Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

Derivative Financial Instruments

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.

Interest Rate Swaps and Caps

We have entered into various interest rate swap and cap 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, 2014, 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 March 31, 2014 and December 31, 2013:

	As of March 31, 2014							As of December 31, 2013
	Notional		Fair Value of Assets		Fair Value of Liabilities			Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges:
Interest rate swaps	$	1,046,547	$	0	$	(102,796	)	$	1,071,447	$	183	$	(113,331	)
Interest rate caps		36,000		946		0			36,000		1,122		0
Net fair value	$	1,082,547	$	946	$	(102,796	)	$	1,107,447	$	1,305	$	(113,331	)

During the period April 1, 2014 through December 31, 2014, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $67,288 and a weighted average strike rate of 5.25% as of March 31, 2014, will terminate in accordance with their terms.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $7,537 and $8,286, respectively, to earnings for the three-month periods ended March 31, 2014 and 2013.

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 interest rate swaps associated with these CDO notes payable was discontinued and amounts are reclassified from accumulated other comprehensive income to earnings over the remaining life of the interest rate swaps. As of March 31, 2014, the notional value associated with these interest rate swaps where hedge accounting was discontinued was $561,151 and had a liability balance with a fair value of $62,821. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month periods ended March 31, 2014 and 2013. 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.

Effective interest rate swaps are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or derivative liabilities.