Landings	Land	St. Pete Beach, FL		21,595		—		—			—			21,595		—		—			—			2009		N/A
Sharpstown Mall	Retail	Houston, TX		6,737		26,948		—			85			6,737		27,033		(826	)		(34,364	) (2)		2009		30
Stonecreek Apartments	Multi-Family	Fort Collins, CO		2,400		9,600		—			7			2,400		9,607		(267	)		(10,310	) (5)		2009		30
Belle Creek Apartments	Multi-Family	Henderson, CO		1,890		7,562		—			4			1,890		7,566		(210	)		(15,182	) (2)		2009		30
Willows	Multi-Family	Las Vegas, NV		2,184		8,737		—			—			2,184		8,737		(243	)		(11,800	) (2)		2009		30
Regency Meadows	Multi-Family	Las Vegas, NV		1,875		7,499		—			117			1,875		7,616		(209	)		(10,103	) (2)		2009		30
Executive Center	Office	Milwaukee, WI		1,581		6,324		—			—			1,581		6,324		(158	)		(8,409	) (2)		2009		30
Remington	Multi-Family	Tampa, FL		4,273		17,092		—			1,747			4,273		18,839		(446	)		(24,750	) (2)		2009		30
Desert Wind	Multi-Family	Phoenix, AZ		2,520		10,080		—			—			2,520		10,080		(224	)		(12,221	) (2)		2009		30
Eagle Ridge	Multi-Family	Colton, CA		3,198		12,792		—			125			3,198		12,917		(284	)		(16,671	) (2)		2009		30
Emerald Bay	Multi-Family	Las Vegas, NV		6,500		26,000		—			8			6,500		26,008		(578	)		(27,939	) (2)		2009		30
Grand Terrace	Multi-Family	Colton, CA		4,619		18,477		—			97			4,619		18,574		(411	)		(23,390	) (2)		2009		30
Las Vistas	Multi-Family	Phoenix, AZ		2,440		9,760		—			7			2,440		9,767		(218	)		(12,010	) (2)		2009		30
Penny Lane	Multi-Family	Mesa, AZ		1,540		6,160		—			12			1,540		6,172		(138	)		(9,316	) (2)		2009		30
Sandal Ridge	Multi-Family	Mesa, AZ		1,980		7,920		—			7			1,980		7,927		(176	)		(11,309	) (2)		2009		30
Long Beach Promenade	Office	Long Beach, CA		860		3,440		—			—			860		3,440		(38	)		(5,225	) (2)		2009		30
Murrells Retail Associates	Retail	Myrtle Beach, SC		—		2,500		—			14			—		2,514		(21	)		(18,667	) (2)		2009		30

52

Property Name	Description	Location		Initial Cost				Cost of Improvements, net of Retirements				Gross Carrying Amount				Accumulated Depreciation- Building			Encumbrances (Unpaid Principal)			Year of Acquisition		Life of Depreciation
				Land		Building		Land		Building		Land(1)		Building(1)
Preserve @ Colony Lakes	Multi-Family		Stafford, TX		6,720		26,880		—		—		6,720		26,880		(224	)		(34,425	) (6)		2009		30
English Aire/Lafayette Landing	Multi-Family		Austin, TX		3,440		13,760		—		169		3,440		13,929		(115	)		(17,032	) (2)		2009		30
Tresa at Arrowheads	Multi-Family		Phoenix, AZ		7,080		28,320		—		—		7,080		28,320		(139	)		(36,675	) (2)		2009		30
8600 Burton Way	Multi-Family		Los Angeles, CA		963		3,854		—		—		963		3,854		—			(7,500	) (2)		2009		30
Madison Park & Southgreen	Multi-Family		Indianapolis, IN		1,260		5,040		—		—		1,260		5,040		(14	)		(7,520	) (2)		2009		30
Mineral Business Center	Office		Denver, CO		1,940		7,760		—		—		1,940		7,760		—			(10,949	) (2)		2009		30
1501 Yamato Road	Office		Boca Raton, FL		8,200		32,800		—		—		8,200		32,800		—			(41,753	) (2)		2009		30
				$	158,689	$	585,139	$	628	$	18,152	$	159,317	$	603,291	$	(25,548	)	$	(711,175	)

(1) The aggregate cost basis for federal income tax purposes of our investments in real estate approximates the carrying amount at December 31, 2009.

Investments in Real Estate	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008
Balance, beginning of period	$	375,097		$	137,205
Additions during period:
Acquisitions		416,751			237,439
Improvements to land and building		6,004			2,110
Deductions during period:
Dispositions of real estate		(17,100	)		(1,657	)
Deconsolidation of real estate		(18,144	)		—
Balance, end of period:	$	762,608		$	375,097

53

Accumulated Depreciation	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008
Balance, beginning of period	$	11,762		$	5,728
Depreciation expense		15,714			6,620
Dispositions of real estate		(1,371	)		(586	)
Other		(557	)		—
Balance, end of period:	$	25,548		$	11,762

(2) These encumbrances are held by our consolidated securitizations, RAIT I, RAIT II, Taberna 8, or Taberna 9.

(3) Of these encumbrances, $17,500 is held by third parties and $13,692 is held by RAIT I and RAIT II.

(4) Of these encumbrances, $19,500 is held by third parties and $7,125 is held by RAIT I.

(5) Of these encumbrances, $8,490 is held by third parties and $1,820 is held by RAIT II.

(6) Of these encumbrances, $26,400 is held by third parties and $8,025 is held by RAIT I.

54

RAIT Financial Trust

Schedule IV

Mortgage Loans on Real Estate

As of December 31, 2009

(Dollars in thousands)

(1) Summary of Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity Interests

Description of mortgages	Number of Loans		Interest Rate						Maturity Date				Principal				Carrying Amount  of Mortgages
			Lowest			Highest			Earliest		Latest		Lowest		Highest
Commercial mortgages
Multi-family		27		4.3	%		12.0	%		3/1/10		12/31/20	$	607	$	31,801	$	390,175
Office		16		2.7	%		8.0	%		3/1/10		3/1/16		4,589		26,085		196,394
Retail		9		6.5	%		9.2	%		3/1/10		10/2/13		2,790		73,980		202,550
Other		3		7.0	%		8.5	%		3/1/10		7/30/14		2,225		30,000		35,925
Subtotal		55		2.7	%		12.0	%		3/1/10		12/31/20		607		73,980		825,044
Mezzanine loans
Multi-family		58		2.1	%		15.0	%		3/1/10		11/25/38		100		11,349		126,978
Office		41		2.8	%		12.5	%		3/1/10		5/1/21		122		27,732		182,840
Retail		21		6.3	%		12.5	%		11/1/11		6/11/17		210		25,860		84,329
Other		9		5.2	%		12.5	%		3/1/10		8/31/21		246		18,617		27,658
Subtotal		129		2.1	%		15.0	%		3/1/10		11/25/38		100		27,732		421,805
Other loans
Multi-family		2		7.2	%		7.2	%		12/7/10		12/7/10		15,585		15,946		31,530
Office		4		2.5	%		9.1	%		3/1/10		10/30/16		1,206		21,943		50,787
Retail		1		3.0	%		3.0	%		8/30/12		8/30/12		23,072		23,072		23,072
Other		2		3.7	%		4.0	%		4/9/10		8/1/13		5,500		15,000		18,500
Subtotal		9		2.5	%		9.1	%		3/1/10		10/30/16		1,206		23,072		123,889
Preferred equity interests
Multi-family		7		8.9	%		13.0	%		5/19/10		4/1/15		884		12,800		28,760
Office		13		9.1	%		12.0	%		11/1/11		1/1/17		90		19,500		56,149
Retail		4		9.9	%		12.5	%		3/1/14		10/11/16		650		5,000		7,675
Other		1		17.0	%		17.0	%		9/4/21		9/4/21		6,000		6,000		6,000
Subtotal		25		8.9	%		17.0	%		5/19/10		9/4/21		90		19,500		98,584
Total commercial mortgages, mezzanine loans, other loans and preferred equity interests		218		2.1	%		17.0	%		3/1/10		11/25/38	$	90	$	73,980	$	1,469,322

(a) The tax basis of the commercial mortgages, mezzanine loans, other loans and preferred equity interests approximates the carrying amount.

(b) Reconciliation of carrying amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests:

55

	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008
Balance, beginning of period	$	2,048,233		$	2,354,243
Additions during period:
New mortgage loans and preferred equity interests		—			107,509
Additional advances		17,357			25,271
Accretion of discount		1,139			704
Deductions during period:
Collections of principal		(81,914	)		(250,806	)
Conversion of loans to real estate owned property		(459,491	)		(188,688	)
Deconsolidation of VIEs		(56,002	)		—
Balance, end of period:	$	1,469,322		$	2,048,233

(a) Summary of Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity by Geographic Location:

Location by State	Number  of Loans		Interest Rate						Principal				Total Carrying Amount of Mortgages(a)
			Lowest			Highest			Lowest		Highest
Various States		14		2.5	%		12.5	%		988		73,980		279,019
Texas		41		3.7	%		14.5	%		350		25,860	$	240,722
Florida		18		5.5	%		14.5	%		750		31,801		156,091
California		19		2.8	%		12.5	%		249		20,000		139,365
New York		17		6.5	%		12.5	%		246		27,732		132,950
Pennsylvania		13		2.7	%		15.0	%		600		28,168		63,513
North Carolina		3		2.1	%		7.3	%		4,471		28,229		54,497
Colorado		5		6.3	%		12.0	%		3,000		26,085		52,323
Minnesota		6		7.0	%		12.5	%		423		16,488		43,113
Tennessee		6		7.5	%		17.0	%		1,110		22,113		39,353
Arizona		3		5.0	%		7.4	%		100		29,150		37,250
Massachusetts		3		5.2	%		12.0	%		998		18,617		36,641
Mississippi		2		4.3	%		12.5	%		820		25,741		26,561
Illinois		3		11.0	%		12.5	%		210		19,500		23,305
Wisconsin		18		9.8	%		12.5	%		90		3,200		20,845
Ohio		5		6.5	%		12.5	%		434		12,168		20,325
New Jersey		6		5.0	%		12.5	%		550		4,813		12,881
Georgia		5		6.8	%		12.5	%		300		5,749		12,850
Virginia		6		8.5	%		12.5	%		120		9,862		12,702
Connecticut		2		11.0	%		12.0	%		2,243		8,302		10,545
Alabama		2		7.8	%		12.0	%		2,450		7,195		9,645
Missouri		1		4.0	%		4.0	%		8,845		8,845		8,845
Arkansas		1		7.4	%		7.4	%		7,701		7,701		7,701
Idaho		1		7.5	%		7.5	%		5,931		5,931		5,931
Indiana		4		12.0	%		12.5	%		371		2,819		5,835
Nevada		1		11.0	%		11.0	%		5,061		5,061		5,061
Maryland		3		11.0	%		14.5	%		340		2,500		4,213
Michigan		3		12.0	%		12.5	%		593		1,300		2,517
Vermont		1		11.5	%		11.5	%		1,102		1,102		1,102
South Carolina		1		12.5	%		12.5	%		1,000		1,000		1,000
South Dakota		1		12.5	%		12.5	%		742		742		742
Delaware		1		12.5	%		12.5	%		670		670		670
District of Columbia		1		12.0	%		12.0	%		616		616		616
Louisiana		1		12.5	%		12.5	%		346		346		346
Kentucky		1		12.5	%		12.5	%		247		247		247
		218		2.1	%		17.0	%	$	90	$	73,980	$	1,469,322

56

EX-99.6

Exhibit 99.6

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)

	As of March 31, 2010			As of December 31, 2009
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,405,112		$	1,467,566
Allowance for losses		(76,823	)		(86,609	)
Total investments in mortgages and loans		1,328,289			1,380,957
Investments in real estate		795,952			738,235
Investments in securities and security-related receivables, at fair value		649,978			694,897
Cash and cash equivalents		18,540			25,034
Restricted cash		170,629			156,167
Accrued interest receivable		33,146			37,625
Other assets		30,200			28,105
Deferred financing costs, net of accumulated amortization of $7,981 and $7,290, respectively		21,770			23,778
Intangible assets, net of accumulated amortization of $4,426 and $82,929, respectively		9,823			10,178
Total assets	$	3,058,327		$	3,094,976
Liabilities and Equity
Indebtedness (including $174,389 and $234,433 at fair value, respectively)	$	1,996,600		$	2,077,123
Accrued interest payable		20,640			17,432
Accounts payable and accrued expenses		17,464			21,889
Derivative liabilities		196,161			186,986
Deferred taxes, borrowers’ escrows and other liabilities		24,821			21,625
Total liabilities		2,255,686			2,325,055
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.01 par value per share, 200,000,000 shares authorized, 78,114,890 and 74,420,598 issued and outstanding, including 14,159 unvested restricted share awards at December 31, 2009		781			744
Additional paid in capital		1,639,736			1,630,428
Accumulated other comprehensive income (loss)		(126,599	)		(118,973	)
Retained earnings (deficit)		(713,980	)		(745,262	)
Total shareholders’ equity		800,005			767,004
Noncontrolling interests		2,636			2,917
Total equity		802,641			769,921
Total liabilities and equity	$	3,058,327		$	3,094,976

The accompanying notes are an integral part of these consolidated financial statements.

1

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)

	For the Three-Month Periods Ended March 31
	2010			2009
Revenue:
Investment interest income	$	41,330		$	151,093
Investment interest expense		(23,555	)		(103,020	)
Net interest margin		17,775			48,073
Rental income		16,075			8,886
Fee and other income		8,839			2,820
Total revenue		42,689			59,779
Expenses:
Real estate operating expense		12,437			8,311
Compensation expense		8,052			5,638
General and administrative expense		4,890			4,257
Provision for losses		17,350			119,504
Depreciation expense		5,828			3,550
Amortization of intangible assets		355			315
Total expenses		48,912			141,575
Income (loss) before other income (expense), taxes and discontinued operations		(6,223	)		(81,796	)
Interest and other income (expense)		91			(187	)
Gains (losses) on sale of assets		3,924			—
Gains on extinguishment of debt		19,810			35,207
Change in fair value of financial instruments		16,437			(99,805	)
Unrealized gains (losses) on interest rate hedges		(13	)		(242	)
Equity in income (loss) of equity method investments		4			(7	)
Income (loss) before taxes and discontinued operations		34,030			(146,830	)
Income tax benefit (provision)		(47	)		36
Income (loss) from continuing operations		33,983			(146,794	)
Income (loss) from discontinued operations		470			(1,620	)
Net income (loss)		34,453			(148,414	)
(Income) loss allocated to preferred shares		(3,406	)		(3,406	)
(Income) loss allocated to noncontrolling interests		235			7,588
Net income (loss) allocable to common shares	$	31,282		$	(144,232	)
Earnings (loss) per share—Basic:
Continuing operations	$	0.41		$	(2.20	)
Discontinued operations		0.01			(0.02	)
Total earnings (loss) per share—Basic	$	0.42		$	(2.22	)
Weighted-average shares outstanding—Basic		74,952,313			64,949,070
Earnings (loss) per share—Diluted:
Continuing operations	$	0.40		$	(2.20	)
Discontinued operations		0.01			(0.02	)
Total earnings (loss) per share—Diluted	$	0.41		$	(2.22	)
Weighted-average shares outstanding—Diluted		75,512,999			64,949,070
Distributions declared per common share	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the Three-Month Periods Ended March 31
	2010			2009
Net income (loss)	$	34,453		$	(148,414	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(15,230	)		(2,762	)
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		13			242
Realized (gains) losses on interest rate hedges reclassified to earnings		11,725			13,362
Change in fair value of available-for-sale securities		(4,134	)		(13,785	)
Total other comprehensive income (loss)		(7,626	)		(2,943	)
Comprehensive income (loss) before allocation to noncontrolling interests		26,827			(151,357	)
Allocation to noncontrolling interests		235			6,911
Comprehensive income (loss)	$	27,062		$	(144,446	)

The accompanying notes are an integral part of these consolidated financial statements.

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Three-Month Periods Ended March 31
	2010			2009
Operating activities:
Net income (loss)	$	34,453		$	(148,414	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		17,350			119,504
Share-based compensation expense		1,671			1,285
Depreciation and amortization		6,803			4,501
Amortization of deferred financing costs and debt discounts		898			4,607
Accretion of discounts on investments		(822	)		(1,617	)
(Gains) losses on sales of assets		(4,190	)		2,052
Gains on extinguishment of debt		(19,810	)		(35,207	)
Change in fair value of financial instruments		(16,437	)		99,805
Unrealized gains (losses) on interest rate hedges		13			242
Equity in (income) loss of equity method investments		(4	)		7
Unrealized foreign currency (gains) losses on investments		(434	)		192
Changes in assets and liabilities:
Accrued interest receivable		3,656			3,524
Other assets		(2,554	)		(2,509	)
Accrued interest payable		(7,904	)		11,522
Accounts payable and accrued expenses		(4,374	)		(9,248	)
Deferred taxes, borrowers’ escrows and other liabilities		(5,766	)		(21,332	)
Cash flow from operating activities		2,549			28,914
Investing activities:
Proceeds from sales of other securities		11,342			—
Purchase and origination of loans for investment		(17,151	)		(8,043	)
Principal repayments on loans		21,845			119,980
Investments in real estate		(5,942	)		(7,756	)
Proceeds from dispositions of real estate		5,124			—
(Increase) Decrease in restricted cash		(9,615	)		5,215
Cash flow from investing activities		5,603			109,396
Financing activities:
Repayments on secured credit facilities and other indebtedness		(1,807	)		(7,541	)
Repayments on residential mortgage-backed securities		—			(96,587	)
Repayments and repurchase of CDO notes payable		(2,956	)		(17,032	)
Proceeds from issuance of convertible senior debt and other indebtedness		—			1,177
Repayments and repurchase of convertible senior notes		(7,175	)		(1,454	)
Acquisition of noncontrolling interests in CDOs		(46	)		—
Payments for deferred costs		(109	)		—
Common share issuance, net of costs incurred		853			44
Distributions paid to preferred shares		(3,406	)		(3,406	)
Cash flow from financing activities		(14,646	)		(124,799	)
Net change in cash and cash equivalents		(6,494	)		13,511
Cash and cash equivalents at the beginning of the period		25,034			27,463
Cash and cash equivalents at the end of the period	$	18,540		$	40,974
Supplemental cash flow information:
Cash paid for interest	$	9,103		$	75,838
Cash refunds received for taxes		(554	)		—
Non-cash increase in trust preferred obligations		—			91,869
Non-cash increase in investments in real estate from the conversion of loans		41,290			142,781
Non-cash decrease in convertible senior notes from extinguishment of debt		(18,755	)		—

The accompanying notes are an integral part of these consolidated financial statements.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We conduct our business through our subsidiaries, RAIT Partnership, L.P. and Taberna Realty Finance Trust, or Taberna, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. Taberna is also a Maryland REIT.

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments, and to mitigate interest rate risk through derivative instruments.

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2009 included in Part II, Item 5 of the quarterly report on Form 10-Q as of September 30, 2010. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interest as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

Under FASB ASC Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidated the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

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d. Investments in Loans

We invest in commercial mortgages, mezzanine loans, debt securities and other loans. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

e. Allowance for Losses, Impaired Loans and Non-accrual Status

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

f. Investments in Real Estate

Investments in real estate are shown net of accumulated depreciation. We capitalize all costs related to the improvement of the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements – 30 years; furniture, fixtures, and equipment – 5 to 10 years; and tenant improvements – shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

g. Investments in Securities

We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “k. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-

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than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

h. Transfers of Financial Assets

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

i. Revenue Recognition

1) Investment interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible.

For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

2) Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) property management services to third parties, and (d) providing fixed income trading and advisory services to our customers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from CDOs while such CDOs are consolidated. During the three-month periods ended March 31, 2010 and 2009, we received $3,671 and $4,977, respectively, of earned asset management fees associated with consolidated CDOs, of which we eliminated $1,016 and $2,856, respectively, of management fee income.

j. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as

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either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

k. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category are trust preferred securities, or TruPS, and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

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l. Income Taxes

RAIT and Taberna have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our shareholders. Management believes that all of the criteria to maintain RAIT’s and Taberna’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

From time to time, our TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the CDO entities. Certain CDO entities may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our taxable income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us.

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and as new information becomes available, the balances are adjusted as appropriate.

Certain TRS entities are currently subject to ongoing tax examinations and assessments in various jurisdictions. The IRS is currently examining Taberna Capital Management LLC’s, or TCM’s, federal income tax returns for the 2006 through 2008 tax years. TCM engaged the services of Taberna Capital (Bermuda), Ltd., or TCB, from June 2006 through June 2008 and RAIT Capital Ireland Ltd. from July 2008 through the present, to provide various sub-advisory services in connection with TCM’s management of various CDOs. Pursuant to a transfer pricing study prepared by an international accounting firm, TCM deducted the costs paid to TCB for their services from its income for federal income tax purposes. The IRS has challenged the transfer pricing methodology applied by TCM and has issued a Notice, of Proposed Adjustment, or NOPA, for the 2006 and 2007 tax years. The NOPA proposes to reduce the deductions by $7,057 and $14,988 for the 2006 and 2007 tax years. With respect to the 2008 tax year, TCM deducted $18,971 under this transfer pricing methodology. Management is responding to the IRS NOPA and intends to refute the proposed adjustments. Management believes it has complied with the requirements outlined in the Internal Revenue Code and believes that its tax filing position will be sustained based on its technical merits.

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m. Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements. See Note 9 for additional disclosures pertaining to VIEs.

On January 1, 2010, we adopted Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and describes the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

NOTE 3: INVESTMENTS IN LOANS

Our investments in mortgages and loans are accounted for at amortized cost.

Investments in Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity Interests

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of March 31, 2010:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial mortgages	$	767,947		$	(2,657	)	$	765,290			47		6.8	%		May 2010 to Mar. 2016
Mezzanine loans		430,880			(6,867	)		424,013			122		9.4	%		May 2010 to Nov. 2038
Other loans		126,235			(1,787	)		124,448			11		5.2	%		May 2010 to Oct. 2016
Preferred equity interests		92,331			—			92,331			23		10.9	%		May 2010 to Sept. 2021
Total		1,417,393			(11,311	)		1,406,082			203		7.7	%
Deferred fees		(970	)		—			(970	)
Total	$	1,416,423		$	(11,311	)	$	1,405,112

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

During the three-month periods ended March 31, 2010 and 2009, we completed the conversion of 4 and 11 commercial real estate loans with a carrying value of $52,105 and $200,259 to real estate owned properties. During the three-month periods ended March 31, 2010 and 2009, we charged off $10,815 and $48,888, respectively, related to the conversion of commercial real estate loans to owned properties. See Note 5.

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The following table summarizes the delinquency statistics of our investments in loans as of March 31, 2010 and December 31, 2009:

Delinquency Status	As of March 31, 2010		As of December 31, 2009
30 to 59 days	$	50,474	$	20,760
60 to 89 days		29,150		82,685
90 days or more		60,310		44,310
In foreclosure or bankruptcy proceedings		39,860		47,625
Total	$	179,794	$	195,380

As of March 31, 2010 and December 31, 2009, approximately $132,978 and $171,372, respectively, of our commercial mortgages and mezzanine loans were on non-accrual status and had a weighted-average interest rate of 8.8% and 9.7%, respectively.

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for the three-month periods ended March 31, 2010 and 2009:

	For the Three-Month Period Ended March 31, 2010								For the Three-Month Period Ended March 31, 2009
	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages  and Mortgage-Related Receivables		Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables			Total
Beginning balance	$	86,609		$	—	$	86,609		$	117,737		$	54,236		$	171,973
Provision		17,350			—		17,350			61,165			58,339			119,504
Deductions for net charge-offs		(27,136	)		—		(27,136	)		(52,673	)		(12,752	)		(65,425	)
Ending balance	$	76,823		$	—	$	76,823		$	126,229		$	99,823		$	226,052

As of March 31, 2010 and December 31, 2009, we identified 24 and 31 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $172,113 and $189,961 as impaired. As of March 31, 2010 and December 31, 2009, we had allowance for losses of $76,823 and $86,609 associated with our commercial mortgages, mezzanine loans and other loans.

The average unpaid principal balance of total impaired loans was $181,037 and $187,313 during the three-month periods ended March 31, 2010 and 2009. We recorded interest income from impaired loans of $1,314 and $1,451 for the three-month periods ended March 31, 2010 and 2009.

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of March 31, 2010:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	689,070	$	(275,340	)	$	413,730		5.0	%		24.5
Other securities		10,000		(9,700	)		300		4.8	%		42.6
Total trading securities		699,070		(285,040	)		414,030		5.0	%		24.8
Available-for-sale securities		3,600		(3,510	)		90		2.4	%		32.6
Security-related receivables
TruPS receivables		112,570		(30,219	)		82,351		6.8	%		12.5
Unsecured REIT note receivables		61,000		(2,656	)		58,344		6.6	%		7.5
CMBS receivables (2)		158,868		(93,546	)		65,322		6.0	%		33.8
Other securities		112,287		(82,446	)		29,841		3.0	%		30.2
Total security-related receivables		444,725		(208,867	)		235,858		5.5	%		23.9
Total investments in securities	$	1,147,395	$	(497,417	)	$	649,978		5.2	%		24.6

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(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

(2) CMBS receivables include securities with a fair value totaling $7,081 that are rated “BBB+” and “B-” by Standard & Poor’s and securities with a fair value totaling $58,241 that are rated between “AAA” and “A-” by Standard & Poor’s.

A substantial portion of our gross unrealized losses is greater than 12 months.

TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to FASB ASC Topic 860, “Transfers and Servicing.”

As of March 31, 2010 and December 31, 2009, $166,282 and $108,125, respectively, in principal amount of TruPS, subordinated debentures and subordinated debenture receivables were on non-accrual status and had a weighted-average coupon of 3.7% and 4.9%, respectively, and a fair value of $37,332 and $26,400, respectively. As of March 31, 2010 and December 31, 2009, $29,725 and $24,500, respectively, in par amount of other securities were on non-accrual status and had a weighted average coupon of 2.9% and 3.1%, respectively, and a fair value of $460 and $370, respectively.

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of March 31, 2010 and December 31, 2009, investment in securities of $808,633 and $888,681, respectively, in principal amount of TruPS and subordinated debentures, and $219,868 and $230,768, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities. Some of these investments were previously eliminated upon the consolidation of various VIEs that we consolidate and the corresponding subordinated debentures of the VIEs are included as assets in our consolidated balance sheet as of December 31, 2009. As of January 1, 2010 we adopted an accounting standard which changed the determination of the consolidation of a VIE. Accordingly, we deconsolidated these VIEs as of January 1, 2010. See Note 9 for additional disclosures.

NOTE 5: INVESTMENTS IN REAL ESTATE

As of March 31, 2010, we maintained investments in 43 real estate properties and three parcels of land. As of December 31, 2009, we maintained investments in 36 real estate properties and three parcels of land.

The table below summarizes our investments in real estate:

	As of March 31, 2010			As of December 31, 2009
Multi-family real estate properties	$	545,493		$	508,942
Office real estate properties		216,925			190,874
Retail real estate properties		36,406			40,584
Parcels of land		22,208			22,208
Subtotal		821,032			762,608
Plus: Escrows and reserves		5,609			1,175
Less: Accumulated depreciation and amortization		(30,689	)		(25,548	)
Investments in real estate	$	795,952		$	738,235

As of March 31, 2010, we have identified four properties as assets held for sale. The carrying amount of these assets is $78,990 and liabilities related to these assets is $20,938. These amounts are included in the investments in real estate and indebtedness, accrued interest payable, accounts payable and accrued expenses, and deferred taxes, borrowers’ escrows and other liabilities financial statement captions. Liabilities related to assets held for sale exclude $47,706 of first mortgages held by RAIT I and RAIT II that are eliminated in our consolidated balance sheet. See Note 14—Assets Held For Sale and Discontinued Operations.

During the three-month period ended March 31, 2010, we converted four loans, comprised of six multi-family properties, to owned real estate. Upon conversion, we recorded the six properties at fair value of $41,340. We previously held bridge or mezzanine loans with respect to these real estate properties.

As of January 1, 2010, we adopted an accounting standard which changed the determination of the consolidation of VIEs. Accordingly, we consolidated two office properties as of January 1, 2010 as we are the primary beneficiary of the VIEs. The fair value of the properties consolidated, net of their related liabilities at fair value, was $5,005 as of January 1, 2010.

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The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the eight properties during the three-month period ended March 31, 2010, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	62,590
Cash and cash equivalents		370
Restricted cash		913
Other assets		3,857
Total assets acquired		67,730
Liabilities assumed:
Loans payable on real estate		(16,714	)
Accounts payable and accrued expenses		(3,093	)
Other liabilities		(1,578	)
Total liabilities assumed		(21,385	)
Estimated fair value of net assets acquired	$	46,345

The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective conversion date:

Description	Estimated Fair Value
Fair value of consideration transferred:
Commercial real estate loans	$	53,802
Other considerations		(7,457	)
Total fair value of consideration transferred	$	46,345

During the three-month period ended March 31, 2010, these investments contributed revenue of $1,293 and a net loss allocable to common shares of $212. During the three-month period ended March 31, 2010, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the conversion occurred on January 1, 2009 and 2010, respectively. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Three-Month Period Ended March 31, 2010		For the Three-Month Period Ended March 31, 2009
Total revenue, as reported	$	42,689	$	59,779
Pro forma revenue		43,175		61,196
Net income (loss) allocable to common shares, as reported		31,282		(144,232	)
Pro forma net income (loss) allocable to common shares		31,016		(143,891	)

These amounts have been calculated after adjusting the results of the acquired businesses to reflect the additional depreciation that would have been charged assuming the fair value adjustments to our investments in real estate had been applied from January 1, 2009 and 2010, respectively, together with the consequential tax effects.

We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.

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NOTE 6: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of March 31, 2010:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	191,863	$	191,569		6.9	%		Apr. 2027
Secured credit facilities		48,203		48,203		4.8	%		Feb. 2011 to Dec. 2011
Senior secured notes		65,000		65,000		11.7	%		Apr. 2014
Loans payable on real estate		25,094		25,094		5.2	%		Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		17,003		9.2	%		Mar. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		393,312		371,969		7.6	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,393,750		1,393,750		0.7	%		2036 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,182,398		157,386		0.9	%		2035 to 2038
Loans payable on real estate		73,495		73,495		5.6	%		Aug. 2010 to Aug. 2016
Total non-recourse indebtedness		2,649,643		1,624,631		0.9	%
Total indebtedness	$	3,042,955	$	1,996,600		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1,775,340 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1,384,948 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of March 31, 2010 was $873,209. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $371,969 as of March 31, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the three-month period ended March 31, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the three-month period ended March 31, 2010, we repurchased $54,500 in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $35,746. The purchase price consisted of $6,925 in cash, the issuance of 3,150,000 common shares, and the issuance of a $22,000 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $17,103, net of deferred financing costs and unamortized discounts that were written off.

Secured credit facilities. As of March 31, 2010, we have borrowed an aggregate amount of $48,203 under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of March 31, 2010, the first secured credit facility had an unpaid principal balance of $21,023 which is payable in December 2011 under the current terms of this facility. As of March 31, 2010, the second secured credit facility had an unpaid principal balance of $22,180. This facility terminated in April 2010 and the unpaid principal balance is payable in April 2011. As of March 31, 2010, the third secured credit facility had an unpaid principal balance of $5,000. We are amortizing this balance with monthly principal repayments of $500 which will result in the full repayment of this credit facility by February 2011.

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Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47,000 aggregate principal amount of our convertible senior notes for a total consideration of $31,240. The purchase price consisted of (a) our issuance of the $22,000 senior secured convertible note, (b) 1,500,000 common shares issued, and (c) $6,000 in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1,427 of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1,050 principal amount of the senior secured convertible note into 300,000 common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their OC and IC trigger tests as of March 31, 2010.

During the three-month period ended March 31, 2010, we repurchased, from the market, a total of $3,000 in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $293 and we recorded a gain on extinguishment of debt of $2,707.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing overcollateralization, or OC, trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the three-month period ended March 31, 2010, $2,663 of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of March 31, 2010, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

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The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of March 31, 2010 and December 31, 2009:

	As of March 31, 2010					As of December 31, 2009
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,783,717	$	(196,161	)	$	1,826,167	$	(186,986	)
Interest rate caps		36,000		1,095			36,000		1,335
Net fair value	$	1,819,717	$	(195,066	)	$	1,862,167	$	(185,651	)

The following table summarizes the effect on income by derivative instrument type for the following periods:

	For the Three-Month Period Ended March 31, 2010						For the Three-Month Period Ended March 31, 2009
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)			Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)
Interest rate swaps	$	(1,343	)	$	(13	)	$	(2,355	)	$	(225	)
Currency options		—			—			—			(17	)
Total	$	(1,343	)	$	(13	)	$	(2,355	)	$	(242	)

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. As of March 31, 2010, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $970,276 and had a liability balance with a fair value of $109,678. During the three-month periods ended March 31, 2010 and 2009, the change in value of these hedges was a decrease of $17,815 and an increase of $8,293, respectively. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in investment interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, trust preferred obligations, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, senior secured notes, loans payable on real estate and other indebtedness approximates cost due to the nature of these instruments.

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The following table summarizes the carrying amount and the fair value of our financial instruments as of March 31, 2010:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,405,112	$	1,355,917
Investments in securities and security-related receivables		649,978		649,978
Cash and cash equivalents		18,540		18,540
Restricted cash		170,629		170,629
Derivative assets		1,095		1,095
Liabilities
Recourse indebtedness:
Convertible senior notes		191,569		83,222
Secured credit facilities		48,203		48,203
Senior secured notes		65,000		65,000
Junior subordinated notes, at fair value		17,003		17,003
Junior subordinated notes, at amortized cost		25,100		11,185
Loans payable on real estate		25,094		25,094
Financial Instrument	Carrying Amount		Estimated Fair Value
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,393,750		675,160
CDO notes payable, at fair value		157,386		157,386
Loans payable on real estate		73,495		73,495
Derivative liabilities		196,161		196,161

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) ) (a)		Balance as of March 31, 2010
Trading securities
TruPS	$	—	$	—	$	413,730	$	413,730
Other securities		—		300		—		300
Available-for-sale securities		—		90		—		90
Security-related receivables
TruPS receivables		—		—		82,351		82,351
Unsecured REIT note receivables		—		58,344		—		58,344
CMBS receivables		—		65,322		—		65,322
Other securities		—		29,841		—		29,841
Derivative assets		—		1,095		—		1,095
Total assets	$	—	$	154,992	$	496,081	$	651,073
Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) ) (a)		Balance as of March 31, 2010
Junior subordinated notes, at fair value	$	—	$	17,003	$	—	$	17,003
CDO notes payable, at fair value		—		—		157,386		157,386
Derivative liabilities		—		196,161		—		196,161
Total liabilities	$	—	$	213,164	$	157,386	$	370,550

(a) As of March 31, 2010, there were no transfers between Level 1 and Level 2, as well as, there were no transfers into and out of Level 3.

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The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the three-month period ended March 31, 2010:

Assets	Trading Securities—TruPS and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2009	$	471,106		$	73,649		$	544,755
Change in fair value of financial instruments		153,699			10,050			163,749
Purchases and sales, net		(140,203	)		(1,348	)		(141,551	)
Deconsolidation of VIEs		(70,872	)		—			(70,872	)
Balance, as of March 31, 2010	$	413,730		$	82,351		$	496,081

Liabilities	Trust Preferred Obligations			CDO Notes Payable, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2009	$	70,872		$	146,557		$	217,429
Change in fair value of financial instruments		—			13,492			13,492
Purchases and sales, net		—			(2,663	)		(2,663	)
Deconsolidation of VIEs		(70,872	)		—			(70,872	)
Balance, as of March 31, 2010	$	—		$	157,386		$	157,386

Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

Description	For the Three-Month Period Ended March 31, 2010			For the Three-Month Period Ended March 31, 2009
Change in fair value of trading securities and security-related receivables	$	47,745		$	(190,687	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(13,493	)		82,589
Change in fair value of derivatives		(17,815	)		8,293
Change in fair value of financial instruments	$	16,437		$	(99,805	)

The changes in the fair value for the investment in securities, CDO notes payable and other liabilities for which the fair value option was elected for the three-month periods ended March 31, 2010 and 2009 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives for which the fair value option was elected for the three-month periods ended March 31, 2010 and 2009 was mainly due to changes in interest rates.

NOTE 9: VARIABLE INTEREST ENTITIES

On January 1, 2010, we adopted an accounting standard which provided guidance when to consolidate a VIE. Under the new standard, the determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Upon adoption, we evaluated our investments under this new consolidation standard and the following changes in previous consolidation conclusions were made:

• TruPS Investment and Obligations – Previously, we held implicit interests in trusts which issued TruPS. Under the previous consolidation guidance, we were considered to be primary beneficiaries of the trusts and reported their assets and liabilities in our consolidated balance sheet. RAIT does not meet both criteria to be the primary beneficiary of these entities as we do not have the power to direct the activities of the underlying trusts. Therefore, we deconsolidated these entities as of January 1, 2010 by reducing our assets and liabilities by $70,872.

• Investments in Real Estate – We identified two properties to be VIEs that we previously did not consolidate as we were not previously the primary beneficiary: Willow Grove and Cherry Hill. RAIT evaluated its interests in these real estate properties and determined that we are the primary beneficiary. Upon consolidation of these properties on January 1, 2010, we increased our assets and liabilities by $20,931.

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The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of March 31, 2010, our consolidated VIEs were: Taberna Preferred Funding VIII, Ltd., Taberna Preferred Funding IX, Ltd, RAIT CRE CDO I, Ltd., RAIT Preferred Funding II, Ltd., Willow Grove and Cherry Hill.

	As of March 31, 2010			As of December 31, 2009 (a)
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,970,867		$	1,959,118
Allowance for losses		(10,903	)		(10,903	)
Total investments in mortgages and loans		1,959,964			1,948,215
Investments in real estate		21,487			—
Investments in securities and security-related receivables, at fair value		649,887			694,809
Cash and cash equivalents		225			272
Restricted cash		126,938			117,322
Accrued interest receivable		42,678			38,397
Deferred financing costs, net of accumulated amortization of $6,465 and $5,897, respectively		19,564			20,132
Total assets	$	2,820,743		$	2,819,147
Liabilities and Equity
Indebtedness (including $157,386 and $217,429 at fair value, respectively)	$	1,754,657		$	1,794,339
Accrued interest payable		24,835			21,855
Accounts payable and accrued expenses		541			232
Derivative liabilities		196,161			186,986
Deferred taxes, borrowers’ escrows and other liabilities		3,056			3,136
Total liabilities		1,979,250			2,006,548
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(122,235	)		(115,004	)
RAIT Investment		153,515			167,011
Retained earnings (deficit)		810,213			760,592
Total shareholders’ equity		841,493			812,599
Total liabilities and equity	$	2,820,743		$	2,819,147

(a) Includes the assets and liabilities of the TruPS Investments and Obligations. Based on the adoption of the accounting standard, these VIEs were deconsolidated as of January 1, 2010 and no longer appear in our consolidated financial statements. Upon deconsolidation, investments in securities and indebtedness both decreased by $70,872 as of January 1, 2010.

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. Certain amounts included in the table above are eliminated upon consolidation with other RAIT subsidiaries that maintain investments in the debt or equity securities issued by these entities.

RAIT does not have any contractual obligation to provide the VIEs listed above with any financial support. RAIT has not provided and does not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

NOTE 10: EQUITY

Preferred Shares

On January 26, 2010, our board of trustees declared a first quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled $3,406.

On April 22, 2010, our board of trustees declared a second quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on June 30, 2010 to holders of record on June 1, 2010.

Common Shares

Share Repurchases:

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject

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to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $240.

Equity Compensation:

On January 26, 2010, the compensation committee awarded 1,500,000 phantom units, valued at $1,905 using our closing stock price of $1.27, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 500,000 phantom units, valued at $635 using our closing stock price of $1.27, to our non-executive officer employees. These awards generally vest over three-year periods.

During the three-months ended March 31, 2010, 70,392 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

Share Issuances:

During the three-month period ended March 31, 2010, we issued 3,150,000 common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $54,500 of our convertible notes. See Note 7-“Indebtedness” above.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10,000,000 common shares. During the three-month period ended March 31, 2010, we issued a total of 473,762 common shares pursuant to the DRSPP at a weighted-average price of $2.11 per share and we received $1,000 of net proceeds. Effective May 7, 2010 we registered an additional 8,787,635 common shares so that, together with previously registered common shares available for issuance under the DRSPP, 12,000,000 common shares, in the aggregate, are available for issuance under the DRSPP.

Standby Equity Distribution Agreement (SEDA):

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50,000, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50,000 worth of common shares under the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12,500,000 common shares. As of March 31, 2010, no shares have been issued pursuant to this arrangement.

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NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month periods ended March 31, 2010 and 2009:

	For the  Three-Month Periods Ended March 31
	2010			2009
Income (loss) from continuing operations	$	33,983		$	(146,794	)
(Income) loss allocated to preferred shares		(3,406	)		(3,406	)
(Income) loss allocated to noncontrolling interests		235			7,588
Income (loss) from continuing operations allocable to common shares		30,812			(142,612	)
Income (loss) from discontinued operations		470			(1,620	)
Net income (loss) allocable to common shares	$	31,282		$	(144,232	)
Weighted-average shares outstanding—Basic		74,952,313			64,949,070
Dilutive securities under the treasury stock method		560,686			—
Weighted-average shares outstanding—Diluted		75,512,999			64,949,070
Earnings (loss) per share—Basic:
Continuing operations	$	0.41		$	(2.20	)
Discontinued operations		0.01			(0.02	)
Total earnings (loss) per share—Basic	$	0.42		$	(2.22	)
Earnings (loss) per share—Diluted:
Continuing operations	$	0.40		$	(2.20	)
Discontinued operations		0.01			(0.02	)
Total earnings (loss) per share—Diluted	$	0.41		$	(2.22	)

For the three-month periods ended March 31, 2010 and 2009, securities convertible into 6,693,341 and 12,371,752 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities described below. All of these relationships and transactions were approved or ratified by a majority of our independent trustees as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

Our Chairman, Betsy Z. Cohen, is the Chief Executive Officer and a director of The Bancorp, Inc., or Bancorp, and Chairman of the Board and Chief Executive Officer of its wholly-owned subsidiary, The Bancorp Bank, a commercial bank. Daniel G. Cohen was our chief executive officer from the date of the Taberna acquisition until his resignation from that position on February 22, 2009. Mr. Cohen was a trustee of RAIT from the date of the Taberna acquisition until his resignation from that position on February 26, 2010. Mr. Cohen is the Chairman of the Board of Bancorp and Vice-Chairman of the Board of Bancorp Bank. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of March 31, 2010 and December 31, 2009, we had $97 and $410, respectively, of cash and cash equivalents and $780 and $1,601, respectively, of restricted cash on deposit at Bancorp. During the three-month period ended March 31, 2009, we received $7 of interest income from Bancorp. We did not receive any interest income from the Bancorp during the three-month period ended March 31, 2010. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp at an annual rental expense based upon the amount of square footage occupied. We have signed a sublease agreement with a third party for the remaining term of our sublease. Rent paid to Bancorp was $68 and $84 for the three-month periods ended March 31, 2010 and 2009, respectively. Rent received for our sublease was $41 for the three-month period ended March 31, 2010.

Mr. Cohen holds controlling positions in various companies with which we conduct business. Mr. Cohen serves as the Chairman of the board of directors and Chief Executive Officer of Cohen & Company Inc. or, Cohen & Company, and as the Chairman of the board of managers, Chief Executive Officer and Chief Investment Officer of Cohen Brothers, LLC, or Cohen Brothers, a majority owned subsidiary of Cohen & Company. Each transaction between us and Cohen & Company is described below:

a). Office Leases—We maintain sub-lease agreements for shared office space and facilities with Cohen & Company. Rent expense during the three-month periods ended March 31, 2010 and 2009, relating to these leases was $12 and $12, respectively. Rent expense has been included in general and administrative expense in the accompanying consolidated statements of operations. Future minimum lease payments due over the remaining term of the lease are $295.

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b). Common Shares— As of December 31, 2009, Cohen & Company and its affiliate entities owned 510,434 of our common shares. During the period ended March 31, 2010, Cohen & Company and its affiliates sold these shares and do not own any of our common shares as March 31, 2010.

c). Brokerage Services—During 2010, Cohen & Company sold $6,500 Bear Stearns Commercial Mortgage Securities to an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we earned $33 in principal transaction income.

d). EuroDekania—EuroDekania is an affiliate of Cohen & Company. In September 2007, EuroDekania purchased approximately €10,000 ($13,892) of the subordinated notes and all of the €32,250 ($44,802) BBB-rated debt securities in Taberna Europe CDO II. We invested €17,500 ($24,311) in the total subordinated notes and earn management fees of 35 basis points on the collateral assets owned by this entity. EuroDekania receives a fee equal to 3.5 basis points of our subordinated collateral management fee which is payable to EuroDekania only if we collect our subordinated management fee and EuroDekania retains an investment in the subordinated notes. During the three-month periods ended March 31, 2010 and 2009, we did not receive any subordinated collateral management fees; therefore, no collateral management fee expense was payable to EuroDekania.

e). Star Asia—Star Asia is an affiliate of Cohen & Company. During 2010, Star Asia purchased $2,315 LB-UBS Commercial Mortgage Trust securities from an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we did not earn any principal transaction income. In March 2009, Star Asia issued debt securities to a third party, upon which a subsequent exchange offer was entered into with Taberna Preferred Funding III, Ltd., or Taberna III, for $22,425 and Taberna Preferred Funding IV, Ltd., or Taberna IV, for $19,434. Taberna Capital Management was the collateral manager for Taberna III and Taberna IV. We received an opinion from an independent third party concluding that the transaction was fair from Taberna III and IV’s financial viewpoint. There were no fees earned by Taberna Capital Management or Star Asia.

f). Kleros Preferred Funding VIII, Ltd.—Kleros Preferred Funding VIII, Ltd., or Kleros VIII, is a securitization managed by Cohen & Company. In June 2007, we purchased approximately $26,400 in par amount of bonds rated A through BBB issued by Kleros VIII, for a purchase price of approximately $23,997. As of March 31, 2010, the bonds have a current fair value of $0 and have been placed on non-accrual status.

Brandywine Construction & Management, Inc., or Brandywine, is an affiliate of Edward E. Cohen, the spouse of Betsy Z. Cohen and father of Daniel G. Cohen. Brandywine provided real estate management services to two properties underlying our investments in real estate. During the three-month periods ended March 31, 2010 and 2009, Brandywine earned management fees of $26 and $26, respectively. We believe that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties.

NOTE 13: ASSET DISPOSITIONS

During 2009, we disposed of our investments in six residential mortgage portfolios and four Taberna CDOs. All assets sold and related liabilities were removed from our consolidated balance sheet on the date of sale, with any gains or losses on dispositions recorded in our accompanying statements of operations under gains (losses) on sale of assets.

On July 16, 2009, we sold our residential mortgage portfolio to an affiliate of Angelo, Gordon & Co., L.P., pursuant to a Purchase and Sale Agreement, dated as of July 15, 2009 between our subsidiary, Taberna Loan Holdings I, LLC, and AG Park Lane I Corp. We sold all of our notes and equity interests, or the retained interests, together with any principal or interest payable thereon, issued by the following six securitizations of residential mortgage loans: Bear Stearns ARM Trust 2005-7, Bear Stearns ARM Trust 2005-9, Citigroup Mortgage Loan Trust 2005-1, CWABS Trust 2005 HYB9, Merrill Lynch Mortgage Investors Trust, Series 2005-A9 and Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2. The purchase price paid by the buyer was $15,800, plus accrued interest and we recorded a $61,841 loss on sale of assets.

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Previously we consolidated Taberna Preferred Funding III, Ltd, Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding VI, Ltd. and Taberna Preferred Funding VII, Ltd., four securitizations in which we were determined to be the primary beneficiary primarily due to our majority ownership of the equity interests issued by the securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and determined that we are no longer the primary beneficiary and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation” (formerly referenced as FIN 46R). We recorded losses on the sales of assets related to these VIEs of $313,808 in June 2009.

Summarized Statement of Operations for the Three Months Ended March 31, 2009

The table below summarizes the statement of operations for the four Taberna CDOs and six residential mortgage portfolios sold in June and July 2009, respectively. The information presented below is for the three-month period ended March 31, 2009 (dollars in thousands).

	For the Three Months Ended March 31, 2009
Revenue:
Investment interest income	$	91,572
Investment interest expense		(68,437	)
Net interest margin		23,135
General and administrative expenses		(331	)
Provision for losses		(62,003	)
Income before other income (expense)		(39,199	)
Change in fair value of financial instruments		(37,401	)
Net income (loss)		(76,600	)
(Income) loss allocated to noncontrolling interests		7,403
Net income (loss) allocable to common shares	$	(69,197	)

NOTE 14: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

As of March 31, 2010, we had four properties designated as held for sale. As of December 31, 2009, we had four properties designated as held for sale, including one property that was sold during the three-month period ended March 31, 2010. The following table summarizes the consolidated balance sheet of the real estate properties classified as assets held for sale:

	As of March 31, 2010		As of December 31, 2009
Assets:
Investments in real estate	$	75,223	$	79,790
Cash and cash equivalents		1,052		1,069
Other assets		2,561		2,410
Deferred financing costs, net		154		161
Total assets held for sale	$	78,990	$	83,430
Liabilities:
Other indebtedness	$	18,494	$	18,508
Accrued interest payable		150		62
Accounts payable and accrued expenses		1,695		1,667
Other liabilities		599		766
Total liabilities related to assets held for sale (a)	$	20,938	$	21,003

(a) Liabilities related to assets held for sale exclude $47,706 of first mortgages held by RAIT’s CDO securitizations that are eliminated in our consolidated balance sheet.

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For the three-month periods ended March 31, 2010 and 2009, income (loss) from discontinued operations relates to four real estate properties designated as held for sale and three real estate properties sold or deconsolidated since January 1, 2009. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Three-Month Periods Ended March 31
	2010		2009
Revenue:
Rental income	$	2,530	$	2,900
Expenses:
Real estate operating expense		1,706		1,929
Depreciation expense		620		636
Total expenses		2,326		2,565
Income (loss) before interest and other income		204		335
Interest and other income		—		97
Income (loss) from discontinued operations		204		432
Gain (loss) on sale of assets		266		(2,052	)
Total income (loss) from discontinued operations	$	470	$	(1,620	)

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

NOTE 15: COMMITMENTS AND CONTINGENCIES

Riverside National Bank of Florida Litigation

RAIT subsidiary Taberna Capital Management, LLC is named as one of fifteen defendants in a lawsuit filed by Riverside National Bank of Florida, or Riverside, on November 13, 2009 in the Supreme Court of the State of New York, County of New York. (A substantially similar action was filed by Riverside on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, and subsequently discontinued without prejudice and refiled in New York County.) The action, titled Riverside National Bank of Florida v. The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., Fitch, Inc., Taberna Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., JPMorgan Chase & Co., J.P. Morgan Securities Inc., Citigroup Global Markets, Credits Suisse Securities (USA) LLC, ABN Amro, Inc., Cohen & Company, and SunTrust Robinson Humphrey, Inc., asserts claims in connection with Riverside’s purchase of certain CDO securities, including securities from the Taberna Preferred Funding II, IV, and V CDOs. Riverside alleges that offering materials issued in connection with the CDOs it purchased did not adequately disclose the process by which the rating agencies rated each of the securities. Riverside also alleges, among other things, that the offering materials should have disclosed an alleged conflict of interest of the rating agencies as well as the role that the rating agencies played in structuring each CDO. Riverside seeks damages in excess of $132 million, rescission of its purchases of the securities at issue, an accounting of certain amounts received by the defendants together with the imposition of a constructive trust, and punitive damages of an unspecified amount. On December 11, 2009, the defendants moved to dismiss all of Riverside’s claims. Riverside filed oppositions to the defendants’ motions on February 19, 2010, voluntarily dismissing its contract causes of action and opposing the remainder of defendants’ motions to dismiss. No date for oral argument of the motions has been set. On April 16, 2010, the Office of the Comptroller of the Currency closed Riverside and named the Federal Deposit Insurance Corporation as receiver and thus as successor-in-interest to Riverside as plaintiff in this action. In a Purchase and Assumption Agreement dated April 16, 2010, TD Bank, National Association, acquired the banking operations of Riverside from the FDIC, but appears not to have acquired Riverside’s litigation claims. On May 4, 2010, Riverside moved to substitute the FDIC as plaintiff and to stay this action for 90 days. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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NOTE 16: SUBSEQUENT EVENTS

On April 22, 2010 RAIT sold or delegated its collateral management rights and responsibilities relating to eight Taberna securitizations with approximately $5.9 billion in total assets under management to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16.5 million. These securitizations were not consolidated by RAIT and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. The transaction generated a $9.3 million in gain on sale of asset.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders of RAIT Financial Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Financial Trust and subsidiaries as of March 31, 2010 and the related consolidated statements of operations, other comprehensive income (loss) and cash flows for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1k and 9 to the consolidated financial statements, the Company adopted the new accounting standards classified under FASB ASC Topic 810 “Consolidation” for variable interest entities on January 1, 2010.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009 (except for Notes 6 and 15, as to which the date is November 5, 2010), and the related consolidated statements of operations, other comprehensive income (loss), shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2010, we expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

May 7, 2010 (except for Notes 5 and 14, as to which the date is November 5, 2010)

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EX-99.7

Exhibit 99.7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

Overview

We are a vertically integrated commercial real estate company capable of originating, investing in, managing, servicing, trading and advising on commercial real estate-related assets. In 2010, we continue to progress in adapting RAIT to the current market environment. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

In order to take advantage of market opportunities in the future, and to maximize shareholder value over time, we will continue to focus on:

• expanding RAIT’s commercial real estate revenue by investing in commercial real estate-related assets, managing and servicing investments for our own account or for others, providing property management services and providing our broker-dealer activities, including fixed-income trading and real estate advisory services;

• creating value through investing in our commercial real estate properties and implementing cost savings programs to help maximize property value over time;

• reducing our leverage while developing new financing sources;

• managing our investment portfolios to reposition non-performing assets, increase our cash flows and ultimately recover the value of our assets over time; and

• managing the size and cost structure of our business to match our operating environment.

We generated net income allocable to common shares of $31.3 million, or $0.41 per common share-diluted, during the three-months ended March 31, 2010, primarily by the following:

• Gains on debt extinguishments. During the three-months ended March 31, 2010, we repurchased $54.5 million of our convertible notes and $3.0 million of our CDO notes payable for total consideration of $35.7 million. The consideration was comprised of: cash of $6.9 million, the issuance of a $22.0 million convertible senior note and 3.2 million common shares. These transactions generated $19.8 million in gains on extinguishment of debt. See “Liquidity and Capital Resources-Capitalization” below for more information regarding these transactions.

• Provision for losses. The provision for losses recorded during the three-months ended March 31, 2010 was $17.4 million. While we recorded additional provision for losses during the three-months ended March 31, 2010, we saw improvement in the performance of our portfolio of commercial real estate loans from prior quarters.

• Change in fair value of financial instruments. For the three months ended March 31, 2010, the net change in fair value of financial instruments increased net income by $16.4 million. Generally, the change in fair value of our financial assets, which are recorded at fair value under FASB ASC Topic 825, “Financial Instruments”, was the primary driver of this improvement with several of our assets improving. This is consistent with the general improvement in asset pricing throughout the financial sector during the first quarter of 2010.

We expect to continue to focus our efforts on enhancing our commercial real estate loan portfolio and our investments in real estate, which are our primary investment portfolios. Although economic conditions are improving, some of our borrowers within our commercial real estate loan portfolio are under financial stress. Where it is likely to enhance our ultimate returns, we will consider restructuring loans or foreclosing on the underlying property. During the three-months ended March 31, 2010, we converted four loans, comprised of six properties, into direct ownership. We expect to engage in ongoing workout activity with respect to our commercial real estate loans that may result in the conversion of the property into owned real estate. We may take a non-cash charge to earnings at the time of any loan conversion to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion.

As described below under “Securitizations,” in April 2010 we sold or delegated our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations. While this transaction reduced our assets under management from $10.0 billion at March 31, 2010 to $4.1 billion, it also generated $16.5 million of cash and is consistent with our strategy of focusing on our commercial real estate portfolio. The transaction generated a $9.3 million in gain on sale of asset.

1

Set forth below are key statistics relating to our business through March 31, 2010 (dollars in thousands):

	As of or For the Three-Month Periods Ended
	March 31, 2010			December 31, 2009			September 30, 2009			June 30, 2009			March 31, 2009
Financial Statistics:
Recourse debt maturing within 1-year	$	10,905		$	24,390		$	49,494		$	49,494		$	54,161
Assets under management (a)	$	9,911,824		$	10,126,853		$	10,374,491		$	13,878,962		$	13,922,257
Debt to equity		2.8x			3.0x			3.3x			7.4x			6.0x
Total revenue	$	42,689		$	38,475		$	41,425		$	57,831		$	59,779
Earnings per share, diluted	$	0.41		$	0.24		$	(0.38	)	$	(4.43	)	$	(2.22	)
Commercial Real Estate (“CRE”) Loan Portfolio:
Reported CRE Loans—unpaid principal	$	1,417,393		$	1,473,700		$	1,582,065		$	1,653,837		$	1,859,143
Non-accrual loans—unpaid principal	$	132,978		$	171,372		$	246,029		$	171,809		$	177,233
Non-accrual loans as a % of reported loans		9.4	%		11.6	%		15.6	%		10.4	%		9.5	%
Reserve for losses	$	76,823		$	86,609		$	85,620		$	108,842		$	126,229
Reserves as a % of non-accrual loans		57.8	%		50.5	%		34.8	%		63.4	%		71.2	%
Provision for losses	$	17,350		$	22,500		$	18,467		$	27,548		$	61,565
CRE Property Portfolio:
Reported investments in real estate	$	795,952		$	738,235		$	645,484		$	604,619		$	501,459
Number of properties owned		46			39			34			30			24
Multifamily units owned		7,893			6,967			6,367			5,550			4,249
Office square feet owned		1,550,401			1,350,177			1,035,435			1,035,435			1,035,435
Retail square feet owned		1,069,652			1,069,643			1,095,452			639,791			639,791
Average physical occupancy		70.8	%		69.8	%		73.1	%		75.8	%		73.3	%

(a) On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations with $5.9 billion of assets to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced to $4.1 billion.

Investors should read the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate lack of liquidity and reduced performance.

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Our Investment Portfolio

Our consolidated investment portfolio is currently comprised of the following asset classes:

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We have originated senior long-term mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. Our financing is usually “non-recourse.” Non-recourse financing means we look primarily to the assets securing the payment of the loan, subject to certain standard exceptions. We may also engage in recourse financing by requiring personal guarantees from controlling persons of our borrowers. We also acquire existing commercial real estate loans held by banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of March 31, 2010 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities		Number of Loans
Commercial mortgages	$	765,290		6.8	%		May 2010 to Mar. 2016		47
Mezzanine loans		424,013		9.4	%		May 2010 to Nov. 2038		122
Other loans		124,448		5.2	%		May 2010 to Oct. 2016		11
Preferred equity interests		92,331		10.9	%		May 2010 to Sep. 2021		23
Total	$	1,406,082		7.7	%				203

Due to current economic conditions, we have limited capacity to originate new investments. However, we expect to focus on this asset class when economic conditions improve and as existing loans are repaid.

The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of March 31, 2010:

(a) Based on book value.

Investments in real estate. We generate a return on our real estate investments through rental income and other sources of income from the operations of the real estate underlying our investment. We also benefit from any increase in the value of the real estate in addition to current income. We finance our acquisitions of real estate through a combination of secured mortgage financing provided by financial institutions and existing financing provided by our two CRE loan securitizations. During 2010, we acquired $41.3 million of real estate investments upon conversion of $52.1 million of commercial real estate loans, usually subject to retaining the existing financing provided by our two CRE loan securitizations. As of March 31, 2010, we owned 7,893 multifamily units, 1,550,401 square feet of office space and 1,069,652 square feet of retail space. The average occupancy of our portfolio of 46 properties is 70.8% as of March 31, 2010.

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The table below describes certain characteristics of our investments in real estate as of March 31, 2010 (dollars in thousands, except average effective rent):

	Investments in Real Estate (a)		% of Total Portfolio			Units/ Square Feet/ Acres		Number of Properties		Average Effective Rent (b)
Multi-family real estate properties (c)	$	530,770		66.7	%		7,893		32	$	717
Office real estate properties (d)		207,663		26.1	%		1,350,247		9		19.31
Retail real estate properties (d)		35,311		4.4	%		1,069,652		2		11.89
Parcels of land		22,208		2.8	%		7.3		3		—
Total	$	795,952		100.0	%				46

(a) Investments in real estate include $75.2 million of assets held for sale as of March 31, 2010.

(b) Based on operating performance for the three-month period ended March 31, 2010.

(c) Average effective rent is rent per unit per month.

(d) Average effective rent is rent per square foot per year.

We expect to continue to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding loans that become subject to increased credit risks.

The charts below describe the property types and the geographic breakdown of our investments in real estate as of March 31, 2010:

(a) Based on book value.

Investment in debt securities. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of March 31, 2010, we retained a controlling interest in two securitizations—Taberna VIII and Taberna IX, which are consolidated entities. All of the collateral assets for the debt securities and the related non-recourse CDO financing obligations are presented at fair value in our reported results.

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The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2010 (dollars in thousands):

									Issuer Statistics
Industry Sector	Estimated Fair Value		% of Total			Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	99,951		20.1	%		4.3	%		69.8	%		1.6	x
Office		133,398		26.9	%		7.8	%		60.3	%		1.2	x
Residential Mortgage		38,386		7.7	%		2.5	%		99.0	%		4.7	x
Specialty Finance		65,909		13.3	%		4.9	%		109.4	%		3.3	x
Homebuilders		55,136		11.1	%		7.8	%		1.9	%		(0.1	)x
Retail		54,313		10.9	%		3.9	%		120.2	%		1.3	x
Hospitality		25,216		5.1	%		6.3	%		139.5	%		(0.8	)x
Storage		23,772		4.8	%		8.0	%		60.3	%		3.8	x
Total	$	496,081		100.0	%		5.3	%		73.0	%		1.8	x

The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2010:

(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.

(b) Based on estimated fair value.

We have invested, and expect to continue to invest, in CMBS, unsecured REIT notes and other real estate-related debt securities.

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually. These companies are generally rated investment grade by one or more nationally recognized rating agencies.

CMBS generally are multi-class debt or pass-through certificates secured or backed by single loans or pools of mortgage loans on commercial real estate properties. Our CMBS investments may include loans and securities that are rated investment grade by one or more nationally-recognized rating agencies, as well as both unrated and non-investment grade loans and securities.

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The table and the chart below describe certain characteristics of our real estate-related debt securities as of March 31, 2010 (dollars in thousands):

Investment Description	Estimated Fair Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	58,344		6.6	%		7.5	$	61,000
CMBS receivables		65,322		6.0	%		33.8		158,868
Other securities		30,231		3.0	%		31.4		125,887
Total	$	153,897		5.0	%		28.4	$	345,755

(a) S&P Ratings as of March 31, 2010.

Securitization Summary

Overview. We have used securitizations, mainly through CDOs, to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolio for the long-term. To finance our investments in the foreseeable future, management will seek to structure match funded financing through reinvesting asset repayments in our existing securitizations, loan participations, bank lines of credit, joint-venture opportunities and other methods that preserve our capital while making investments that generate an attractive return.

A CDO is a securitization structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the CDO liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower than the average yield of the securities backing the CDO. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the CDO are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Unlike typical securitization structures, the underlying assets in our CDO pool may be sold or repaid, subject to certain limitations, without a corresponding pay-down of the CDO debt, provided the proceeds are reinvested in qualifying assets.

CDO Management. During the quarter ended March 31, 2010 and through April 20, 2010, we served as the collateral manager for all 13 CDO securitizations we sponsored with varying amounts of retained or residual interests held by us. In general, during this period, we received senior asset management fees, based on the amount of collateral assets, as a priority ahead of debt service payments. On April 21, 2010, we sold or delegated our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group, LLC, or Fortress, for $16.5 million. These securitizations were comprised of Taberna II, Taberna III, Taberna IV, Taberna V, Taberna VI, Taberna VII, Taberna Europe I, and Taberna Europe II. Subsequent to the transaction with Fortress in April, we receive collateral management fees only for Taberna I, Taberna VIII, Taberna IX, RAIT I and RAIT II.

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CDO Performance. Our CDOs contain interest coverage and overcollateralization triggers, or OC Triggers, that must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns. If the interest coverage or OC Triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant CDO indenture.

As of the most recent payment information, the following CDO securitizations were not passing their required interest coverage or OC Triggers and we received only senior asset management fees and interest on certain of the more senior-rated debt owned by us related to these CDO transactions: Taberna I, Taberna II, Taberna III, Taberna IV, Taberna V, Taberna VI, Taberna VII, Taberna VIII, Taberna IX, Taberna Europe I and Taberna Europe II. In addition, events of default existed in Taberna II, Taberna III, Taberna IV and Taberna VI. An event of default in a CDO may be cause for our removal as collateral manager of that CDO in limited circumstances where an event of default is caused by a breach or default of the collateral manager. We are unable to predict with certainty which CDOs, in the future, will experience events of default or which, if any, remedies the appropriate note holders may seek to exercise in the future. All applicable interest coverage and OC Triggers continue to be met for our two commercial real estate CDOs, RAIT I and RAIT II and we continue to receive all of our management fees, interest and residual returns from these CDOs.

Set forth below is a summary of the CDO investments in our consolidated securitizations as of the most recent payment information is as follows (dollars in millions):

• Taberna VIII—Taberna VIII has $674.0 million of total collateral, of which $85.1 million is defaulted. The current overcollateralization (O/C) test is failing at 91.3% with an O/C trigger of 103.5%. We have invested $133.0 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $704.5 million of total collateral, of which $154.1 million is defaulted. The current O/C test is failing at 81.4% with an O/C trigger of 105.4%. We have invested $186.5 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $64.3 million is defaulted. The current O/C test is passing at 120.1% with an O/C trigger of 116.2%. We have invested $223.5 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

• RAIT II—RAIT II has $815.1 million of total collateral, of which $20.0 million is defaulted. The current O/C test is passing at 114.9% with an O/C trigger of 111.7%. We have invested $233.7 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

Generally, our investments in the subordinated notes and equity securities in our consolidated CDOs are subordinate in right of payment and in liquidation to the senior notes issued by the CDOs. We may also own common shares, or the non-economic residual interest, in certain of the entities above.

Assets Under Management

We use assets under management, or AUM, as a tool to measure our financial and operating performance. The following defines this measure and describes its relevance to our financial and operating performance:

Assets under management represents the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our financial performance. AUM includes our total investment portfolio and assets associated with unconsolidated CDOs for which we derive asset management fees.

The table below summarizes our assets under management as of March 31, 2010 and December 31, 2009 (dollars in thousands):

	Assets Under Management at March 31, 2010		Assets Under Management at December 31, 2009
Commercial real estate portfolio (1)	$	2,063,076	$	2,084,685
European portfolio (2)		1,763,310		1,878,601
U.S. TruPS portfolio (3)		6,084,750		6,162,790
Other investments		687		777
Total (4)	$	9,911,824	$	10,126,853

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(1) As of March 31, 2010 and December 31, 2008, our commercial real estate portfolio was comprised of $1.2 billion and $1.2 billion, respectively, of assets collateralizing RAIT I and RAIT II, $796.0 million and $738.2 million, respectively, of investments in real estate and $82.9 million and $106.6 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

(2) Our European portfolio is comprised of assets collateralizing Taberna Europe I and Taberna Europe II.

(3) Our U.S. TruPS portfolio is comprised of assets collateralizing Taberna I through Taberna IX, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans.

(4) On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations with $5.9 billion of assets to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced to $4.1 billion.

REIT Taxable Income

To qualify as a REIT, we are required to make annual distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, to avoid certain U.S. federal excise taxes, we are required to make distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year. Because we expect to make distributions based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP.

Our board of trustees monitors RAIT’s REIT taxable income, and under its policy, will determine dividends when a full year of REIT taxable income is available. The board intends to declare a dividend, if any, in at least the amount necessary to meet RAIT’s annual distribution requirements. The board expects to continue to review and determine the dividends on RAIT’s preferred shares on a quarterly basis.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our shareholders, we believe that presenting the information management uses to calculate our net taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures as determined and reported by other companies.

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The table below reconciles the differences between reported net income (loss) total taxable income (loss) and estimated REIT taxable income (loss) for the three-month periods ended March 31, 2010 and 2009 (dollars in thousands):

	For the Three-Month Periods Ended March 31
	2010			2009
Net income (loss), as reported	$	34,453		$	(148,414	)
Add (deduct):
Provision for losses		17,350			119,504
Charge-offs on allowance for losses		(27,136	)		(65,425	)
Domestic TRS book-to-total taxable income differences:
Income tax provision (benefit)		47			(36	)
Stock compensation, forfeitures and other temporary tax differences		98			(1,357	)
Change in fair value of financial instruments, net of noncontrolling interests (1)		(16,437	)		86,347
Amortization of intangible assets		355			315
CDO investments aggregate book-to-taxable income differences (2)		(13,872	)		(19,119	)
Accretion of (premiums) discounts		—			(105	)
Other book to tax differences		1,773			1,133
Total taxable income (loss)		(3,369	)		(27,157	)
Less: Taxable income attributable to domestic TRS entities		(1,067	)		(987	)
Plus: Dividends paid by domestic TRS entities		5,000			—
Less: Deductible preferred dividends		(3,406	)		(3,406	)
Estimated REIT taxable income (loss)	$	(2,842	)	$	(31,550	)

(1) Change in fair value of financial instruments is reported net of allocation to noncontrolling interests of $(13,458) for the three- months ended March 31, 2009.

(2) Amounts reflect the aggregate book-to-taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that Taberna consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between Taberna and its CDO investments.

Results of Operations

Three-Month Period Ended March 31, 2010 Compared to the Three-Month Period Ended March 31, 2009

Revenue

Investment interest income. Investment interest income decreased $109.8 million, or 72.6%, to $41.3 million for the three-month period ended March 31, 2010 from $151.1 million for the three-month period ended March 31, 2009. This net decrease was primarily attributable to decreases in interest income of: $47.1 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $49.9 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $329.0 million in total principal amount of investments on non-accrual status as of March 31, 2010, 20 new properties, representing $367.4 million of investments in commercial loans, transitioned from loans to real estate owned since March 31, 2009 and the reduction in short-term LIBOR of approximately 0.9% during the three-month period ended March 31, 2010 compared to the three-month period ended March 31, 2009.

Investment interest expense. Investment interest expense decreased $79.4 million, or 77.1%, to $23.6 million for the three-month period ended March 31, 2010 from $103.0 million for the three-month period ended March 31, 2009. This net decrease was primarily attributable to decreases in interest expense of: $25.0 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $46.3 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to repurchases of $153.3 million of our convertible senior notes since March 31, 2009, net of additional interest cost incurred for the insurance of new debt instruments associated therewith, and the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 0.9% during the three-month period ended March 31, 2010 compared to the three-month period ended March 31, 2009.

Rental income. Rental income increased $7.2 million to $16.1 million for the three-month period ended March 31, 2010 from $8.9 million for the three-month period ended March 31, 2009. This increase was primarily attributable to 19 new properties, with direct real estate investments of $304.5 million, acquired or consolidated since March 31, 2009.

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Fee and other income. Fee and other income increased $6.0 million, or 213.4%, to $8.8 million for the three-month period ended March 31, 2010 from $2.8 million for the three-month period ended March 31, 2009. We received $3.4 million of fee income from our restructuring advisory services, $2.1 million of property management fees and reimbursement income associated with the property management activities that we acquired in May 2009 and $0.5 million of increased asset management fees resulting from the recognition of senior collateral management fees on the Taberna securitizations that were deconsolidated in June 2009.

Expenses

Real estate operating expense. Real estate operating expense increased $4.1 million to $12.4 million for the three-month period ended March 31, 2010 from $8.3 million for the three-month period ended March 31, 2009. This increase was primarily attributable to 19 new properties, with direct real estate investments of $304.5 million, acquired or consolidated since March 31, 2009.

Compensation expense. Compensation expense increased $2.5 million, or 42.8%, to $8.1 million for the three-month period ended March 31, 2010 from $5.6 million for the three-month period ended March 31, 2009. This increase was primarily due to $2.0 million of compensation costs associated with the property management activities that were acquired in May 2009, the expansion of our broker-dealer and advisory activities, and higher stock-based compensation amortization of $0.4 million resulting from the vesting of certain restricted shares and phantom units subsequent to March 31, 2009.

General and administrative expense. General and administrative expense increased $0.6 million, or 14.9%, to $4.9 million for the three-month period ended March 31, 2010 from $4.3 million for the three-month period ended March 31, 2009. This increase is primarily due to our property management activities that we acquired in May 2009 and our broker-dealer and advisory activities.

Provision for losses. The provision for losses relates to our investments in our residential mortgages and commercial mortgage loan portfolios. The provision for losses decreased by $102.1 million for the three-month period ended March 31, 2010 to $17.4 million as compared to $119.5 million for the three-month period ended March 31, 2009. This decrease was primarily attributable to $58.3 million of provision for losses related to our residential mortgage portfolio during the three-month period ended March 31, 2009 which was disposed during July 2009. Subsequent to March 31, 2009, we have transitioned 20 loans to real estate owned properties, with direct real estate investments of $310.1 million, including one property that has been sold and one property held for sale, and realized losses of $57.3 million when these loans were converted from impaired loans to owned real estate. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Depreciation expense. Depreciation expense increased $2.3 million to $5.8 million for the three-month period ended March 31, 2010 from $3.5 million for the three-month period ended March 31, 2009. This increase was primarily attributable to 19 new properties, with direct real estate investments of $304.5 million, acquired or consolidated since March 31, 2009 as well as increased depreciation of furniture and fixtures we added since March 31, 2009.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense increased $0.1 million to $0.4 million for the three-month period ended March 31, 2010 from $0.3 million for the three-month period ended March 31, 2009. This increase resulted from the $1.6 million of intangible assets acquired from Jupiter Communities on May 1, 2009.

Other Income (Expense)

Gains (losses) on sale of assets. Gains on sale of assets were $3.9 million during the three-month period ended March 31, 2010. The gains on sale of assets are primarily attributable to the disposition of $11.4 million in total principal amount of unsecured REIT note receivables in our CRE securitizations.

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended March 31, 2010 are attributable to the repurchase of $54.5 million in aggregate principal amount of convertible senior notes and $3.0 million in aggregate principal amount of CDO notes payable. The aggregate debt was repurchased from the market for 3,150,000 of our common shares, issued a $22.0 million senior secured convertible note and $6.9 million of cash. As a result of these repurchases, we recorded gains on extinguishment of debt of $19.8 million.

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Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the three-month periods ended March 31, 2010 and 2009, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended March 31, 2010			For the Three-Month Period  Ended March 31, 2009
Change in fair value of trading securities and security-related receivables	$	47,745		$	(190,687	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(13,493	)		82,589
Change in fair value of derivatives		(17,815	)		8,293
Change in fair value of financial instruments	$	16,437		$	(99,805	)

Discontinued operations. Income (loss) from discontinued operations increased $2.1 million to income of $0.5 million for the three-month period ended March 31, 2010 compared to a loss of $1.6 million for the three-month period ended March 31, 2009 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a gain of $0.3 million on a property that was sold in March 2010 and a $2.1 million loss on a VIE that was deconsolidated in March 2009.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. The disruption in the credit markets has reduced our liquidity and capital resources and has generally increased the cost of any new sources of liquidity over historical levels. Due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced or eliminated and we do not expect to sponsor new securitizations to provide us with long-term financing for the foreseeable future. We are seeking to expand our use of secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments generating attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements.

We expect to continue to receive substantial cash flow from our investment portfolio. Our consolidated securitizations collateralized by U.S. commercial real estate loans, RAIT I and RAIT II, continue to perform and make distributions on our retained interests and pay us management fees. RAIT I and RAIT II are our primary source of cash from our operations. While our consolidated securitizations collateralized by trust preferred securities, or TruPS, Taberna VIII and Taberna IX, are currently failing several of their respective over-collateralization tests, we continue to receive our senior management fees from these securitizations. We continue to explore strategies to generate liquidity from our investments in real estate and our investments in debt securities as we seek to focus on our commercial real estate lending platform.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that our assets could be sold directly to raise additional cash. We may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

• to repay our indebtedness, including repurchasing or retiring our debt before it becomes due;

• to pay our expenses, including compensation to our employees;

• to pay U.S. federal, state, and local taxes of our TRSs;

• to repurchase our common shares; and

• to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

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We intend to meet these liquidity requirements primarily through the following:

• the use of our cash and cash equivalent balances of $18.5 million as of March 31, 2010;

• cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our vertically integrated commercial real estate platform;

• proceeds from the sales of assets;

• proceeds from future borrowings; and

• proceeds from future offerings of our common and preferred shares, including our DRSPP Plan.

Cash Flows

As of March 31, 2010 and 2009, we maintained cash and cash equivalents of approximately $18.5 million and $41.0 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Three-Month Periods Ended March 31
	2010			2009
Cash flow from operating activities	$	2,549		$	28,914
Cash flow from investing activities		5,603			109,396
Cash flow from financing activities		(14,646	)		(124,799	)
Net change in cash and cash equivalents		(6,494	)		13,511
Cash and cash equivalents at beginning of period		25,034			27,463
Cash and cash equivalents at end of period	$	18,540		$	40,974

Our principal source of cash flow is historically from our investing activities. The reduction in cash inflow from our investing activities primarily resulted from $21.8 million in principal repayments on loans and investments during the three-month period ended March 31, 2010 as compared to $120.0 million during the three-month period ended March 31, 2009.

Our decreased cash inflow from operating activities is primarily due to the disposition of the Taberna III, Taberna IV, Taberna VI, and Taberna VII securitizations in June 2009 and from the disposition of the residential mortgage portfolio in July 2009.

The cash outflow from our financing activities during the three-month period ended March 31, 2010 as compared to the three-month period ended March 31, 2009 is primarily due to a reduction in the repayments on residential mortgage-backed securities of $0 and $96.6 million as we sold this portfolio in July 2009.

Our assets under management have historically been financed on a long-term basis through securitizations and our rights to cash flow from these portfolios depend on the terms of the debt and equity securities we hold in these securitizations. Several of our securitizations are currently failing several of their respective over-collateralization tests due to collateral defaults and are re-directing cash flow associated with our retained interests to repay principal on senior debt. See “Securitization Summary” above.

Our two commercial real estate securitized financing arrangements, RAIT I and RAIT II, include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts during the first five years of each facility. At March 31, 2010, these revolvers are fully utilized and have no additional capacity. We have $73.4 million of restricted cash in our two CRE securitizations to invest in commercial loans as of March 31, 2010, subject to $33.9 million of future funding commitments and borrowing requirements.

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Capitalization

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of March 31, 2010 (dollars in thousands):

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	191,863	$	191,569		6.9	%		Apr. 2027
Secured credit facilities		48,203		48,203		4.8	%		Feb. 2011 to Dec. 2011
Senior secured notes		65,000		65,000		11.7	%		Apr. 2014
Loans payable on real estate		25,094		25,094		5.2	%		Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		17,003		9.2	%		Mar. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		393,312		371,969		7.6	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,393,750		1,393,750		0.7	%		2036 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,182,398		157,386		0.9	%		2035 to 2038
Loans payable on real estate		73,495		73,495		5.6	%		Aug. 2010 to Aug. 2016
Total non-recourse indebtedness		2,649,643		1,624,631		0.9	%
Total indebtedness	$	3,042,955	$	1,996,600		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1.8 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1.4 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of March 31, 2010 was $873.2 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $372.0 million as of March 31, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the three-month period ended March 31, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the three-month period ended March 31, 2010, we repurchased $54.5 million in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $35.7 million. The purchase price consisted of $6.9 million in cash, the issuance of 3.2 million common shares, and the issuance of a $22.0 million 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $17.1 million, net of deferred financing costs and unamortized discounts that were written off.

Secured credit facilities. As of March 31, 2010, we have borrowed an aggregate amount of $48.2 million under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of March 31, 2010, the first secured credit facility had an unpaid principal balance of $21.0 million which is payable in December 2011 under the current terms of this facility. As of March 31, 2010, the second secured credit facility had an unpaid principal balance of $22.2 million. This facility terminated in April 2010 and the unpaid principal balance is payable in April 2011. As of March 31, 2010, the third secured credit facility had an unpaid principal balance of $5.0 million. We are amortizing this balance with monthly principal repayments of $0.5 million which will result in the full repayment of this credit facility by February 2011.

Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47.0 million aggregate principal amount of our convertible senior notes for a total consideration of $31.2 million. The

13

purchase price consisted of (a) our issuance of the $22.0 million senior secured convertible note, (b) 1.5 million common shares issued, and (c) $6.0 million in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1.4 million of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1.1 million principal amount of the senior secured convertible note into 300,000 common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their OC and IC trigger tests as of March 31, 2010.

During the three-month period ended March 31, 2010, we repurchased, from the market, a total of $3.0 million in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $0.3 million and we recorded a gain on extinguishment of debt of $2.7 million.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing overcollateralization, or OC, trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the three-month period ended March 31, 2010, $2.7 million of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Equity Financing.

Preferred Shares

On January 26, 2010, our board of trustees declared a first quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled 3.4 million.

On April 22, 2010, our board of trustees declared a second quarter 2010 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on June 30, 2010 to holders of record on June 1, 2010.

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Common Shares

- Share Repurchases

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $0.2 million.

-Equity Compensation

On January 26, 2010, the compensation committee awarded 1.5 million phantom units, valued at $1.9 million using our closing stock price of $1.27, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 0.5 million phantom units, valued at $0.6 million using our closing stock price of $1.27, to our non-executive officer employees. These awards generally vest over three-year periods.

During the three-months ended March 31, 2010, 70,392 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

-Share Issuances

During the three-month period ended March 31, 2010, we issued 3.2 million common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $54.5 million of our convertible notes. See “Capitalization” above.

-DRSPP

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 10.0 million common shares. During the three-months ended March 31, 2010, we issued a total of 0.5 million common shares pursuant to the DRSPP at a weighted-average price of $2.11 per share and received $1.0 million of net proceeds. Effective May 7, 2010 we registered an additional 8,787,635 common shares so that, together with previously registered common shares available for issuance under the DRSPP, 12,000,000 common shares, in the aggregate, are available for issuance under the DRSPP.

-SEDA

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50.0 million, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50.0 million worth of common shares under the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12.5 million common shares. As of March 31, 2010, no shares have been issued pursuant to this arrangement.

Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a discussion of our critical accounting policies. On January 1, 2010 we adopted several new accounting pronouncements and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as of March 31, 2010, as set forth herein. Management discusses our critical accounting policies and management’s judgments and estimates with our Audit Committee.

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Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements.

On January 1, 2010, we adopted Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and describes the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

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EX-99.8

Exhibit 99.8

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)

	As of June 30, 2010			As of December 31, 2009
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,388,312		$	1,467,566
Allowance for losses		(78,672	)		(86,609	)
Total investments in mortgages and loans		1,309,640			1,380,957
Investments in real estate		803,548			738,235
Investments in securities and security-related receivables, at fair value		681,815			694,897
Cash and cash equivalents		28,944			25,034
Restricted cash		155,027			156,167
Accrued interest receivable		34,884			37,625
Other assets		25,323			28,105
Deferred financing costs, net of accumulated amortization of $8,041 and $7,290, respectively		21,108			23,778
Intangible assets, net of accumulated amortization of $1,479 and $82,929, respectively		3,487			10,178
Total assets	$	3,063,776		$	3,094,976
Liabilities and Equity
Indebtedness (including $165,607 and $234,433 at fair value, respectively)	$	1,943,539		$	2,077,123
Accrued interest payable		19,326			17,432
Accounts payable and accrued expenses		17,193			21,889
Derivative liabilities		236,780			186,986
Deferred taxes, borrowers’ escrows and other liabilities		22,984			21,625
Total liabilities		2,239,822			2,325,055
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.01 par value per share, 200,000,000 shares authorized, 85,317,328 and 74,420,598 issued and outstanding, including 14,159 unvested restricted share awards at December 31, 2009		853			744
Additional paid in capital		1,655,835			1,630,428
Accumulated other comprehensive income (loss)		(143,418	)		(118,973	)
Retained earnings (deficit)		(691,661	)		(745,262	)
Total shareholders’ equity		821,676			767,004
Noncontrolling interests		2,278			2,917
Total equity		823,954			769,921
Total liabilities and equity	$	3,063,776		$	3,094,976

The accompanying notes are an integral part of these consolidated financial statements.

1

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)

	For the  Three-Month Periods Ended June 30						For the  Six-Month Periods Ended June 30
	2010			2009			2010			2009
Revenue:
Investment interest income	$	39,173		$	130,388		$	80,503		$	281,481
Investment interest expense		(23,233	)		(91,860	)		(46,788	)		(194,880	)
Net interest margin		15,940			38,528			33,715			86,601
Rental income		17,685			10,624			33,760			19,510
Fee and other income		3,512			8,679			12,351			11,499
Total revenue		37,137			57,831			79,826			117,610
Expenses:
Real estate operating expense		14,828			9,873			27,265			18,184
Compensation expense		6,886			6,022			14,938			11,660
General and administrative expense		5,367			5,272			10,257			9,529
Provision for losses		7,644			66,096			24,994			185,600
Asset impairments		—			46,015			—			46,015
Depreciation expense		6,845			5,011			12,673			8,561
Amortization of intangible assets		168			352			523			667
Total expenses		41,738			138,641			90,650			280,216
Income (loss) before other income (expense), taxes and discontinued operations		(4,601	)		(80,810	)		(10,824	)		(162,606	)
Interest and other income (expense)		226			2,236			317			2,049
Gains (losses) on sale of assets		7,692			(313,758	)		11,616			(313,758	)
Gains on extinguishment of debt		17,202			12,349			37,012			47,556
Change in fair value of financial instruments		4,446			91,357			20,883			(8,448	)
Unrealized gains (losses) on interest rate hedges		51			(244	)		38			(486	)
Equity in income (loss) of equity method investments		—			(1	)		4			(8	)
Income (loss) before taxes and discontinued operations		25,016			(288,871	)		59,046			(435,701	)
Income tax benefit (provision)		(96	)		(693	)		(143	)		(657	)
Income (loss) from continuing operations		24,920			(289,564	)		58,903			(436,358	)
Income (loss) from discontinued operations		456			303			926			(1,317	)
Net income (loss)		25,376			(289,261	)		59,829			(437,675	)
(Income) loss allocated to preferred shares		(3,415	)		(3,415	)		(6,821	)		(6,821	)
(Income) loss allocated to noncontrolling interests		358			4,809			593			12,397
Net income (loss) allocable to common shares	$	22,319		$	(287,867	)	$	53,601		$	(432,099	)
Earnings (loss) per share—Basic:
Continuing operations	$	0.27		$	(4.43	)	$	0.68		$	(6.63	)
Discontinued operations		0.01			—			0.01			(0.02	)
Total earnings (loss) per share—Basic	$	0.28		$	(4.43	)	$	0.69		$	(6.65	)
Weighted-average shares outstanding—Basic		80,340,703			64,995,483			77,661,419			64,972,363
Earnings (loss) per share—Diluted:
Continuing operations	$	0.26		$	(4.43	)	$	0.67		$	(6.63	)
Discontinued operations		0.01			—			0.01			(0.02	)
Total earnings (loss) per share—Diluted	$	0.27		$	(4.43	)	$	0.68		$	(6.65	)
Weighted-average shares outstanding—Diluted		82,260,906			64,995,483			78,784,783			64,972,363
Distributions declared per common share	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the  Three-Month Periods Ended June 30						For the  Six-Month Periods Ended June 30
	2010			2009			2010			2009
Net income (loss)	$	25,376		$	(289,261	)	$	59,829		$	(437,675	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(27,473	)		24,451			(42,703	)		21,689
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		(51	)		244			(38	)		486
Realized (gains) losses on interest rate hedges reclassified to earnings		11,546			11,597			23,271			24,959
Change in fair value of available-for-sale securities		(841	)		205			(4,975	)		(13,580	)
Realized (gains) losses on available-for-sale securities reclassified to earnings		—			44,275			—			44,275
Realized (gains) losses on sales of assets of VIEs		—			28,196			—			28,196
Total other comprehensive income (loss)		(16,819	)		108,968			(24,445	)		106,025
Comprehensive income (loss) before allocation to noncontrolling interests		8,557			(180,293	)		35,384			(331,650	)
Allocation to noncontrolling interests		358			4,809			593			11,720
Comprehensive income (loss)	$	8,915		$	(175,484	)	$	35,977		$	(319,930	)

The accompanying notes are an integral part of these consolidated financial statements.

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Six-Month Periods  Ended June 30
	2010			2009
Operating activities:
Net income (loss)	$	59,829		$	(437,675	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		24,994			185,600
Share-based compensation expense		2,292			2,139
Depreciation and amortization		14,421			10,451
Amortization of deferred financing costs and debt discounts		1,191			8,139
Accretion of discounts on investments		(2,732	)		(3,377	)
(Gains) losses on sales of assets		(11,882	)		315,810
Gains on extinguishment of debt		(37,012	)		(47,556	)
Change in fair value of financial instruments		(20,883	)		8,448
Unrealized (gains) losses on interest rate hedges		(38	)		486
Equity in (income) loss of equity method investments		(4	)		8
Asset impairments		—			46,015
Unrealized foreign currency (gains) losses on investments		(189	)		(438	)
Changes in assets and liabilities:
Accrued interest receivable		1,554			6,533
Other assets		1,947			(1,365	)
Accrued interest payable		(20,363	)		6,956
Accounts payable and accrued expenses		(4,645	)		(3,382	)
Deferred taxes, borrowers’ escrows and other liabilities		(5,641	)		(49,783	)
Cash flow from operating activities		2,839			47,009
Investing activities:
Proceeds from sales of other securities		14,626			—
Purchase and origination of loans for investment		(17,574	)		(23,363	)
Principal repayments on loans		22,465			259,306
Investment in Jupiter Communities		—			(1,300	)
Investments in real estate		(9,161	)		(4,054	)
Proceeds from dispositions of real estate		5,124			—
Proceeds from sale of collateral management rights		14,106			—
(Increase) decrease in restricted cash		4,438			11,954
Cash flow from investing activities		34,024			242,543
Financing activities:
Proceeds from issuance of convertible senior debt and other indebtedness		—			1,177
Repayments on secured credit facilities, repurchase agreements and other indebtedness		(11,599	)		(13,992	)
Repayments on residential mortgage-backed securities		—			(223,335	)
Proceeds from issuance of CDO notes payable		—			50
Repayments and repurchase of CDO notes payable		(8,172	)		(31,776	)
Repayments and repurchase of convertible senior notes		(10,512	)		(1,446	)
Acquisition of noncontrolling interests in CDOs		(46	)		—
Payments for deferred costs		(187	)		(95	)
Common share issuance, net of costs incurred		4,384			73
Distributions paid to preferred shares		(6,821	)		(6,821	)
Cash flow from financing activities		(32,953	)		(276,165	)
Net change in cash and cash equivalents		3,910			13,387
Cash and cash equivalents at the beginning of the period		25,034			27,463
Cash and cash equivalents at the end of the period	$	28,944		$	40,850
Supplemental cash flow information:
Cash paid for interest	$	23,084		$	196,520
Cash paid (refunds received) for taxes		(1,781	)		—
Non-cash decrease in trust preferred obligations		—			(223,334	)
Non-cash increase in investments in real estate from the conversion of loans		52,687			258,545
Non-cash decrease in convertible senior notes from extinguishment of debt		(24,530	)		—

The accompanying notes are an integral part of these consolidated financial statements.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2010

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We conduct our business through our subsidiaries, RAIT Partnership, L.P. and Taberna Realty Finance Trust, or Taberna, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. Taberna is also a Maryland REIT.

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments, and to mitigate interest rate risk through derivative instruments.

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2009 included in Part II, Item 5 of the quarterly report on Form 10-Q as of September 30, 2010. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on an evaluation as who has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria above are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidated the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

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c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

d. Investments in Loans

We invest in commercial mortgages, mezzanine loans, debt securities and other loans. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

e. Allowance for Losses, Impaired Loans and Non-accrual Status

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans, and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

f. Investments in Real Estate

Investments in real estate are shown net of accumulated depreciation. We capitalize all costs related to the improvement of the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements – 30 years; furniture, fixtures, and equipment – 5 to 10 years; and tenant improvements – shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

g. Investments in Securities

We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “k. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

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We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

h. Transfers of Financial Assets

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings, or security-related receivables.

i. Revenue Recognition

1) Investment interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible.

For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

2) Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) providing property management services to third parties, and (d) providing fixed income trading and advisory services to our customers. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from CDOs while such CDOs are consolidated.

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During the three-month periods ended June 30, 2010 and 2009, we received $1,432 and $3,900, respectively, of earned asset management fees. Of these fees, we eliminated $967 and $2,021, respectively, of management fee income upon consolidation of VIEs.

During the six-month periods ended June 30, 2010 and 2009, we received $5,104 and $8,877, respectively, of earned asset management fees. Of these fees, we eliminated $1,983 and $4,877, respectively, of management fee income upon consolidation of VIEs.

j. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings.

k. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

• Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

• Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs.

• Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category are trust preferred securities, or TruPS, and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our

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own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that we and others are willing to pay for an asset. Ask prices represent the lowest price that we and others are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

l. Income Taxes

RAIT and Taberna have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our shareholders. Management believes that all of the criteria to maintain RAIT’s and Taberna’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

From time to time, our TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to CDO entities. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the CDO entities. Certain CDO entities may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the CDO entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our taxable income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us.

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and as new information becomes available, the balances are adjusted as appropriate.

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Certain TRS entities are currently subject to ongoing tax examinations in various jurisdictions. The IRS is currently examining Taberna Capital Management LLC’s, or TCM’s, federal income tax returns for the 2006 through 2008 tax years. TCM engaged the services of Taberna Capital (Bermuda), Ltd., or TCB, from June 2006 through June 2008 and RAIT Capital Ireland Ltd., or RCI, from July 2008 through the present, to provide various sub-advisory services in connection with TCM’s management of various CDOs. Pursuant to transfer pricing studies prepared by an international accounting firm, TCM deducted the costs paid to TCB and RCI for their services from its income for federal income tax purposes. The IRS has challenged the transfer pricing methodology applied by TCM for 2006 and 2007 and has issued a Notice of Proposed Adjustment, or NOPA, for the 2006 and 2007 tax years. The NOPA proposes to reduce the deductions by $7,057 and $14,988 for the 2006 and 2007 tax years. With respect to the 2008 tax year that has recently been included by the IRS in its examination, TCM deducted $18,971 under this transfer pricing methodology. During the three-month period ended June 30, 2010, management obtained and provided to the IRS a second transfer pricing study prepared by an independent, international public accounting firm for the period 2006 and 2007 that supports its deductions and responded to the IRS NOPA refuting the proposed adjustments. Management believes it has complied with the requirements outlined in the Internal Revenue Code and believes that its tax filing position will be sustained based on its merits. Accordingly, no reserve has been established.

m. Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements. See Note 9 for additional disclosures pertaining to VIEs.

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and requires a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This accounting standard update is to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Existing disclosure guidance is amended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses and to disclose credit quality indicators, past due information, and modifications of its financing receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the impact that this accounting standard update may have on our consolidated financial statements.

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NOTE 3: INVESTMENTS IN LOANS

Our investments in mortgages and loans are accounted for at amortized cost.

Investments in Commercial Mortgages, Mezzanine Loans, Other Loans and Preferred Equity Interests

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of June 30, 2010:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	757,124		$	(1,852	)	$	755,272			48		6.8	%		Aug. 2010 to Dec. 2020
Mezzanine loans		434,239			(6,505	)		427,734			119		9.2	%		Aug. 2010 to Nov. 2038
Preferred equity interests		97,103			(1,225	)		95,878			24		10.6	%		Nov. 2011 to Sept. 2021
Total CRE Loans		1,288,466			(9,582	)		1,278,884			191		7.9	%
Other loans		111,518			(1,550	)		109,968			7		5.0	%		Aug. 2010 to Oct. 2016
Total		1,399,984			(11,132	)		1,388,852			198		7.7	%
Deferred fees		(540	)		—			(540	)
Total investments in loans	$	1,399,444		$	(11,132	)	$	1,388,312

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

During the six-month periods ended June 30, 2010 and 2009, we completed the conversion of five and 18 commercial real estate loans with a carrying value of $64,048 and $270,266 to owned properties. During the six-month periods ended June 30, 2010 and 2009, we charged off $11,361 and $79,763, respectively, related to the conversion of commercial real estate loans to owned properties. See Note 5.

The following table summarizes the delinquency statistics of our investments in loans as of June 30, 2010 and December 31, 2009:

Delinquency Status	As of June 30, 2010		As of December 31, 2009
30 to 59 days	$	11,493	$	20,760
60 to 89 days		49,341		82,685
90 days or more		88,013		44,310
In foreclosure or bankruptcy proceedings		35,560		47,625
Total	$	184,407	$	195,380

As of June 30, 2010 and December 31, 2009, approximately $131,377 and $171,372, respectively, of our commercial mortgages and mezzanine loans were on non-accrual status and had a weighted-average interest rate of 8.5% and 9.7%, respectively. As of June 30, 2010, approximately $31,530 of other loans were on non-accrual status and had a weighted-average interest rate of 7.2%. There were no other loans on non-accrual status as of December 31, 2009.

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Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for the three-month periods ended June 30, 2010 and 2009:

	For the Three-Month Period Ended June 30, 2010								For the Three-Month Period Ended June 30, 2009
	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables		Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables			Total
Beginning balance	$	76,823		$	—	$	76,823		$	126,229		$	99,823		$	226,052
Provision		7,644			—		7,644			27,548			38,548			66,096
Deductions for net charge-offs		(5,795	)		—		(5,795	)		(44,935	)		(9,581	)		(54,516	)
Ending balance	$	78,672		$	—	$	78,672		$	108,842		$	128,790		$	237,632

The following table provides a roll-forward of our allowance for losses for the six-month periods ended June 30, 2010 and 2009:

	For the Six-Month Period Ended June 30, 2010								For the Six-Month Period Ended June 30, 2009
	Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables		Total			Commercial Mortgages, Mezzanine Loans and Other Loans			Residential Mortgages and Mortgage-Related Receivables			Total
Beginning balance	$	86,609		$	—	$	86,609		$	117,737		$	54,236		$	171,973
Provision		24,994			—		24,994			89,113			96,487			185,600
Deductions for net charge-offs		(32,931	)		—		(32,931	)		(98,008	)		(21,933	)		(119,941	)
Ending balance	$	78,672		$	—	$	78,672		$	108,842		$	128,790		$	237,632

As of June 30, 2010 and December 31, 2009, we identified 24 and 31 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $179,889 and $189,961 as impaired. As of June 30, 2010 and December 31, 2009, we had allowance for losses of $78,672 and $86,609 associated with our commercial mortgages, mezzanine loans and other loans.

The average unpaid principal balance of total impaired loans was $184,925 and $191,363 during the three-month periods ended June 30, 2010 and 2009 and $180,654 and $182,095 during the six-month periods ended June 30, 2010 and 2009. We recorded interest income from impaired loans of $1,178 and $290 for the three-month periods ended June 30, 2010 and 2009 and $2,492 and $1,741 for the six-month periods ended June 30, 2010 and 2009.

Subsequent to June 30, 2010, we completed the conversion of two commercial real estate loans with a carrying value of $44,549 to real estate owned properties. We are completing the process of estimating the fair value of the assets acquired.

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NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of June 30, 2010:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	689,070	$	(247,616	)	$	441,454		5.0	%		24.3
Other securities		10,000		(9,900	)		100		4.8	%		42.4
Total trading securities		699,070		(257,516	)		441,554		5.0	%		24.5
Available-for-sale securities		3,600		(3,510	)		90		2.4	%		32.4
Security-related receivables
TruPS receivables		111,092		(26,950	)		84,142		6.9	%		12.4
Unsecured REIT note receivables		61,000		(449	)		60,551		6.6	%		7.2
CMBS receivables (2)		158,868		(90,460	)		68,408		6.0	%		33.5
Other securities		105,903		(78,833	)		27,070		2.8	%		31.4
Total security-related receivables		436,863		(196,692	)		240,171		5.5	%		24.0
Total investments in securities	$	1,139,533	$	(457,718	)	$	681,815		5.2	%		24.4

(1) Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments which does not necessarily correspond to the carrying amount.

(2) CMBS receivables include securities with a fair value totaling $26,662 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $39,368 that are rated “BBB+” and “B-” by Standard & Poor’s, and securities with a fair value totaling $2,378 that are rated “CCC” by Standard & Poor’s.

A substantial portion of our gross unrealized losses is greater than 12 months.

TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to FASB ASC Topic 860, “Transfers and Servicing.”

The following table summarizes the non-accrual status of our investments in securities:

	As of June 30, 2010							As of December 31, 2009
	Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value		Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value
TruPS and TruPS receivables	$	183,682		3.4	%	$	53,021	$	108,125		4.9	%	$	26,400
Other Securities		40,754		2.7	%		874		24,500		3.1	%		370
CMBS receivables		4,204		5.7	%		19		—		—			—

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of June 30, 2010 and December 31, 2009, investment in securities of $807,156 and $888,681, respectively, in principal amount of TruPS and subordinated debentures, and $219,868 and $230,768, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

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NOTE 5: INVESTMENTS IN REAL ESTATE

As of June 30, 2010, we maintained investments in 44 real estate properties and three parcels of land. As of December 31, 2009, we maintained investments in 36 real estate properties and three parcels of land.

The table below summarizes our investments in real estate as of June 30, 2010:

	Book Value			Number of Properties		Average Physical Occupancy
Multi-family real estate properties	$	545,840			32		83.5	%
Office real estate properties		228,658			10		55.5	%
Retail real estate properties		37,774			2		58.7	%
Parcels of land		22,208			3		—
Subtotal		834,480			47		74.4	%
Plus: Escrows and reserves		5,539
Less: Accumulated depreciation and amortization		(36,471	)
Investments in real estate	$	803,548

As of June 30, 2010, we have identified four properties as assets held for sale. The carrying amount of these assets is $78,642 and liabilities related to these assets is $20,961. These amounts are included in the investments in real estate and indebtedness, accrued interest payable, accounts payable and accrued expenses, and deferred taxes, borrowers’ escrows and other liabilities financial statement captions. Liabilities related to assets held for sale exclude $47,885 of first mortgages held by RAIT I and RAIT II that are eliminated in our consolidated balance sheet. See Note 14—Assets Held For Sale and Discontinued Operations.

During the six-month period ended June 30, 2010, we converted five loans, comprised of six multi-family properties and one office property, to owned real estate. Upon conversion, we recorded the seven properties at fair value of $52,687. We previously held bridge or mezzanine loans with respect to these real estate properties.

As of January 1, 2010, we adopted an accounting standard which changed the determination of the consolidation of VIEs. Accordingly, we consolidated two office properties as of January 1, 2010 as we were determined to be the primary beneficiary of the VIEs. The fair value of the properties consolidated, net of their related liabilities at fair value, was $5,005 as of January 1, 2010.

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the nine properties during the six-month period ended June 30, 2010, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	74,590
Cash and cash equivalents		440
Restricted cash		1,408
Other assets		3,908
Total assets acquired		80,346
Liabilities assumed:
Loans payable on real estate		(16,714	)
Accounts payable and accrued expenses		(3,158	)
Other liabilities		(1,592	)
Total liabilities assumed		(21,464	)
Estimated fair value of net assets acquired	$	58,882

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The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective conversion date:

Description	Estimated Fair Value
Fair value of consideration transferred:
Commercial real estate loans	$	66,197
Other considerations		(7,315	)
Total fair value of consideration transferred	$	58,882

During the six-month period ended June 30, 2010, these investments contributed revenue of $3,568 and a net loss allocable to common shares of $777. During the six-month period ended June 30, 2010, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the conversion occurred on January 1, 2009 and 2010, respectively. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Six-Month Period Ended June 30, 2010		For the Six-Month Period Ended June 30, 2009
Total revenue, as reported	$	79,826	$	117,610
Pro forma revenue		80,782		120,954
Net income (loss) allocable to common shares, as reported		53,601		(432,099	)
Pro forma net income (loss) allocable to common shares		53,403		(431,496	)

These amounts have been calculated after adjusting the results of the acquired businesses to reflect the additional depreciation that would have been charged assuming the fair value adjustments to our investments in real estate had been applied from January 1, 2009 and 2010, respectively, together with the consequential tax effects.

We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.

As of June 30, 2010, our investments in real estate of $803,548 is financed through $95,915 of mortgages held by third parties and $673,376 of mortgages held by our RAIT I and RAIT II CDO securitizations. Together, along with commercial real estate loans held by RAIT I and RAIT II, these mortgages serve as collateral for the CDO notes payable issued by the RAIT I and RAIT II CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation.

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NOTE 6: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of June 30, 2010:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	171,863	$	171,632		6.9	%		Apr. 2027
Secured credit facilities		41,036		41,036		4.7	%		Feb. 2011 to Dec. 2011
Senior secured notes		63,950		63,950		11.7	%		Apr. 2014
Loans payable on real estate		22,513		22,513		4.9	%		Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		17,003		9.2	%		Dec. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%		Apr. 2037
Total recourse indebtedness		362,514		341,234		7.6	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,380,250		1,380,250		0.8	%		2045 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,178,663		148,604		1.0	%		2037 to 2038
Loans payable on real estate		73,451		73,451		5.7	%		Aug. 2010 to Aug. 2016
Total non-recourse indebtedness		2,632,364		1,602,305		1.0	%
Total indebtedness	$	2,994,878	$	1,943,539		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012, April 2017, and April 2022.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1,788,988 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1,383,033 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2010 was $906,101. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $341,234 as of June 30, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

The current status or activity in our financing arrangements occurring as of or during the six-month period ended June 30, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the six-month period ended June 30, 2010, we repurchased $74,500 in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $49,970. The purchase price consisted of $10,180 in cash, the issuance of 8,190,000 common shares, and the issuance of a $22,000 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $22,289, net of deferred financing costs and unamortized discounts that were written off.

On July 19, 2010, we repurchased $10,000 in aggregate principal amount of our convertible senior notes for a total consideration consisting of the issuance of 3,325,000 common shares and a cash payment of $500. We recorded a gain on the extinguishment of debt of $2,082, net of deferred financing costs and unamortized discounts that were written off.

16

Secured credit facilities. As of June 30, 2010, we have borrowed an aggregate amount of $41,036 under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of June 30, 2010, the first secured credit facility had an unpaid principal balance of $20,876 which is payable in December 2011 under the current terms of this facility. As of June 30, 2010, the second secured credit facility had an unpaid principal balance of $16,160 which is payable in October 2011 under the current terms of this facility. As of June 30, 2010, the third secured credit facility had an unpaid principal balance of $4,000. We are amortizing this balance with monthly principal repayments of $500 which will result in the full repayment of this credit facility by February 2011.

Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47,000 aggregate principal amount of our convertible senior notes for a total consideration of $31,240. The purchase price consisted of (a) our issuance of the $22,000 senior secured convertible note, (b) 1,500,000 common shares issued, and (c) $6,000 in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1,427 of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1,050 principal amount of the senior secured convertible note into 300,000 common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly-owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their interest coverage and overcollateralization triggers, or OC Triggers, tests as of June 30, 2010.

During the six-month period ended June 30, 2010, we repurchased, from the market, a total of $16,500 in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $1,790 and we recorded a gain on extinguishment of debt of $14,725.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC Trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC Trigger test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC Trigger test failures are due to defaulted collateral assets and credit risk securities. During the six-month period ended June 30, 2010, $6,398 of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

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Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of June 30, 2010, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of June 30, 2010 and December 31, 2009:

	As of June 30, 2010					As of December 31, 2009
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,760,127	$	(236,780	)	$	1,826,167	$	(186,986	)
Interest rate caps		36,000		1,338			36,000		1,335
Net fair value	$	1,796,127	$	(235,442	)	$	1,862,167	$	(185,651	)

The following table summarizes the effect on income by derivative instrument type for the following periods:

	For the Three-Month Period Ended June 30, 2010					For the Three-Month  Period Ended June 30, 2009
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)		Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)
Interest rate swaps	$	(1,388	)	$	51	$	(689	)	$	(240	)
Currency options		—			—		—			(4	)
Total	$	(1,388	)	$	51	$	(689	)	$	(244	)

	For the Six-Month Period Ended June 30, 2010					For the Six-Month Period Ended June 30, 2009
Type of Derivative	Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)		Amounts Reclassified to Earnings for Effective Hedges— Gains (Losses)			Amounts Reclassified to Earnings for Hedge Ineffectiveness— Gains (Losses)
Interest rate swaps	$	(2,731	)	$	38	$	(3,044	)	$	(465	)
Currency options		—			—		—			(21	)
Total	$	(2,731	)	$	38	$	(3,044	)	$	(486	)

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. As of June 30, 2010, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $970,276 and a liability with a fair value of $132,982. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month and six-month periods ended June 30, 2010 and 2009. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in investment interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

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NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, trust preferred obligations, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, senior secured notes, loans payable on real estate and other indebtedness approximates cost due to the nature of these instruments.

The following table summarizes the carrying amount and the fair value of our financial instruments as of June 30, 2010:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,388,312	$	1,314,333
Investments in securities and security-related receivables		681,815		681,815
Cash and cash equivalents		28,944		28,944
Restricted cash		155,027		155,027
Derivative assets		1,338		1,338
Liabilities
Recourse indebtedness:
Convertible senior notes		171,632		115,139
Secured credit facilities		41,036		41,036
Senior secured notes		63,950		63,950
Junior subordinated notes, at fair value		17,003		17,003
Junior subordinated notes, at amortized cost		25,100		11,185
Loans payable on real estate		22,513		22,513
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,380,250		671,090
CDO notes payable, at fair value		148,604		148,604
Loans payable on real estate		73,451		73,451
Derivative liabilities		236,780		236,780

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2010, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of June 30, 2010
Trading securities
TruPS	$	—	$	—	$	441,454	$	441,454
Other securities		—		100		—		100
Available-for-sale securities		—		90		—		90
Security-related receivables
TruPS receivables		—		—		84,142		84,142
Unsecured REIT note receivables		—		60,551		—		60,551
CMBS receivables		—		68,408		—		68,408
Other securities		—		27,070		—		27,070
Derivative assets		—		1,338		—		1,338
Total assets	$	—	$	157,557	$	525,596	$	683,153

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Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of June 30, 2010
Junior subordinated notes, at fair value	$	—	$	17,003	$	—	$	17,003
CDO notes payable, at fair value		—		—		148,604		148,604
Derivative liabilities		—		236,780		—		236,780
Total liabilities	$	—	$	253,783	$	148,604	$	402,387

(a) During the six-month period ended June 30, 2010, there were no transfers between Level 1 and Level 2, nor were there any transfers into or out of Level 3.

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value for the six-month period ended June 30, 2010:

Assets	Trading Securities—TruPS and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2009	$	471,106		$	73,649		$	544,755
Change in fair value of financial instruments		181,423			13,319			194,742
Purchases and sales, net		(140,203	)		(2,826	)		(143,029	)
Deconsolidation of VIEs		(70,872	)		—			(70,872	)
Balance, as of June 30, 2010	$	441,454		$	84,142		$	525,596

Liabilities	Trust Preferred Obligations			CDO Notes Payable, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2009	$	70,872		$	146,557		$	217,429
Change in fair value of financial instruments		—			8,445			8,445
Purchases and sales, net		—			(6,398	)		(6,398	)
Deconsolidation of VIEs		(70,872	)		—			(70,872	)
Balance, as of June 30, 2010	$	—		$	148,604		$	148,604

Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

	For the Three-Month Periods Ended June 30					For the Six-Month Periods Ended June 30
Description	2010			2009		2010			2009
Change in fair value of trading securities and security-related receivables	$	35,256		$	8,651	$	82,998		$	(182,036	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		5,046			69,005		(8,445	)		151,594
Change in fair value of derivatives		(35,856	)		13,701		(53,670	)		21,994
Change in fair value of financial instruments	$	4,446		$	91,357	$	20,883		$	(8,448	)

The changes in the fair value for the investment in securities, CDO notes payable and other liabilities for which the fair value option was elected for the three-month and six-month periods ended June 30, 2010 and 2009 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives for which the fair value option was elected for the three-month and six-month periods ended June 30, 2010 and 2009 was mainly due to changes in interest rates.

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NOTE 9: VARIABLE INTEREST ENTITIES

On January 1, 2010, we adopted an accounting standard which provided guidance when to consolidate a VIE. Under the new standard, the determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. Upon adoption, we evaluated our investments under this new consolidation standard and the following changes in previous consolidation conclusions were made:

• TruPS Investment and Obligations – Previously, we held implicit interests in trusts which issued TruPS. Under the previous consolidation guidance, we were considered to be primary beneficiaries of the trusts and reported their assets and liabilities in our consolidated balance sheet. RAIT does not meet both criteria to be the primary beneficiary of these entities as we do not have the power to direct the activities of the underlying trusts. Therefore, we deconsolidated these entities as of January 1, 2010 by reducing our assets and liabilities by $70,872.

• Investments in Real Estate – We identified two properties to be VIEs that we previously did not consolidate as we were not previously the primary beneficiary: Willow Grove and Cherry Hill. RAIT evaluated its interests in these real estate properties and determined that we are the primary beneficiary. Upon consolidation of these properties on January 1, 2010, we increased our assets and liabilities by $20,931.

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of June 30, 2010, our consolidated VIEs were: Taberna Preferred Funding VIII, Ltd., Taberna Preferred Funding IX, Ltd, RAIT CRE CDO I, Ltd., RAIT Preferred Funding II, Ltd., Willow Grove and Cherry Hill.

	As of June 30, 2010			As of December 31, 2009 (a)
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,985,179		$	1,959,118
Allowance for losses		(10,903	)		(10,903	)
Total investments in mortgages and loans		1,974,276			1,948,215
Investments in real estate		21,444			—
Investments in securities and security-related receivables, at fair value		681,727			694,809
Cash and cash equivalents		175			272
Restricted cash		112,942			117,322
Accrued interest receivable		49,336			38,397
Deferred financing costs, net of accumulated amortization of $7,041 and $5,897, respectively		18,987			20,132
Total assets	$	2,858,887		$	2,819,147
Liabilities and Equity
Indebtedness (including $148,604 and $217,429 at fair value, respectively)	$	1,745,622		$	1,794,339
Accrued interest payable		28,093			21,855
Accounts payable and accrued expenses		830			232
Derivative liabilities		236,780			186,986
Deferred taxes, borrowers’ escrows and other liabilities		3,306			3,136
Total liabilities		2,014,631			2,006,548
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(138,213	)		(115,004	)
RAIT Investment		141,435			167,011
Retained earnings (deficit)		841,034			760,592
Total shareholders’ equity		844,256			812,599
Total liabilities and equity	$	2,858,887		$	2,819,147

(a) Includes the assets and liabilities described in the TruPS Investments and Obligations above. Based on the adoption of the accounting standard, these VIEs were deconsolidated as of January 1, 2010 and no longer appear in our consolidated financial statements. Upon deconsolidation, investments in securities and indebtedness both decreased by $70,872 as of January 1, 2010.

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The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. Certain amounts included in the table above are eliminated upon consolidation with other RAIT subsidiaries that maintain investments in the debt or equity securities issued by these entities.

RAIT does not have any contractual obligation to provide the VIEs listed above with any financial support. RAIT has not provided and does not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

NOTE 10: EQUITY

Preferred Shares

On January 26, 2010, our board of trustees declared first quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled $3,406.

On April 22, 2010, our board of trustees declared second quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2010 to holders of record on June 1, 2010 and totaled $3,415.

On July 27, 2010, our board of trustees declared third quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on September 30, 2010 to holders of record on September 1, 2010.

Common Shares

Share Repurchases:

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $240.

Equity Compensation:

On January 26, 2010, the compensation committee awarded 1,500,000 phantom units, valued at $1,905 using our closing stock price of $1.27 on that date, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 500,000 phantom units, valued at $635 using our closing stock price of $1.27 on that date, to our non-executive officer employees. These awards generally vest over three-year periods.

During the six-month period ended June 30, 2010, 73,425 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

Share Issuances:

During the six-month period ended June 30, 2010, we issued 8,190,000 common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $74,500 of our convertible notes. On July 19, 2010, we repurchased $10,000 in aggregate principal amount of our convertible senior notes for a total consideration consisting of the issuance of 3,325,000 common shares and a cash payment of $500. See Note 6-“Indebtedness” above.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we have registered and reserved for issuance, in the aggregate, 18,787,635 common shares. During the six-month period ended June 30, 2010, we issued a total of 1,879,873 common shares pursuant to the DRSPP at a weighted-average price of $2.27 per share and we received $4,275 of net proceeds. As of June 30, 2010, 11,727,667 common shares, in aggregate, remain available for issuance under the DRSPP.

Standby Equity Distribution Agreement (SEDA):

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50,000, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the

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SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12,500,000 common shares. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50,000 worth of common shares under the SEDA. During the three-month period ended June 30, 2010, 441,966 common shares were issued pursuant to this arrangement at a price of $2.26 and we received $1,000 of proceeds. In July 2010, 711,018 common shares were issued pursuant to this arrangement at a price of $2.11 and we received $1,500 of proceeds. After reflecting the common shares issued in July 2010, 11,347,016 common shares, in the aggregate, remain available for issuance under the SEDA.

Capital on Demand™ Sales Agreement:

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 17,500,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. As of the date of the filing of this quarterly report on Form 10-Q, no common shares have been issued pursuant to the COD sales agreement.

NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2010 and 2009:

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2010			2009			2010			2009
Income (loss) from continuing operations	$	24,920		$	(289,564	)	$	58,903		$	(436,358	)
(Income) loss allocated to preferred shares		(3,415	)		(3,415	)		(6,821	)		(6,821	)
(Income) loss allocated to noncontrolling interests		358			4,809			593			12,397
Income (loss) from continuing operations allocable to common shares		21,863			(288,170	)		52,675			(430,782	)
Income (loss) from discontinued operations		456			303			926			(1,317	)
Net income (loss) allocable to common shares	$	22,319		$	(287,867	)	$	53,601		$	(432,099	)
Weighted-average shares outstanding—Basic		80,340,703			64,995,483			77,661,419			64,972,363
Dilutive securities under the treasury stock method		1,920,203			—			1,123,364			—
Weighted-average shares outstanding—Diluted		82,260,906			64,995,483			78,784,783			64,972,363
Earnings (loss) per share—Basic:
Continuing operations	$	0.27		$	(4.43	)	$	0.68		$	(6.63	)
Discontinued operations		0.01			—			0.01			(0.02	)
Total earnings (loss) per share—Basic	$	0.28		$	(4.43	)	$	0.69		$	(6.65	)
Earnings (loss) per share—Diluted:
Continuing operations	$	0.26		$	(4.43	)	$	0.67		$	(6.63	)
Discontinued operations		0.01			—			0.01			(0.02	)
Total earnings (loss) per share—Diluted	$	0.27		$	(4.43	)	$	0.68		$	(6.65	)

For the three-month and six-month periods ended June 30, 2009, securities convertible into 16,890,315 and 16,276,428 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three-month and six-month periods ended June 30, 2010, securities convertible into 6,693,341 common shares were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities described below. All of these relationships and transactions were approved or ratified by our audit committee as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

Our Chairman, Betsy Z. Cohen, is the Chief Executive Officer and a director of The Bancorp, Inc., or Bancorp, and Chairman of the Board and Chief Executive Officer of its wholly-owned subsidiary, The Bancorp Bank, a commercial bank. Mrs. Cohen’s son, Daniel G. Cohen, was our chief executive officer from the date of the Taberna acquisition until his resignation from that position on February 22, 2009. Mr. Cohen was a trustee of RAIT from the date of the Taberna acquisition until his resignation from that position

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on February 26, 2010. Mr. Cohen is the Chairman of the Board of Bancorp and Vice-Chairman of the Board of Bancorp Bank. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of June 30, 2010 and December 31, 2009, we had $854 and $410, respectively, of cash and cash equivalents and $927 and $1,601, respectively, of restricted cash on deposit at Bancorp. During the three-month and six-month periods ended June 30, 2009, we received $4 and $11 of interest income from Bancorp. We did not receive any interest income from the Bancorp during the three-month and six-month periods ended June 30, 2010. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp at an annual rental expense based upon the amount of square footage occupied. We have signed a sublease agreement with a third party for the remaining term of our sublease. Rent paid to Bancorp was $79 and $84 for the three-month periods ended June 30, 2010 and 2009, respectively, and $147 and $168 for the six-month periods ended June 30, 2010 and 2009. Rent received for our sublease was $41 and $82 for the three-month and six-month periods ended June 30, 2010, respectively.

Mr. Cohen holds controlling positions in various companies with which we conduct business. Mr. Cohen serves as the Chairman of the board of directors and Chief Executive Officer of Cohen & Company Inc. or, Cohen & Company, and as the Chairman of the board of managers, Chief Executive Officer and Chief Investment Officer of Cohen Brothers, LLC, or Cohen Brothers, a majority owned subsidiary of Cohen & Company. Each transaction between us and Cohen & Company is described below:

a). Office Leases—We maintain sub-lease agreements for shared office space and facilities with Cohen & Company. Rent expense during the three-month periods ended June 30, 2010 and 2009, relating to these leases was $13 and for the six-month periods ended June 30, 2010 and 2009 was $25. Rent expense has been included in general and administrative expense in the accompanying consolidated statements of operations. Future minimum lease payments due over the remaining term of the lease are $283.

b). Common Shares—As of December 31, 2009, Cohen & Company and its affiliate entities owned 510,434 of our common shares. During the period ended June 30, 2010, Cohen & Company and its affiliates sold these shares and do not own any of our common shares as June 30, 2010.

c). Brokerage Services—During 2010, Cohen & Company sold $7,000 in aggregate principal amount of debt securities to an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we earned $38 in principal transaction income.

d). Star Asia—Star Asia is an affiliate of Cohen & Company. During 2010, Star Asia purchased $2,315 in aggregate principal of debt securities from an unrelated third party using the broker-dealer services of RAIT Securities, LLC, for which we did not earn any principal transaction income. In March 2009, Star Asia issued debt securities to a third party, upon which a subsequent exchange offer was entered into with Taberna Preferred Funding III, Ltd., or Taberna III, for $22,425 and Taberna Preferred Funding IV, Ltd., or Taberna IV, for $19,434. Taberna Capital Management was the collateral manager for Taberna III and Taberna IV. We received an opinion from an independent third party concluding that the transaction was fair from Taberna III and IV’s financial viewpoint. There were no fees earned by Taberna Capital Management or Star Asia.

e). Kleros Preferred Funding VIII, Ltd.—Kleros Preferred Funding VIII, Ltd., or Kleros VIII, is a securitization managed by Cohen & Company. In June 2007, we purchased approximately $26,400 in par amount of bonds rated A through BBB issued by Kleros VIII, for a purchase price of approximately $23,997. As of June 30, 2010, the bonds have a current fair value of $0 and have been placed on non-accrual status.

Brandywine Construction & Management, Inc., or Brandywine, is an affiliate of Edward E. Cohen, the spouse of Betsy Z. Cohen and father of Daniel G. Cohen. Brandywine provided real estate management services to two properties underlying our investments in real estate. During the three-month periods ended June 30, 2010 and 2009, Brandywine earned management fees of $26 and $20, respectively, and $52 and $46 for the six-month periods ended June 30, 2010 and 2009. We believe that the management fees charged by Brandywine are comparable to those that could be obtained from unaffiliated third parties.

NOTE 13: ASSET DISPOSITIONS

On April 22, 2010 RAIT sold or delegated its collateral management rights and responsibilities relating to eight Taberna securitizations with approximately $5,858,931 in total assets under management to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16,518. These securitizations were not consolidated by RAIT and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. The transaction generated a $7,938 in gain on sale of asset.

During 2009, we disposed of our investments in six residential mortgage portfolios and four Taberna CDOs. All assets sold and related liabilities were removed from our consolidated balance sheet on the date of sale, with any gains or losses on dispositions recorded in our accompanying statements of operations under gains (losses) on sale of assets.

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On July 16, 2009, we sold our residential mortgage portfolio to an affiliate of Angelo, Gordon & Co., L.P., pursuant to a Purchase and Sale Agreement, dated as of July 15, 2009 between our subsidiary, Taberna Loan Holdings I, LLC, and AG Park Lane I Corp. We sold all of our notes and equity interests, or the retained interests, together with any principal or interest payable thereon, issued by the following six securitizations of residential mortgage loans: Bear Stearns ARM Trust 2005-7, Bear Stearns ARM Trust 2005-9, Citigroup Mortgage Loan Trust 2005-1, CWABS Trust 2005 HYB9, Merrill Lynch Mortgage Investors Trust, Series 2005-A9 and Merrill Lynch Mortgage Backed Securities Trust, Series 2007-2. The purchase price paid by the buyer was $15,800, plus accrued interest and we recorded a $61,841 loss on sale of assets.

Previously we consolidated Taberna Preferred Funding III, Ltd, Taberna Preferred Funding IV, Ltd., Taberna Preferred Funding VI, Ltd. and Taberna Preferred Funding VII, Ltd., four securitizations in which we were determined to be the primary beneficiary primarily due to our majority ownership of the equity interests issued by the securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and determined that we are no longer the primary beneficiary and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation” (formerly referenced as FIN 46R). We recorded losses on the sales of assets related to these VIEs of $313,808 in June 2009.

Summarized Statement of Operations

The table below summarizes the statement of operations for the four Taberna CDOs and six residential mortgage portfolios sold in June and July 2009, respectively. The information presented below is for the six-month periods ended June 30, 2009 (dollars in thousands).

	For the Six Months Ended June 30, 2009
Revenue:
Investment interest income	$	168,226
Investment interest expense		(121,935	)
Net interest margin		46,291
General and administrative expenses		(830	)
Provision for losses		(101,981	)
Income before other income (expense)		(56,520	)
Losses on sales of assets		(313,808	)
Change in fair value of financial instruments		(60,177	)
Net income (loss)		(430,505	)
(Income) loss allocated to noncontrolling interests		12,053
Net income (loss) allocable to common shares	$	(418,452	)

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NOTE 14: ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

As of June 30, 2010, we had four properties designated as held for sale. As of December 31, 2009, we had four properties designated as held for sale, including one property that was sold during the six-month period ended June 30, 2010. The following table summarizes the consolidated balance sheet of the real estate properties classified as assets held for sale:

	As of June 30, 2010		As of December 31, 2009
Assets:
Investments in real estate	$	74,652	$	79,790
Cash and cash equivalents		982		1,069
Other assets		2,860		2,410
Deferred financing costs, net		148		161
Total assets held for sale	$	78,642	$	83,430
Liabilities:
Other indebtedness	$	18,482	$	18,508
Accrued interest payable		228		62
Accounts payable and accrued expenses		1,493		1,667
Other liabilities		758		766
Total liabilities related to assets held for sale (a)	$	20,961	$	21,003

(a) Liabilities related to assets held for sale exclude $47,885 of first mortgages held by RAIT’s CDO securitizations that are eliminated in our consolidated balance sheet.

For the three-month and six-month periods ended June 30, 2010 and 2009, income (loss) from discontinued operations relates to four real estate properties designated as held for sale and three real estate properties sold or deconsolidated since January 1, 2009. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Three-Month Periods Ended June 30				For the Six-Month Periods Ended June 30
	2010		2009		2010		2009
Revenue:
Rental income	$	2,569	$	2,280	$	5,099	$	5,180
Expenses:
Real estate operating expense		1,509		1,367		3,215		3,296
General and administrative expense		—		164		—		164
Depreciation expense		605		587		1,225		1,223
Total expenses		2,114		2,118		4,440		4,683
Income (loss) before interest and other income		455		162		659		497
Interest and other income		1		141		1		238
Income (loss) from discontinued operations		456		303		660		735
Gain (loss) on sale of assets		—		—		266		(2,052	)
Total income (loss) from discontinued operations	$	456	$	303	$	926	$	(1,317	)

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

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NOTE 15: COMMITMENTS AND CONTINGENCIES

Riverside National Bank of Florida Litigation

RAIT subsidiary Taberna Capital Management, LLC is named as one of fifteen defendants in a lawsuit filed by Riverside National Bank of Florida, or Riverside, on November 13, 2009 in the Supreme Court of the State of New York, County of New York. (A substantially similar action was filed by Riverside on August 6, 2009 in the Supreme Court of the State of New York, County of Kings, and subsequently discontinued without prejudice and refiled in New York County.) The action, titled Riverside National Bank of Florida v. The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., Fitch, Inc., Taberna Capital Management, LLC, Cohen & Company Financial Management, LLC f/k/a Cohen Bros. Financial Management LLC, FTN Financial Capital Markets, Keefe Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., JPMorgan Chase & Co., J.P. Morgan Securities Inc., Citigroup Global Markets, Credits Suisse Securities (USA) LLC, ABN Amro, Inc., Cohen & Company, and SunTrust Robinson Humphrey, Inc., asserts claims in connection with Riverside’s purchase of certain CDO securities, including securities from the Taberna Preferred Funding II, IV, and V CDOs. Riverside alleges that offering materials issued in connection with the CDOs it purchased did not adequately disclose the process by which the rating agencies rated each of the securities. Riverside also alleges, among other things, that the offering materials should have disclosed an alleged conflict of interest of the rating agencies as well as the role that the rating agencies played in structuring each CDO. Riverside seeks damages in excess of $132 million, rescission of its purchases of the securities at issue, an accounting of certain amounts received by the defendants together with the imposition of a constructive trust, and punitive damages of an unspecified amount.

On December 11, 2009, the defendants moved to dismiss all of Riverside’s claims. Riverside filed oppositions to the defendants’ motions on February 19, 2010, voluntarily dismissing its contract causes of action and opposing the remainder of defendants’ motions to dismiss. On April 16, 2010, the Office of the Comptroller of the Currency closed Riverside and named the Federal Deposit Insurance Corporation as receiver and thus as successor-in-interest to Riverside as plaintiff in this action. In a Purchase and Assumption Agreement dated April 16, 2010, a bank acquired the banking operations of Riverside from the FDIC, but appears not to have acquired Riverside’s litigation claims. On May 4, 2010, Riverside moved to substitute the FDIC as plaintiff and to stay this action for 90 days. On June 2, 2010, defendants were notified that Riverside’s motion had been granted; the court’s order was filed the following day. On June 3, 2010, pursuant to 28 U.S.C. Sec. 1446 and 12. U.S.C. Sec. 18189(b)(2)(A), defendants removed the action from the Supreme Court of the State of New York, County of New York to the United States District Court for the Southern District of New York. On June 25, 2010, the court directed the parties to refile all papers supporting and opposing defendants’ motions to dismiss, in conformance with the applicable rules of the court. Defendants’ motions to dismiss are due by August 24, 2010. An adverse resolution of the litigation could have a material adverse effect on our financial condition and results of operations.

Routine Litigation

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders of RAIT Financial Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Financial Trust and subsidiaries as of June 30, 2010, and the related consolidated statements of operations, comprehensive income (loss) and cash flows for the three and six-month periods ended June 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 2(k) and 9 to the consolidated financial statements, the Company adopted the new accounting standards classified under FASB ASC Topic 810 “Consolidation” for variable interest entities on January 1, 2010.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009 (except for Notes 6 and 15, as to which the date is November 5, 2010), and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2010, we expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

August 6, 2010 (except for Notes 5 and 14, as to which the date is November 5, 2010)

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EX-99.9

Exhibit 99.9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

Overview

We are a vertically integrated commercial real estate company capable of originating, investing in, managing, servicing, trading and advising on commercial real estate-related assets. In 2010, we continue to progress in adapting RAIT to the current market environment. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

In order to take advantage of market opportunities in the future, and to maximize shareholder value over time, we will continue to focus on:

• expanding RAIT’s commercial real estate revenue by investing in commercial real estate-related assets, managing and servicing investments for our own account or for others, providing property management services and providing our broker-dealer activities, including fixed-income trading and real estate advisory services;

• creating value through investing in our commercial real estate properties and implementing cost savings programs to help maximize property value;

• reducing our leverage while developing new financing sources;

• managing our investment portfolios to reposition non-performing assets, increase our cash flows and ultimately recover the value of our assets; and

• managing the size and cost structure of our business to match our operating environment.

We generated net income allocable to common shares of $53.6 million, or $0.68 per common share-diluted, during the six-month period ended June 30, 2010. The primary items affecting our operating performance were the following:

• Gains on debt extinguishments. During the six-month period ended June 30, 2010, we repurchased $74.5 million of our convertible notes and $16.5 million of our CDO notes payable for total consideration of $51.7 million. The consideration was comprised of: cash of $12.0 million, the issuance of a $22.0 million convertible senior note and 8.2 million common shares. These transactions generated $37.0 million in gains on extinguishment of debt. See “Liquidity and Capital Resources-Capitalization” below for more information regarding these transactions.

• Provision for losses. The provision for losses recorded during the six-month period ended June 30, 2010 was $25.0 million. While we recorded additional provision for losses during the six-month period ended June 30, 2010, we saw improvement in the performance of our portfolio of commercial real estate loans from prior quarters.

• Change in fair value of financial instruments. For the six-month period ended June 30, 2010, the net change in fair value of financial instruments increased net income by $20.9 million. Generally, the change in fair value of our financial assets, which are recorded at fair value under FASB ASC Topic 825, “Financial Instruments”, was the primary driver of this improvement with several of our assets improving. This is consistent with the general improvement in asset pricing throughout the financial sector during the first and second quarters of 2010.

We expect to continue to focus our efforts on enhancing our commercial real estate property portfolio and our commercial real estate loan portfolio, which are our primary investment portfolios. We are seeing signs of stabilization in these portfolios, including improved occupancy rates in our commercial real estate property portfolio and a reduction in our non-accrual loans and provision for losses in commercial real estate loan portfolio in the six-month period ended June 30, 2010. Although certain economic conditions are improving, some of our borrowers within our commercial real estate loan portfolio are under financial stress. Where it is likely to enhance our ultimate returns, we will consider restructuring loans or foreclosing on the underlying property. During the six-month period ended June 30, 2010, we converted five loans, originally collateralized by seven properties, into direct ownership. We expect to engage in ongoing workout activity with respect to our commercial real estate loans that may result in the conversion of some of the

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properties into owned real estate. We may take a non-cash charge to earnings at the time of any loan conversion to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion. The conversion of loans to owned properties is reflected in the growing portion of our revenue derived from rental income as opposed to net interest margin.

We are seeking to develop new sources of fee income. As described below under “Securitizations,” in April 2010 we sold or delegated our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations which will reduce our collateral management fees for managing securitizations going forward. We are seeking to enhance our fee income through management fees generated by our multi-family property management subsidiary, Jupiter Communities, LLC, and commissions and other fees generated by our broker/dealer subsidiary, RAIT Securities, LLC, as well as other potential new businesses. We may also generate fee income by developing arrangements with third parties to originate commercial real estate investments.

Key Statistics

Set forth below are key statistics relating to our business through June 30, 2010 (dollars in thousands):

	As of or For the Three-Month Periods Ended
	June 30, 2010			March 31, 2010			December 31, 2009			September 30, 2009			June 30, 2009
Financial Statistics:
Recourse debt maturing within 1-year	$	9,919		$	10,905		$	24,390		$	49,494		$	49,494
Assets under management (a)	$	4,014,556		$	9,911,824		$	10,126,853		$	10,374,491		$	13,878,962
Debt to equity		2.7x			2.8x			3.0x			3.3x			7.4x
Total revenue	$	37,137		$	42,689		$	38,475		$	41,425		$	57,831
Earnings per share, diluted	$	0.27		$	0.41		$	0.24		$	(0.38	)	$	(4.43	)
Commercial Real Estate (“CRE”) Loan Portfolio (b):
Reported CRE Loans—unpaid principal	$	1,288,466		$	1,305,816		$	1,360,811		$	1,467,806		$	1,538,077
Non-accrual loans—unpaid principal	$	131,377		$	132,978		$	171,372		$	246,029		$	171,809
Non-accrual loans as a % of reported loans		10.2	%		10.2	%		12.6	%		16.8	%		11.2	%
Reserve for losses	$	70,699		$	68,850		$	78,636		$	77,647		$	100,869
Reserves as a % of non-accrual loans		53.8	%		51.8	%		45.9	%		31.6	%		58.7	%
Provision for losses	$	7,644		$	17,350		$	22,500		$	18,467		$	19,575
CRE Property Portfolio:
Reported investments in real estate	$	803,548		$	795,952		$	738,235		$	645,484		$	604,619
Number of properties owned		47			46			39			34			30
Multifamily units owned		7,893			7,893			6,967			6,367			5,550
Office square feet owned		1,732,626			1,550,401			1,350,177			1,035,435			1,035,435
Retail square feet owned		1,069,588			1,069,652			1,069,643			1,095,452			639,791
Average physical occupancy data:
Multifamily properties		83.5	%		78.0	%		77.7	%		78.6	%		82.0	%
Office properties		55.5	%		54.2	%		41.5	%		49.7	%		49.2	%
Retail properties		58.7	%		60.1	%		61.7	%		60.4	%		43.8	%
Total		74.4	%		70.8	%		69.8	%		73.1	%		75.8	%

(a) On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations with $5.9 billion of assets to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced to $4.1 billion.

(b) CRE Loan Portfolio includes commercial mortgages, mezzanine loans, and preferred equity interests only and does not include other loans. See Note 3-“Investments in Loans” in the Notes to Consolidated Financial Statements for information relating to all loans held by RAIT.

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Investors should read the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate lack of liquidity and reduced performance.

Our Investment Portfolio

Our consolidated investment portfolio is currently comprised of the following asset classes:

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We have originated senior long-term mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. Our financing is usually “non-recourse.” Non-recourse financing means we look primarily to the assets securing the payment of the loan, subject to certain standard exceptions. We may also engage in recourse financing by requiring personal guarantees from controlling persons of our borrowers. We also acquire existing commercial real estate loans held by banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of June 30, 2010 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities		Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	755,272		6.8	%		Aug. 2010 to Dec. 2020		48
Mezzanine loans		427,734		9.2	%		Aug. 2010 to Nov. 2038		119
Preferred equity interests		95,878		10.6	%		Nov. 2011 to Sep. 2021		24
Total CRE Loans		1,278,884		7.9	%				191
Other loans		109,968		5.0	%		Aug. 2010 to Oct. 2016		7
Total investments in loans	$	1,388,852		7.7	%				198

Due to current economic conditions, we have limited capacity to originate new investments. However, we expect to focus on this asset class when economic conditions improve and as existing loans are repaid.

The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of June 30, 2010:

(a) Based on book value.

See “Key Statistics-CRE Loan Portfolio” above for key statistics relating to this portfolio.

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Investments in real estate. We generate a return on our real estate investments through rental income and other sources of income from the operations of the real estate underlying our investment. We also benefit from any increase in the value of the real estate in addition to current income. We finance our acquisitions of real estate through a combination of secured mortgage financing provided by financial institutions and existing financing provided by our two CRE loan securitizations. During the six-month period ended June 30, 2010, we acquired $52.7 million of real estate investments upon conversion of $64.0 million of commercial real estate loans, usually subject to retaining the existing financing provided by our two CRE loan securitizations.

The table below describes certain characteristics of our investments in real estate as of June 30, 2010 (dollars in thousands, except average effective rent):

	Investments in Real Estate (a)		Average Physical Occupancy			Units/ Square Feet/ Acres		Number of Properties		Average Effective Rent (b)
Multi-family real estate properties (c)	$	526,701		83.5	%		7,893		32	$	714
Office real estate properties (d)		218,207		55.5	%		1,732,626		10		18.46
Retail real estate properties (d)		36,432		58.7	%		1,069,588		2		10.20
Parcels of land		22,208		—			7.3		3		—
Total	$	803,548		74.4	%				47

(a) Investments in real estate include $74.7 million of assets held for sale as of June 30, 2010.

(b) Based on operating performance for the six-month period ended June 30, 2010.

(c) Average effective rent is rent per unit per month.

(d) Average effective rent is rent per square foot per year.

We expect to continue to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding loans that become subject to increased credit risks.

The charts below describe the property types and the geographic breakdown of our investments in real estate as of June 30, 2010:

(a) Based on book value.

See “Key Statistics-CRE Property Portfolio” above for key statistics relating to this portfolio.

Investment in debt securities. We have provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of June 30, 2010, we retained a controlling interest in two securitizations—Taberna VIII and Taberna IX, which are consolidated entities. All of the collateral assets for the debt securities and the related non-recourse CDO financing obligations are presented at fair value in our reported results.

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The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of June 30, 2010 (dollars in thousands):

						Issuer Statistics
Industry Sector	Estimated Fair Value		Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	90,749		2.7	%		66.7	%		2.2	x
Office		138,568		7.8	%		64.0	%		2.2	x
Residential Mortgage		44,122		2.6	%		79.7	%		(0.7	)x
Specialty Finance		69,782		5.1	%		88.0	%		1.7	x
Homebuilders		59,870		7.8	%		62.4	%		2.3	x
Retail		72,557		4.0	%		84.6	%		1.7	x
Hospitality		25,991		6.3	%		75.7	%		0.3	x
Storage		23,957		8.0	%		59.9	%		3.9	x
Total	$	525,596		5.2	%		72.0	%		1.8	x

The chart below describes the equity capitalization of the issuers of the TruPS and subordinated debentures included in our consolidated financial statements as of June 30, 2010:

(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.

(b) Based on estimated fair value.

We have invested, and expect to continue to invest, in CMBS, unsecured REIT notes and other real estate-related debt securities.

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually. These companies are generally rated investment grade by one or more nationally recognized rating agencies.

CMBS generally are multi-class debt or pass-through certificates secured or backed by single loans or pools of mortgage loans on commercial real estate properties. Our CMBS investments may include loans and securities that are rated investment grade by one or more nationally-recognized rating agencies, as well as both unrated and non-investment grade loans and securities.

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The table and the chart below describe certain characteristics of our real estate-related debt securities as of June 30, 2010 (dollars in thousands):

Investment Description	Estimated Fair Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	60,551		6.6	%		7.2	$	61,000
CMBS receivables		68,408		6.0	%		33.5		158,868
Other securities		27,260		2.9	%		32.3		119,503
Total	$	156,219		4.9	%		28.5	$	339,371

(a) S&P Ratings as of June 30, 2010.

Securitization Summary

Overview. We have used securitizations, mainly through CDOs, to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolio for the long-term. To finance our investments in the foreseeable future, management will seek to structure match funded financing through reinvesting asset repayments in our existing securitizations, loan participations, bank lines of credit, joint-venture opportunities and other methods that preserve our capital while making investments that generate an attractive return.

CDO Performance. Our CDOs contain interest coverage and overcollateralization triggers, or OC Triggers, that must be met in order for us to receive our subordinated management fees, return on our lower-rated debt and residual equity returns. If the interest coverage or OC Triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant CDO indenture.

As of the most recent payment information, our Taberna I, Taberna VIII and Taberna IX CDO securitizations that we manage were not passing their required interest coverage or OC Triggers and we received only senior asset management fees. While events of default do not currently exist in the CDO securitizations that we manage, we are unable to predict with certainty which CDOs, in the future, will experience events of default or which, if any, remedies the appropriate note holders may seek to exercise in the future. All applicable interest coverage and OC Triggers continue to be met for our two commercial real estate CDOs, RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these CDOs.

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Set forth below is a summary of the CDO investments in our consolidated securitizations as of the most recent payment information is as follows (dollars in millions):

• Taberna VIII—Taberna VIII has $670.1 million of total collateral, of which $121.1 million is defaulted. The current overcollateralization (O/C) test is failing at 87.0% with an O/C trigger of 103.5%. We have invested $133.0 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $704.4 million of total collateral, of which $193.0 million is defaulted. The current O/C test is failing at 76.3% with an O/C trigger of 105.4%. We have invested $186.5 million in this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $74.2 million is defaulted. The current O/C test is passing at 118.5% with an O/C trigger of 116.2%. We have invested $236.0 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

• RAIT II—RAIT II has $814.7 million of total collateral, of which $25.4 million is defaulted. The current O/C test is passing at 114.0% with an O/C trigger of 111.7%. We have invested $234.7 million in this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our senior collateral management fees.

Generally, our investments in the subordinated notes and equity securities in our consolidated CDOs are subordinate in right of payment and in liquidation to the senior notes issued by the CDOs. We may also own common shares, or the non-economic residual interest, in certain of the entities above.

Assets Under Management

We use assets under management, or AUM, as a tool to measure our financial and operating performance. The following defines this measure and describes its relevance to our financial and operating performance:

Assets under management represents the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our financial performance. AUM includes our total investment portfolio and assets associated with unconsolidated CDOs for which we derive asset management fees.

The table below summarizes our assets under management as of June 30, 2010 and December 31, 2009 (dollars in thousands):

	Assets Under Management at June 30, 2010		Assets Under Management at December 31, 2009
Commercial real estate portfolio (1)	$	2,053,613	$	2,084,685
European portfolio (2)		—		1,878,601
U.S. TruPS portfolio (3)		1,960,256		6,162,790
Other investments		687		777
Total	$	4,014,556	$	10,126,853

(1) As of June 30, 2010 and December 31, 2009, our commercial real estate portfolio was comprised of $1.2 billion and $1.2 billion, respectively, of assets collateralizing RAIT I and RAIT II, $803.5 million and $738.2 million, respectively, of investments in real estate and $70.2 million and $106.6 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

(2) Our European portfolio as of December 31, 2009 was comprised of assets collateralizing Taberna Europe I and Taberna Europe II. On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced by $5.9 billion.

(3) Our U.S. TruPS portfolio as of December 31, 2009 was comprised of assets collateralizing Taberna I through Taberna IX, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans. On April 22, 2010 as a result of the sale of our collateral management rights and responsibilities relating to eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group, LLC, RAIT’s assets under management were reduced by $5.9 billion.

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REIT Taxable Income

To qualify as a REIT, we are required to make annual distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, to avoid certain U.S. federal excise taxes, we are required to make distributions to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year. Because we expect to make distributions based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our distributions may at times be more or less than our reported earnings as computed in accordance with GAAP.

Our board of trustees monitors RAIT’s REIT taxable income, and under its policy, will determine dividends when a full year of REIT taxable income is available. The board intends to declare a dividend, if any, in at least the amount necessary to meet RAIT’s annual distribution requirements. The board will also consider the composition of any common dividends declared, including the option of paying a portion in cash and the balance in additional common shares. Generally, dividends payable in stock are not treated as dividends for purposes of the deduction for dividends, or as taxable dividends to the recipient. However, the Internal Revenue Service, in Revenue Procedure 2010-12, has given guidance with respect to certain stock distributions by publicly traded REITS. That Revenue Procedure applies to distributions made on or after January 1, 2008 and declared with respect to a taxable year ending on or before December 31, 2011. It provides that publicly-traded REITs can distribute stock (common shares in our case) to satisfy their REIT distribution requirements if stated conditions are met. These conditions include that at least 10% of the aggregate declared distributions be paid in cash and that the shareholders be permitted to elect whether to receive cash or stock, subject to the limit set by the REIT on the cash to be distributed in the aggregate to all shareholders. The board expects to continue to review and determine the dividends on RAIT’s preferred shares on a quarterly basis.

Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of distributions to our shareholders, we believe that presenting the information management uses to calculate our net taxable income is useful to investors in understanding the amount of the minimum distributions that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures as determined and reported by other companies.

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The table below reconciles the differences between reported net income (loss) total taxable income (loss) and estimated REIT taxable income (loss) for the three-month and six-month periods ended June 30, 2010 and 2009 (dollars in thousands):

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2010			2009			2010			2009
Net income (loss), as reported	$	25,376		$	(289,261	)	$	59,829		$	(437,675	)
Add (deduct):
Provision for losses		7,644			66,096			24,994			185,600
Charge-offs on allowance for losses		(5,795	)		(53,831	)		(32,931	)		(119,256	)
Domestic TRS book-to-total taxable income differences:
Income tax (benefit) provision		96			693			143			657
Stock compensation, forfeitures and other temporary tax differences		—			423			98			(934	)
Capital loss carry-forward offsetting capital gains		(7,938	)		—			(7,938	)		—
Asset impairments		—			46,015			—			46,015
Capital losses not offsetting capital gains and other temporary tax differences		—			313,808			—			313,808
Change in fair value of financial instruments, net of noncontrolling interests (1)		(4,446	)		(100,157	)		(20,883	)		(13,810	)
Amortization of intangible assets		168			352			523			667
CDO investments aggregate book-to-taxable income differences (2)		(12,431	)		(18,436	)		(26,303	)		(37,555	)
Accretion of (premiums) discounts		—			(106	)		—			(211	)
Other book to tax differences		859			(1,076	)		2,632			57
Total taxable income (loss)		3,533			(35,480	)		164			(62,637	)
Less: Taxable income attributable to domestic TRS entities		2,912			(5,654	)		1,846			(6,641	)
Plus: Dividends paid by domestic TRS entities		3,500			5,000			8,500			5,000
Less: Deductible preferred dividends		(3,415	)		(3,415	)		(6,821	)		(6,821	)
Estimated REIT taxable income (loss)(3)	$	6,530		$	(39,549	)	$	3,689		$	(71,099	)

(1) Change in fair value of financial instruments is reported net of allocation to noncontrolling interests of $(8,800) and $(22,258) for the three-month and six-month periods ended June 30, 2009, respectively.

(2) Amounts reflect the aggregate book-to-taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that Taberna consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between Taberna and its CDO investments.

(3) As of December 31, 2009, RAIT has an estimated tax net operating loss carry-forward of approximately $19.0 million that may be used to offset its REIT taxable income in the future.

Results of Operations

Three-Month Period Ended June 30, 2010 Compared to the Three-Month Period Ended June 30, 2009

Revenue

Investment interest income. Investment interest income decreased $91.2 million, or 70.0%, to $39.2 million for the three-month period ended June 30, 2010 from $130.4 million for the three-month period ended June 30, 2009. This net decrease was primarily attributable to decreases in interest income of: $33.0 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $48.0 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $391.5 million in total principal amount of investments on non-accrual status as of June 30, 2010 compared to $299.9 million as of June 30, 2009, $237.8 million of commercial real estate loans that were converted to owned real estate since June 30, 2009 and the reduction in short-term LIBOR of approximately 0.3% during the three-month period ended June 30, 2010 compared to the three-month period ended June 30, 2009.

Investment interest expense. Investment interest expense decreased $68.7 million, or 74.7%, to $23.2 million for the three-month period ended June 30, 2010 from $91.9 million for the three-month period ended June 30, 2009. This net decrease was primarily attributable to decreases in interest expense of: $18.6 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $44.2 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to repurchases of $172.8 million of our convertible senior notes since June 30, 2009, net of additional interest cost incurred for the issuance of new debt instruments associated therewith, and the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 0.3% during the three-month period ended June 30, 2010 compared to the three-month period ended June 30, 2009.

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Rental income. Rental income increased $7.1 million, or 67.0%, to $17.7 million for the three-month period ended June 30, 2010 from $10.6 million for the three-month period ended June 30, 2009. This increase was primarily attributable to: $4.9 million resulting from 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009, $0.5 million resulting from a full quarter of operations at seven properties acquired or consolidated during the three-month period ended June 30, 2009 and $1.7 million resulting from increased occupancy at properties acquired or consolidated prior to April 1, 2009. Occupancy increased 3.4% to 78.5% as of June 30, 2010 from 75.1% as of June 30, 2009 for properties acquired or consolidated prior to April 1, 2009.

Fee and other income. Fee and other income decreased $5.2 million, or 59.5%, to $3.5 million for the three-month period ended June 30, 2010 from $8.7 million for the three-month period ended June 30, 2009. Fee income from our restructuring advisory services decreased $4.5 million for the three-month period ended June 30, 2010 compared to the three-month period ended June 30, 2009 and asset management fees decreased $1.4 million due to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010. We generated $0.8 million of riskless principal trade income through our broker-dealer during the three-month period ended June 30, 2010.

Expenses

Real estate operating expense. Real estate operating expense increased $4.9 million, or 49.4%, to $14.8 million for the three-month period ended June 30, 2010 from $9.9 million for the three-month period ended June 30, 2009. This increase was primarily attributable to: $4.4 million resulting from 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009, $0.2 million resulting from a full three months of operations at seven properties acquired or consolidated during the three-month period ended June 30, 2009 and $0.3 million of higher operating expenses from properties acquired or consolidated prior to April 1, 2009.

Compensation expense. Compensation expense increased $0.9 million, or 14.3%, to $6.9 million for the three-month period ended June 30, 2010 from $6.0 million for the three-month period ended June 30, 2009. This increase was primarily due to an increase of $0.5 million of compensation costs associated with the property management activities that were acquired in May 2009 and $0.9 million due to the expansion of our broker-dealer and advisory activities offset by $0.5 million of lower bonus expense.

General and administrative expense. General and administrative expense increased $0.1 million, or 1.8%, to $5.4 million for the three-month period ended June 30, 2010 from $5.3 million for the three-month period ended June 30, 2009. This increase is primarily due to our property management activities that we acquired in May 2009 and the expansion of our broker-dealer and advisory activities.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan and residential mortgage portfolios. The provision for losses decreased by $58.5 million, or 88.4%, to $7.6 million for the three-month period ended June 30, 2010 from $66.1 million for the three-month period ended June 30, 2009. This decrease was primarily attributable to $38.8 million of provision for losses related to our residential mortgage portfolio during the three-month period ended June 30, 2009 which was disposed during July 2009. Subsequent to June 30, 2009, we have transitioned 14 loans to real estate owned properties, with direct real estate investments of $207.5 million, including one property that was sold and one property held for sale, and realized losses of $30.3 million when these loans were converted from impaired loans to owned real estate. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Asset impairments. For the three-month period ended June 30, 2009, we recorded asset impairments totaling $46.0 million that were associated with available-for-sale securities for which we did not elect the fair value option. In making this determination, management considered the estimated fair value of the investments in relation to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value.

Depreciation expense. Depreciation expense increased $1.8 million, or 36.0%, to $6.8 million for the three-month period ended June 30, 2010 from $5.0 million for the three-month period ended June 30, 2009. This increase was primarily attributable to 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009 as well as increased depreciation of furniture and fixtures we added since June 30, 2009.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense decreased $0.2 million, or 52.3%, to $0.2 million for the three-month period ended June 30, 2010 from $0.4 million for the three-month period ended June 30, 2009. This decrease resulted from a $6.2 million charge-off to net intangible assets in connection with the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010.

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Other Income (Expense)

Gains (losses) on sale of assets. Gains on sale of assets were $7.7 million during the three-month period ended June 30, 2010. The gains on sale of assets are primarily attributable to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16.5 million. These securitizations were not consolidated by us and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. This transaction generated a $7.9 million gain on sale of assets.

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended June 30, 2010 are attributable to the repurchase of $20.0 million in aggregate principal amount of convertible senior notes and $13.5 million in aggregate principal amount of CDO notes payable. The aggregate debt was repurchased from the market for 5,040,000 of our common shares and $4.7 million of cash. As a result of these repurchases, we recorded gains on extinguishment of debt of $17.2 million.

Losses on deconsolidation of VIEs. Losses on deconsolidation of VIEs are attributable to the deconsolidation of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and concluded that we are no longer the primary beneficiary of the securitizations and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation”. We recorded losses on deconsolidation of VIEs of $313.8 million for the three-month period ended June 30, 2009.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the three-month periods ended June 30, 2010 and 2009, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period  Ended June 30, 2010			For the Three-Month Period Ended June 30, 2009
Change in fair value of trading securities and security-related receivables	$	35,256		$	8,651
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		5,046			69,005
Change in fair value of derivatives		(35,856	)		13,701
Change in fair value of financial instruments	$	4,446		$	91,357

Discontinued operations. Income (loss) from discontinued operations increased $0.2 million to income of $0.5 million for the three-month period ended June 30, 2010 compared to income of $0.3 million for the three-month period ended June 30, 2009 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods.

Six-Month Period Ended June 30, 2010 Compared to the Six-Month Period Ended June 30, 2009

Revenue

Investment interest income. Investment interest income decreased $201.0 million, or 71.4%, to $80.5 million for the six-month period ended June 30, 2010 from $281.5 million for the six-month period ended June 30, 2009. This net decrease was primarily attributable to decreases in interest income of: $80.1 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $97.9 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease primarily resulted from $391.5 million in total principal amount of investments on non-accrual status as of June 30, 2010 compared to $299.9 million as of June 30, 2009, $237.8 million of commercial real estate loans that were converted to owned real estate since June 30, 2009 and the reduction in short-term LIBOR of approximately 0.6% during the six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009.

Investment interest expense. Investment interest expense decreased $148.1 million, or 76.0%, to $46.8 million for the six-month period ended June 30, 2010 from $194.9 million for the six-month period ended June 30, 2009. This net decrease was primarily attributable to decreases in interest expense of: $43.6 million resulting from the disposition of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations in June 2009 and $91.1 million resulting from the disposition of the residential mortgage portfolio in July 2009. The remaining decrease is primarily attributable to repurchases of $172.8 million of our convertible senior notes since June 30, 2009, net of additional interest cost incurred for the issuance of new debt instruments associated therewith, and the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 0.6% during the six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009.

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Rental income. Rental income increased $14.3 million, or 73.3%, to $33.8 million for the six-month period ended June 30, 2010 from $19.5 million for the six-month period ended June 30, 2009. This increase was primarily attributable to: $8.8 million resulting from 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009, $3.5 million resulting from a full six months of operations in 2010 at 17 properties acquired or consolidated during the six-month period ended June 30, 2009 and $2.0 million resulting from increased occupancy at properties acquired or consolidated prior to January 1, 2009. Occupancy increased 1.2% to 79.2% as of June 30, 2010 from 78.0% as of June 30, 2009 for properties acquired or consolidated prior to January 1, 2009.

Fee and other income. Fee and other income increased $0.9 million, or 7.4%, to $12.4 million for the six-month period ended June 30, 2010 from $11.5 million for the six-month period ended June 30, 2009. Property management fees and reimbursement income associated with the property management activities that we acquired in May 2009 increased $1.9 million during the six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009. We generated $1.0 million of riskless principal trade income through our broker-dealer during the six-month period ended June 30, 2010. Fee income from our restructuring advisory services decreased $1.1 million for the six-month period ended June 30, 2010 compared to the six-month period ended June 30, 2009 and asset management fees decreased $0.9 million due to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations during April 2010.

Expenses

Real estate operating expense. Real estate operating expense increased $9.1 million, or 50.0%, to $27.3 million for the six-month period ended June 30, 2010 from $18.2 million for the six-month period ended June 30, 2009. This increase was primarily attributable to: $7.7 million resulting from 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009, $2.0 million resulting from a full six months of operations at 17 properties acquired or consolidated during the six-month period ended June 30, 2009 offset by $0.6 million of lower operating expenses from properties acquired or consolidated prior to January 1, 2009.

Compensation expense. Compensation expense increased $3.2 million, or 28.1%, to $14.9 million for the six-month period ended June 30, 2010 from $11.7 million for the six-month period ended June 30, 2009. This increase was primarily due to an increase of $2.4 million of compensation costs associated with the property management activities that were acquired in May 2009 and $1.6 million due to the expansion of our broker-dealer and advisory activities offset by $0.6 million of lower bonus expense.

General and administrative expense. General and administrative expense increased $0.8 million, or 7.6%, to $10.3 million for the six-month period ended June 30, 2010 from $9.5 million for the six-month period ended June 30, 2009. This increase is primarily due to our property management activities that we acquired in May 2009 and the expansion of our broker-dealer and advisory activities.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan and residential mortgage portfolios. The provision for losses decreased by $160.6 million, or 86.5%, to $25.0 million for the six-month period ended June 30, 2010 from $185.6 million for the six-month period ended June 30, 2009. This decrease was primarily attributable to $96.7 million of provision for losses related to our residential mortgage portfolio during the six-month period ended June 30, 2009 which was disposed during July 2009. Subsequent to June 30, 2009, we have transitioned 14 loans to real estate owned properties, with direct real estate investments of $207.5 million, including one property that was sold and one property held for sale, and realized losses of $30.3 million when these loans were converted from impaired loans to owned real estate. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Asset impairments. For the six-month period ended June 30, 2009, we recorded asset impairments totaling $46.0 million that were associated with certain investments in loans and available-for-sale securities for which we did not elect the fair value option. In making this determination, management considered the estimated fair value of the investments in relation to our cost bases, the financial condition of the related entity and our intent and ability to hold the investments for a sufficient period of time to recover our investments. For the identified investments, management believes full recovery is not likely and wrote down the investments to their current recovery value, or estimated fair value.

Depreciation expense. Depreciation expense increased $4.1 million, or 47.7%, to $12.7 million for the six-month period ended June 30, 2010 from $8.6 million for the six-month period ended June 30, 2009. This increase was primarily attributable to 13 new properties, with direct real estate investments of $201.9 million, acquired or consolidated since June 30, 2009 as well as increased depreciation of furniture and fixtures we added since June 30, 2009.

Amortization of intangible assets. Intangible amortization represents the amortization of intangible assets acquired from Taberna on December 11, 2006 and Jupiter Communities on May 1, 2009. Amortization expense decreased $0.2 million, or 21.6%, to $0.5 million for the six-month period ended June 30, 2010 from $0.7 million for the six-month period ended June 30, 2009. This decrease resulted from a $6.2 million charge-off to net intangible assets in connection with the sale of our collateral management rights in eight Taberna securitizations during April 2010.

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Other Income (Expense)

Gains (losses) on sale of assets. Gains on sale of assets were $11.6 million during the six-month period ended June 30, 2010. The gains on sale of assets are primarily attributable to the sale or delegation of our collateral management rights and responsibilities relating to eight Taberna securitizations to an affiliate of certain funds managed by an affiliate of Fortress Investment Group LLC for $16.5 million. These securitizations were not consolidated by us and were comprised of Taberna Preferred Funding II, Ltd. through Taberna Preferred Funding VII, Ltd., Taberna Europe CDO I, P.L.C., and Taberna Europe CDO II, P.L.C. This transaction generated a $7.9 million gain on sale of assets. In addition, we disposed of $11.4 million in total principal amount of unsecured REIT note receivables in our CRE securitizations and recorded a gain of $3.8 million.

Gains on extinguishment of debt. Gains on extinguishment of debt during the six-month period ended June 30, 2010 are attributable to the repurchase of $74.5 million in aggregate principal amount of convertible senior notes and $16.5 million in aggregate principal amount of CDO notes payable. The aggregate debt was repurchased from the market for 8,190,000 of our common shares, the issuance of a $22.0 million senior secured convertible note and $12.0 million of cash. As a result of these repurchases, we recorded gains on extinguishment of debt of $37.0 million.

Losses on deconsolidation of VIEs. Losses on deconsolidation of VIEs are attributable to the deconsolidation of the Taberna III, Taberna IV, Taberna VI and Taberna VII securitizations. On June 25, 2009, we sold all of our equity interests and a portion of our non-investment grade debt that we owned in these four securitizations and concluded that we are no longer the primary beneficiary of the securitizations and, therefore, we deconsolidated the securitizations in accordance with FASB ASC Topic 810, “Consolidation”. We recorded losses on deconsolidation of VIEs of $313.8 million for the six-month period ended June 30, 2009.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the six-month periods ended June 30, 2010 and 2009, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Six-Month Period  Ended June 30, 2010			For the Six-Month Period Ended June 30, 2009
Change in fair value of trading securities and security-related receivables	$	82,998		$	(182,036	)
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(8,445	)		151,594
Change in fair value of derivatives		(53,670	)		21,994
Change in fair value of financial instruments	$	20,883		$	(8,448	)

Discontinued operations. Income (loss) from discontinued operations increased $2.2 million to income of $0.9 million for the six-month period ended June 30, 2010 compared to a loss of $1.3 million for the six-month period ended June 30, 2009 primarily due to the timing of properties acquired, sold or deconsolidated during the respective periods. Additionally, we recorded a gain of $0.3 million on a property that was sold in March 2010 and a $2.1 million loss on a VIE that was deconsolidated in March 2009.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. The disruption in the credit markets has reduced our liquidity and capital resources, limited our ability to originate new investments and has generally increased the cost of any new sources of liquidity over historical levels. Due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced or eliminated and we do not expect to sponsor new securitizations to provide us with long-term financing for the foreseeable future. We are seeking to expand our use of secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments generating attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements.

Our consolidated securitizations collateralized by U.S. commercial real estate loans, RAIT I and RAIT II, continue to perform and make distributions on our retained interests and pay us management fees. In addition, restricted cash in these securitizations from repayment of underlying loans and other sources can be used to make new investments held by those securitizations. RAIT I and RAIT II are our primary source of cash from our operations. While our consolidated securitizations collateralized by trust preferred securities, or TruPS, Taberna VIII and Taberna IX, are currently failing several of their respective over-collateralization tests, we

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continue to receive our senior management fees from these securitizations. We continue to explore strategies to generate liquidity from our investments in real estate and our investments in debt securities as we seek to focus on our commercial real estate lending platform.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that our assets could be sold directly to raise additional cash. We may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

• to repay our indebtedness, including repurchasing or retiring our debt before it becomes due;

• to pay our expenses, including compensation to our employees;

• to pay U.S. federal, state, and local taxes of our TRSs;

• to repurchase our common shares; and

• to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through the following:

• the use of our cash and cash equivalent balances of $28.9 million as of June 30, 2010;

• cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our vertically integrated commercial real estate platform;

• proceeds from the sales of assets;

• proceeds from future borrowings; and

• proceeds from future offerings of our common and preferred shares, including our COD sales agreement, SEDA and DRSPP Plan.

Our two commercial real estate securitized financing arrangements, RAIT I and RAIT II, include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts through the fifth anniversary of each financing in 2011 and 2012. At June 30, 2010, these revolvers are fully utilized and have no additional capacity. We also have $58.6 million of restricted cash in RAIT I and RAIT II available to invest in qualifying commercial loans as of June 30, 2010, subject to $31.1 million of future funding commitments and borrowing requirements.

Cash Flows

As of June 30, 2010 and 2009, we maintained cash and cash equivalents of approximately $28.9 million and $40.9 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Six-Month  Periods Ended June 30
	2010			2009
Cash flow from operating activities	$	2,839		$	47,009
Cash flow from investing activities		34,024			242,543
Cash flow from financing activities		(32,953	)		(276,1658	)
Net change in cash and cash equivalents		3,910			13,387
Cash and cash equivalents at beginning of period		25,034			27,463
Cash and cash equivalents at end of period	$	28,944		$	40,850

Our principal source of cash flow is historically from our investing activities. The cash inflow from our investing activities primarily resulted from $22.5 million in principal repayments on loans and investments during the six-month period ended June 30, 2010 as compared to $259.3 million during the six-month period ended June 30, 2009. In addition, we received $14.6 million during the six-month period ended June 30, 2010 for proceeds from the sale of other securities and $16.2 million in net proceeds from the sale of collateral management rights. We did not receive any proceeds from these investing activities during the six-month period ended June 30, 2009.

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Our decreased cash inflow from operating activities is primarily due to the disposition of the Taberna III, Taberna IV, Taberna VI, and Taberna VII securitizations in June 2009 and from the disposition of the residential mortgage portfolio in July 2009.

The cash outflow from financing activities was driven by repurchases of convertible notes of $10.5 million, repayments on secured credit facilities and other indebtedness of $11.6 million, and repurchases of CDO notes payable of $8.2 million for the six-month periods ended June 30, 2010. These outflows were offset by proceeds from common share issuances of $4.4 million for the six-month period ended June 30, 2010. The improvement in our cash flow from financing activities during the six-month period ended June 30, 2010 as compared to the six-month period ended June 30, 2009 is primarily due to a reduction in the repayments on residential mortgage-backed securities, $223.3 million during the six-month period ended June 30, 2009, as we sold this portfolio in July 2009.

Capitalization

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within CDOs or mortgage securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of June 30, 2010:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
Convertible senior notes (1)	$	171,863	$	171,632		6.9	%	Apr. 2027
Secured credit facilities		41,036		41,036		4.7	%	Feb. 2011 to Dec. 2011
Senior secured notes		63,950		63,950		11.7	%	Apr. 2014
Loans payable on real estate		22,513		22,513		4.9	%	Apr. 2012 to Sept. 2012
Junior subordinated notes, at fair value (2)		38,052		17,003		9.2	%	Dec. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%	Apr. 2037
Total recourse indebtedness		362,514		341,234		7.6	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (3)(4)		1,380,250		1,380,250		0.8	%	2045 to 2046
CDO notes payable, at fair value (2)(3)(5)		1,178,663		148,604		1.0	%	2037 to 2038
Loans payable on real estate		73,451		73,451		5.7	%	Aug. 2010 to Aug. 2016
Total non-recourse indebtedness		2,632,364		1,602,305		1.0	%
Total indebtedness	$	2,994,878	$	1,943,539		1.8	%

(1) Our convertible senior notes are redeemable, at the option of the holder, in April 2012, April 2017, and April 2022.

(2) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(4) Collateralized by $1.8 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(5) Collateralized by $1.4 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2010 was $906.1 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by RAIT or RAIT Partnership. As indicated in the table above, our consolidated financial statements include recourse indebtedness of $341.2 million as of June 30, 2010. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. CDOs and other securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

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The current status or activity in our financing arrangements occurring as of or during the six-month period ended June 30, 2010 is as follows:

Recourse Indebtedness

Convertible senior notes. During the six-month period ended June 30, 2010, we repurchased $74.5 million in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the convertible senior notes, for a total consideration of $50.0 million. The purchase price consisted of $10.2 million in cash, the issuance of 8.2 million common shares, and the issuance of a $22.0 million 10.0% Senior Secured Convertible Note due April 2014, or the senior secured convertible note. See “Senior Secured Convertible Note” below. As a result of these transactions, we recorded gains on extinguishment of debt of $22.3 million, net of deferred financing costs and unamortized discounts that were written off.

On July 19, 2010, we repurchased $10.0 million in aggregate principal amount of our convertible senior notes for a total consideration consisting of the issuance of 3.3 million common shares and a cash payment of $0.5 million. We recorded a gain on the extinguishment of debt of $2.1 million, net of deferred financing costs and unamortized discounts that were written off.

Secured credit facilities. As of June 30, 2010, we have borrowed an aggregate amount of $41.0 million under three secured credit facilities, each with a different bank. All of our secured credit facilities are secured by designated commercial mortgages and mezzanine loans. As of June 30, 2010, the first secured credit facility had an unpaid principal balance of $20.9 million which is payable in December 2011 under the current terms of this facility. As of June 30, 2010, the second secured credit facility had an unpaid principal balance of $16.2 million which is payable in October 2011 under the current terms of this facility. As of June 30, 2010, the third secured credit facility had an unpaid principal balance of $4.0 million. We are amortizing this balance with monthly principal repayments of $0.5 million which will result in the full repayment of this credit facility by February 2011.

Senior secured convertible note. On March 25, 2010, pursuant to a securities exchange agreement, we acquired from a noteholder $47.0 million aggregate principal amount of our convertible senior notes for a total consideration of $31.2 million. The purchase price consisted of (a) our issuance of the $22.0 million senior secured convertible note, (b) 1.5 million common shares issued, and (c) $6.0 million in cash. The senior secured convertible note is convertible into our common shares at the option of the holder. The conversion price is $3.50 per common share and the senior secured convertible note may be converted at any time during its term. We also paid $1.4 million of accrued and unpaid interest on the convertible notes through March 25, 2010. The holder of the senior secured convertible note converted $1.1 million principal amount of the senior secured convertible note into 0.3 million common shares effective May 5, 2010.

The senior secured convertible note bears interest at a rate of 10.0% per year. Interest accrues from March 25, 2010 and will be payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning July 15, 2010. The senior secured convertible note matures on April 20, 2014 unless previously prepaid in accordance with its terms prior to such date. The senior secured convertible note is fully and unconditionally guaranteed by two wholly-owned subsidiaries of RAIT, or the guarantors: RAIT Asset Holdings III Member, LLC, or RAHM3, and RAIT Asset Holdings III, LLC, or RAH3. RAHM3 is the sole member of RAH3 and has pledged the equity of RAH3 to secure its guarantee. RAH3’s assets consist of certain CDO notes payable issued by RAIT’s consolidated securitization, RAIT Preferred Funding II, LTD.

The maturity date of the senior secured convertible note may be accelerated upon the occurrence of specified customary events of default, the satisfaction of any related notice provisions and the failure to remedy such event of default, where applicable. These events of default include: RAIT’s failure to pay any amount of principal or interest on the senior secured convertible note when due; the failure of RAIT or any guarantor to perform any obligation on its or their part in any transaction document; and events of bankruptcy, insolvency or reorganization affecting RAIT or any guarantor.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their interest coverage and OC Trigger tests as of June 30, 2010.

During the six-month period ended June 30, 2010, we repurchased, from the market, a total of $16.5 million in aggregate principal amount of CDO notes payable issued by RAIT II. The aggregate purchase price was $1.8 million and we recorded a gain on extinguishment of debt of $14.7 million.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC Trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC Trigger test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, to be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC Trigger test failures are due to defaulted collateral assets and credit risk securities. During the six-month period ended June 30, 2010, $6.4 million of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

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Equity Financing.

Preferred Shares

On January 26, 2010, our board of trustees declared first quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2010 to holders of record on March 1, 2010 and totaled $3.4 million.

On April 22, 2010, our board of trustees declared second quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2010 to holders of record on June 1, 2010 and totaled $3.4 million.

On July 27, 2010, our board of trustees declared third quarter 2010 cash dividends of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on September 30, 2010 to holders of record on September 1, 2010.

Common Shares

- Share Repurchases

On January 26, 2010, the compensation committee approved a cash payment to the Board’s eight non-management trustees intended to constitute a portion of their respective 2010 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares is $0.2 million.

-Equity Compensation

On January 26, 2010, the compensation committee awarded 1.5 million phantom units, valued at $1.9 million using our closing stock price of $1.27 on that date, to our executive officers. Half of these awards vested immediately and the remainder vests in one year. On January 26, 2010, the compensation committee awarded 0.5 million phantom units, valued at $0.6 million using our closing stock price of $1.27 on that date, to our non-executive officer employees. These awards generally vest over three-year periods.

During the six-month period ended June 30, 2010, 73,425 phantom unit awards were redeemed for common shares. These phantom units were fully vested at the time of redemption.

-Share Issuances

During the six-month period ended June 30, 2010, we issued 8.2 million common shares, along with cash and the issuance of a senior secured convertible note, to repurchase $74.5 million of our convertible notes. On July 19, 2010, we repurchased $10.0 million in aggregate principal amount of our convertible senior notes for a total consideration consisting of the issuance of 3.3 million common shares and a cash payment of $0.5 million. See “Capitalization” above.

-DRSPP

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we have registered and reserved for issuance, in the aggregate, 18.8 million common shares. During the six-month period ended June 30, 2010, we issued a total of 1.9 million common shares pursuant to the DRSPP at a weighted-average price of $2.27 per share and we received $4.3 million of net proceeds. As of June 30, 2010, 11.7 million common shares, in aggregate, remain available for issuance under the DRSPP.

-SEDA

On January 13, 2010, we entered into a standby equity distribution agreement, or the SEDA, with YA Global Master SPV Ltd., or YA Global, which is managed by Yorkville Advisors, LLC, whereby YA Global agreed to purchase up to $50.0 million, or the commitment amount, worth of newly issued RAIT common shares upon notices given by us, subject to the terms and conditions of the SEDA. The number of common shares issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 12.5 million common shares. The SEDA terminates automatically on the earlier of January 13, 2012 or the date YA Global has purchased $50.0 million worth of common shares under the SEDA. During the three-month period ended June 30, 2010, 0.4 million common shares were issued pursuant to this arrangement at a price of $2.26 and we received $1.0 million of proceeds. In July 2010, 0.7 million common shares were issued pursuant to this arrangement at a price of $2.11 and we received $1.5 million of proceeds. After reflecting the common shares issued in July 2010, 11.3 million common shares, in the aggregate, remain available for issuance under the SEDA.

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-Capital on Demand™ Sales Agreement

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 17,500,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. As of the date of the filing of this quarterly report on Form 10-Q, no common shares have been issued pursuant to the COD sales agreement. See Part II-Item 5 “Other Information” for further description of the COD sales agreement.

Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a discussion of our critical accounting policies. On January 1, 2010 we adopted several new accounting pronouncements and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as of June 30, 2010. Management discusses our critical accounting policies and management’s judgments and estimates with our Audit Committee.

Recent Accounting Pronouncements

On January 1, 2010, we adopted accounting standards classified under FASB ASC Topic 860, “Transfers and Servicing”, and accounting standards classified under FASB ASC Topic 810, “Consolidation”. The accounting standard classified under FASB Topic 860 eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. The accounting standard classified under FASB Topic 810 changes the determination of when a VIE should be consolidated. Under this standard, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. The adoption of these standards did not have a material effect on our consolidated financial statements.

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and requires a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements; however, these disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements and management is currently evaluating the impact the new Level 3 fair value measurement disclosures may have on our consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This accounting standard update is to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Existing disclosure guidance is amended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses and to disclose credit quality indicators, past due information, and modifications of its financing receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the impact that this accounting standard update may have on our consolidated financial statements.

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