ras-10k_20181231.htm

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2018 of $0.10, was approximately $9,081,081.

As of March 18, 2019, 1,849,530 common shares of beneficial interest, par value $1.50 per share, of the registrant were outstanding.

Portions of the proxy statement for registrant’s 2019 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

The Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report contains or incorporates by reference such “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Words such as “anticipates,” “assumes,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial results and performance identify forward-looking statements. Unless we have indicated otherwise, or the context otherwise requires, references in this report to “RAIT,” “we,” “us,” and “our” or similar terms, are to RAIT Financial Trust and its subsidiaries.

We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 for these statements. These statements may be made directly in this report and they may also be incorporated by reference in this report to other documents filed with the SEC, and include, but are not limited to, statements about future financial and operating results and performance, statements about our strategies, plans, objectives, expectations and intentions with respect to future operations, products and services, and other statements that are not historical facts. These forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements.

RAIT’s forward-looking statements include, but are not limited to, statements regarding RAIT’s strategies, plans and initiatives to:

Risks, uncertainties and contingencies that may affect the results expressed or implied by RAIT’s forward-looking statements include, but are not limited to:

The risk factors discussed and identified in Item 1A of this report and in other of our public filings with the SEC, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.

We are an internally-managed Maryland real estate investment trust, or REIT, focused on managing a portfolio of commercial real estate (CRE) loans and properties. As explained further below, we are currently undertaking steps intended to increase RAIT’s liquidity and better position RAIT to meet its financial obligations as they come due. We were formed in August 1997 and commenced operations in January 1998. We conduct our business through our real estate lending, owning and managing segment concentrated on lending, owning and managing commercial real estate assets throughout the United States. We incorporate the discussion of this business segment here from Note 17 of Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

RAIT’s business strategy has been evolving from September 2017 through the filing of this annual report in response to developments in RAIT’s business and financial situation. On September 7, 2017, we announced that our Board of Trustees, or the board, had formed a committee of independent trustees, or the special committee, to explore and evaluate a wide range of possible strategic and financial alternatives for RAIT. On February 20, 2018, we announced that the special committee review had concluded and did not identify a strategic or financial transaction with another counterparty that was preferable to the steps described below. This special committee review, conducted with the support of financial and legal advisors, evaluated a wide range of potential alternatives which included, but were not limited to, (i) refinements of RAIT’s operations or strategy, (ii) financial transactions, such as a recapitalization or other change to RAIT’s capital structure and (iii) strategic transactions, such as a sale of all or part of RAIT. As a result, the board, after considering the recommendations and advice of the special committee, RAIT’s management and legal and financial advisors, determined that RAIT should focus on taking steps to increase RAIT’s liquidity and better position RAIT to meet its financial obligations as they come due. We refer to these steps as the 2018 strategic steps and they include, but are not limited to:

RAIT’s implementation of the 2018 strategic steps resulted in RAIT generating sufficient liquidity to meet its financial obligations arising during 2018, including the redemption by a RAIT subsidiary, RAIT Asset Holdings IV, LLC, or RAIT IV, of its preferred units which resulted in the cancellation of RAIT’s Series D preferred shares in June 2018 and the satisfaction of the put right of holders of our 4.0% senior convertible notes in October 2018, each as described below. The board terminated the special committee in July 2018.

Beginning in the second half of 2018, RAIT’s management, with direction from the board, resumed the review of the potential strategic and financial alternatives for RAIT, including certain alternatives previously considered in the special committee review. As part of these efforts, RAIT management had preliminary discussions with various third parties to explore whether any of them were interested in any potential strategic and/or financial transaction or other action with respect to RAIT, its assets and/or its lending platform. This review and related preliminary discussions continued through the fourth quarter of 2018 and are still ongoing at the time of filing of this annual report, and have been conducted with the support of financial and legal advisors, with the goals of seeking to maximize value for RAIT’s stakeholders in accordance with their respective interests and to address certain other adverse business and financial conditions facing RAIT, including those referenced below under “Going Concern Considerations.” We refer to our continued implementation of the 2018 strategic steps, combined with our resumption of such review and holding these preliminary discussions, including, without limitation, any transactions or other actions contemplated thereby, as the 2019 strategic steps. We cannot assure you that the 2019 strategic steps will result in any transaction or other action involving RAIT or of the effects that any action, transaction or inaction resulting from the 2019 strategic steps will have on any of RAIT’s stakeholders. See Part I, Item 1A, “Risk Factors” for further discussion of potential risks to stakeholders’ respective interests in RAIT that may result from the 2019 strategic steps, including, without limitation, any transactions with third parties involving the merger of RAIT with or into another company, the recapitalization or restructuring of RAIT and/or the sale of RAIT and/or some or all of its assets including effectuating such merger, recapitalization, restructure and/or sale through bankruptcy proceedings or other means. RAIT does not intend to make

any further public comment regarding this review and these preliminary discussions until the outcome thereof is determined, except as may be required by law.

On June 27, 2018, RAIT IV completed the sale of its FL5 interests, as referenced below, and FL6 interests, as referenced below and together with the FL5 interests, the FL interests, to Melody RE II, LLC, or the FL purchaser, for an aggregate purchase price of $54.6 million.

Prior to the sale, RAIT consolidated Holdings 2016 and FL5 and also consolidated Holdings 2017 and FL6 in its consolidated financial statements as RAIT was the primary beneficiary of these variable interest entities, or VIEs. Holdings 2016 and Holdings 2017 have been referred to as the RAIT Venture VIEs in RAIT’s consolidated financial statements. As a result of the sale, RAIT was no longer considered the primary beneficiary of these entities and has deconsolidated these entities from its consolidated financial statements. RAIT recognized a loss of $8.2 million on the deconsolidation of these entities as the aggregate purchase price for the Interests of $54.6 million was less than RAIT’s net investment in these entities of $62.8 million. After the sale of the Interests, RAIT retained its role as servicer and special servicer of the loans in FL5 and FL6.

Also on June 27, 2018, RAIT, several of RAIT’s subsidiaries, and ARS VI Investor I, LP, or the Series D investor, entered into a redemption and exchange agreement, or the Series D redemption and exchange agreement, whereby RAIT redeemed and cancelled the remaining 2,939,190 preferred units of RAIT IV and corresponding Series D preferred shares for (a) $54.6 million of cash (received by RAIT IV from the sale of the FL interests); (b) $2.2 million of defined available cash held by RAIT IV; and (c) shares of RAIT’s publicly traded Series A preferred shares with an aggregate $9.6 million liquidation preference, Series B preferred shares with an aggregate $4.2 million liquidation preference and Series C preferred shares with an aggregate $2.9 million liquidation preference. In addition, RAIT paid the Series D investor an exchange fee of $0.4 million. The Series D redemption and exchange agreement also provided for the termination of the Securities Purchase Agreement among RAIT, identified RAIT affiliates and the Series D investor, or the Series D purchase agreement, and mutual releases between RAIT and the Series D investor. The redemption and exchange of the preferred units of RAIT IV and the linked Series D preferred shares resulted in an increase to shareholders equity of $11.9 million as the consideration exchanged of $61.6 million was less than the $73.5 million aggregate liquidation preference of Series D preferred shares that were redeemed and cancelled.

On May 11, 2018, the New York Stock Exchange, or the NYSE, suspended trading in RAIT’s securities then listed on the NYSE, which we collectively refer to as the RAIT publicly traded securities: RAIT’s common shares, or the common shares, Series A preferred shares, Series B preferred shares, Series C preferred shares, RAIT’s 7.625% senior notes and RAIT’s 7.125% senior notes. The NYSE carried out this suspension and commenced proceedings to delist the RAIT publicly traded securities from the NYSE when the trading price of the common shares decreased to below $0.16 per share on May 11, 2018 because the NYSE, in interpreting NYSE continued listing standards, determined that a trading price of below $0.16 per share was “abnormally low” and, therefore, was cause for suspension of trading and delisting from the NYSE. As previously reported, on June 5, 2018, the NYSE notified RAIT that RAIT was no longer in compliance with another continued listing standard because RAIT had not maintained at least a $15.0 million average market capitalization over a 30 trading-day period. On December 4, 2018, RAIT received the final decision of the NYSE to delist the RAIT publicly traded securities and, on December 6, 2018, the NYSE filed a Form 25 for each RAIT publicly traded security with the U.S. Securities and Exchange Commission, or the SEC, notifying the SEC of the NYSE’s determination to remove the RAIT publicly traded securities from listing on the NYSE, or the delisting, and to terminate the registration, or the 12(b) deregistration, of the RAIT publicly traded securities under Section 12(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The delisting became effective on December 17, 2018 and the 12(b) deregistration became effective on March 5, 2019. The RAIT publicly traded securities now trade on the OTCQB. The delisting and 12(b) deregistration, in and of themselves, do not affect the trading of the RAIT publicly traded securities on the OTCQB or RAIT’s reporting requirements under Section 12(g) of the Exchange Act and did not cause an event of default under any of RAIT’s then outstanding debt obligations.

Effective after the close of trading on August 13, 2018, we completed a one for fifty reverse stock split, or the reverse stock split, as previously authorized by the board, pursuant to authority granted to the board by RAIT’s common shareholders. The par value of common shares changed to $1.50 per share after the reverse stock split from $0.03 per share prior to the reverse stock split and every fifty shares issued and outstanding prior to the reverse stock split were combined into one common share after the reverse stock split. The reverse stock split did not change the number of authorized common shares. The financial statements included in this Annual Report on Form 10-K give retroactive effect to the reverse stock split and all share and per share amounts have been adjusted accordingly. The reverse stock split did not affect RAIT’s preferred shares, including the number of authorized or outstanding RAIT preferred shares or the dividend rate per share of any outstanding RAIT preferred shares.

Please see Part II, Item 8, “Financial Statements —Note 2: Summary of Significant Accounting Policies—Going Concern

Considerations” and Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—

Liquidity and Capital Resources” for a discussion of going concern considerations.

RAIT’s CRE lending platform previously focused on the origination of first lien loans. We historically also offered mezzanine loans and preferred equity interests in limited circumstances to support first lien loans. These represent a smaller portion of our CRE loan portfolio. Our mezzanine loans are subordinate in repayment priority to a senior mortgage loan or loans on a property and are typically secured by pledges of ownership interests, in whole or in part, in the entities that own the real property. We generate a return on our preferred equity investments primarily through distributions to us at a fixed rate and the payment of distributions are subject to there being sufficient net cash flow from the underlying real estate to make such payments. We used this investment structure as an alternative to a mezzanine loan where the financial needs and tax situation of the borrower, the terms of senior financing secured by the underlying real estate or other circumstances necessitate holding preferred equity. Our CRE loans are in most cases non-recourse or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions. Where possible, we sought to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third-party lenders.

Prior to our implementation of the 2018 strategic steps, our financing strategy involved the use of multiple sources of short-term financing to originate assets including warehouse facilities, repurchase agreements and bank conduit facilities. Our ultimate goal was to finance these investments on a long-term, non-recourse, match-funded basis or to sell these assets into CMBS securitizations. Match funding enabled us to match the interest rates and maturities of our assets with the interest rates and maturities of our financing, thereby reducing interest rate risk and funding risks in financing our portfolio on a long-term basis.

During the year ended December 31, 2018, we sold certain loans which had an unpaid principal balance of $128.8 million and received gross proceeds of $123.1 million. We received $74.9 million of net proceeds after payment of the costs to sell those loans and repayments of indebtedness secured by certain of those loans of $48.2 million.

During the year ended December 31, 2018, we originated $46.2 million of CRE loans prior to our implementation of the 2018 strategic steps, received CRE loan repayments of $391.2 million and deconsolidated loans with an unpaid principal balance of $266.6 million.

The tables below describe certain characteristics of our held-for-investment commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2018 (dollars in thousands):

Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates which differ from current payment terms. We refer to these loans as cash flow loans, all of which were originated prior

to 2011. Although a cash flow loan accrues interest at a stated rate, pursuant to forbearance or other agreements, the borrower is only required to pay interest each month at a minimum rate, which may be as low as zero percent, plus additional interest up to the stated rate to the extent of all cash flow from the property underlying the loan after the payment of property operating expenses and any senior debt service. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 2: Summary of Significant Accounting Policies—Revenue Recognition” for further information on these loans. As of December 31, 2018, we held investments we characterized as cash flow loans, with a recorded investment (including accrued interest) of $75.9 million comprised of preferred equity interests totaling $36.2 million, bridge loans totaling $9.5 million and mezzanine loans totaling $30.2 million.

As of December 31, 2018, our nonaccrual loans total $93.0 million, which is comparable to the $98.6 million of nonaccrual loans as of December 31, 2017. We remain focused on working with our borrowers on these loans to either sell or refinance the underlying properties or to implement other strategies to maximize the value of these assets to us over time. As of December 31, 2018, we had a loan loss reserve of $22.3 million, representing 24.0% of our nonaccrual loans and 4.4% of our total CRE loan portfolio. As of December 31, 2017, our loan loss reserve was $14.9 million, which represented 15.1% of our nonaccrual loans and 1.2% of our total CRE loan portfolio. During the year ended December 31, 2018, we recognized provision for loan losses of $32.9 million, which were primarily driven by certain loans where the borrower and/or property experienced an unfavorable event or events during the period.

We have financed our consolidated CRE loans on a long-term basis through securitizations. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary” for more information about our securitizations.

The charts below describe the property types and the geographic breakdown of our commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2018:

As described above, during 2018, we continued to sell and/or divest our legacy REO portfolio. During the year ended December 31, 2018, we sold five properties for $106.2 million. As of December 31, 2018, our real estate portfolio consisted of an aggregate gross cost (carrying value) of $116.6 million ($107.8 million), comprised of $48.8 million ($40.6 million) of office properties, $49.1 million ($48.5 million) of retail properties, and $18.7 million ($18.7 million) of land. We disposed of one additional REO property with an aggregate gross cost (carrying value), as of December 31, 2018, of approximately $4.9 million ($4.9 million) during the first quarter of 2019.

During the year ended December 31, 2018, we recognized impairment charges on real estate assets of $47.5 million as it was more likely than not that we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in these assets was determined to not be recoverable. These impairment charges are further described below.

We are continuing to market for sale certain of our real estate properties, and the ultimate outcomes of the sales of those properties are dependent on current market conditions and demand specific to each individual property. If we identify additional properties for disposition, our decision to no longer hold them for investment may result in future impairment charges.

We have financed our portfolio of investments in commercial real estate through secured commercial mortgage loans held by either third-party lenders or our commercial real estate securitizations.

The table below describes certain characteristics of our REO portfolio as of December 31, 2018 (dollars in thousands, except average effective rent):

The charts below describe the property types and the geographic breakdown of our investments in real estate as of December 31, 2018:

We conduct our operations to qualify as a REIT. We also conduct the operations of our subsidiary, Taberna Realty Finance Trust, or TRFT to qualify as a REIT, and any REITs we may sponsor or otherwise consolidate in the future, which we collectively refer to as our REIT affiliates, to each qualify as a REIT. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 13: Income Taxes” for further discussion. During the year ended December 31, 2018, we sold our interests in two other REITs, RAIT-Melody 2016 Holdings Trust, or Melody FL-5, and RAIT-Melody 2017 Holdings Trust, or Melody FL-6, and, as such, no longer conduct the operations of these REITs. Our exit of our Taberna securitization segment in 2014 did not involve selling TRFT, which continues to hold assets and liabilities unrelated to the Taberna segment. For a discussion of the tax implications of our and our REIT affiliates’ 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 our REIT affiliates 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 our REIT affiliates may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements may hinder our or our REIT affiliates’ investment performance. These requirements include the following:

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

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:

We rely on the 40% test because we are a holding company that conducts our businesses through wholly-owned or majority-owned subsidiaries. As a result, 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 exclusive of government securities and cash items on an unconsolidated basis. Based on the relative value of our investment in TRFT, on the one hand, and our investment in RAIT Partnership, on the other hand, we can comply with the 40% test only if RAIT Partnership itself complies with the 40% test (or an exemption other than those provided by Sections 3(c)(1) or 3(c)(7)). Because the principal exemptions that RAIT Partnership relies upon to allow it to meet the 40% test are those provided by Sections 3(c)(5)(C) or 3(c)(6) (relating to subsidiaries primarily engaged in specified real estate activities), we are limited in the types of businesses in which we may engage through our subsidiaries.

None of RAIT, RAIT Partnership or any of their subsidiaries has received a no-action letter from the Securities and Exchange Commission, or 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.”

We have historically been subject to significant competition in all aspects of our business. Prior to our decision to implement the 2018 strategic steps, existing industry participants and potential new entrants have competed with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We also saw increasing amounts of competition from new entrants in the market to originate conduit loans and bridge loans. We have competed 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, lenders, governmental bodies and other entities. With respect to our investments in real estate, we face significant competition from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Competition 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 may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Consistent with the implementation and execution of the 2018 strategic steps, our competition continues to focus on other sellers of assets similar to those in our portfolio.

As of March 1, 2019, we had 25 employees. None of our employees are covered by a collective bargaining agreement.

Additional information about us can be found at our website located at www.rait.com. We make available, free of charge, on or through our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Shareholders and other stakeholders should carefully consider the following risk factors in conjunction with the other information contained in this report. The risks discussed in this report could adversely affect our business, operating results, prospects and financial condition. This could cause the value of our common and preferred shares, debt securities, and other securities to decline further and/or you to lose part or all of any investment in our securities. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that, as of the date of this report, we deem immaterial may also harm our business. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Forward-Looking Statements” above in this report.

Actions and/or transactions affecting RAIT resulting from our 2019 strategic steps may have a material adverse effect on one or more classes of RAIT stakeholders.

As described in Part I, Item 1, “Business – Business Strategy” above, RAIT is engaged in the 2019 strategic steps which may lead to one or more actions or transactions involving RAIT, including, without limitation, a possible strategic or refinancing transaction, restructuring of our existing debt or equity, merger or sale of substantially all of RAIT’s assets. We cannot assure you that the 2019 strategic steps will result in any such action or transaction or of the effects that any such action or transaction or no action or transaction would have on any of RAIT’s stakeholders, whether individually or in the aggregate.

We may elect to implement any such transaction through confirmation and consummation of a plan of reorganization and/or one or more sale transactions approved by a bankruptcy court under Chapter 11 of Title 11 of the U.S. Code, or Chapter 11, which would allow for court supervision and approval of the transaction and would help facilitate the requisite stakeholder approvals to implement such a transaction. We may also conclude that it is necessary to initiate Chapter 11 proceedings to implement a restructuring of our obligations even without a transaction. In any event, seeking relief under Chapter 11 would likely have a material adverse effect on

our business, financial condition, results of operations, liquidity and returns to some or all of RAIT’s stakeholders, depending on their respective interests in RAIT. If a transaction were to be implemented in a bankruptcy proceeding, it is likely that holders of our common shares and/or claims and interests with respect to, or rights to acquire, our common shares, and possibly holders of our preferred shares as well, would be entitled to little or no recovery, and those equity interests could be canceled for little or no consideration. Moreover, because we have a significant amount of indebtedness as well as preferred shares that are senior to our common shares in our capital structure, we believe that seeking bankruptcy relief under Chapter 11 would likely cause our existing common shares to be canceled, or otherwise result in a very limited recovery, if any, for our common shareholders, and would place our common shareholders, and possibly our preferred shareholders, at significant risk of losing their entire investment in our shares. Even if an action or transaction resulting from the 2019 strategic steps is implemented outside of bankruptcy, it may require some or all classes of our stakeholders to take a loss. Such a loss, which would likely vary among the classes of our stakeholders, depending on their respective interest in RAIT, could be substantial and/or could be absolute. In addition, as long as a Chapter 11 proceeding continues, our senior management would be required to spend a significant amount of time and effort dealing with the proceeding instead of focusing on our business operations. Bankruptcy relief also may make it more difficult to retain management and other key personnel necessary to the success of our business. We refer to the risks described in this risk factor arising out of RAIT implementing a plan of reorganization under Chapter 11 as the bankruptcy risks.

We may not be able to repay or refinance our existing debt as it becomes due, whether at maturity or as a result of acceleration, and as a result we may be unable to continue as a going concern.

Our current operations and the plans we have implemented or initiated, including, without limitation, the 2019 strategic steps, may not be sufficient to provide sufficient funds to enable RAIT to satisfy the financial and other requirements of certain of RAIT’s indebtedness. Our failure to satisfy such obligations could result in the acceleration of some or all of such indebtedness. The uncertainty associated with our ability to meet our obligations as they become due raises substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm that accompanies its audited consolidated financial statements in this Annual Report on Form 10-K contains an explanatory paragraph regarding the substantial doubt about RAIT’s ability to continue as a going concern. If RAIT is not able to meet its financial obligations as they come due, or does not satisfy the financial covenants of, or experiences a defined fundamental change under, its 7.125% senior notes and 7.625% senior notes, holders of our indebtedness could exercise their put rights or accelerate our outstanding indebtedness. If they did, those obligations, as well as other obligations that are cross-defaulted, would become immediately due and payable and we do not expect we would have sufficient liquidity to repay those amounts in those circumstances.

We are in discussions with various stakeholders and other parties and are pursuing or considering a number of actions and/or transactions, including, without limitation, the 2019 strategic steps, but there can be no assurance that sufficient liquidity can be obtained from one or more of these actions and/or transactions or that these actions and/or transactions can be consummated within the period needed to meet our obligations, as they come due at maturity or because of acceleration. As a result, we could be required to seek relief under Chapter 11. If RAIT seeks such relief, that would give rise to the bankruptcy risks discussed elsewhere in these risk factors.

We have been focused on efforts to increase RAIT’s liquidity and better position RAIT to meet its financial obligations as they come due and not on growing our business, and this has had, and we expect will continue to have, a material adverse effect on the trading price of our securities, our business and financial results.

We may fail to successfully accomplish all of the priorities we identified for the 2019 strategic steps and we may not achieve the results we anticipated, even if we successfully implement one or more of our priorities. In addition, as a result of our prior activities and initiatives, and recent developments, and the 2019 strategic steps, potential buyers of our assets may view us as a distressed seller and as a result seek substantial discounts to the prices we seek, which could adversely affect the proceeds we receive from such asset sales.

Events and circumstances, such as financial or unforeseen difficulties, market disruptions, delays and unexpected costs, may occur that could result in our not realizing desired outcomes. If we fail to implement the 2019 strategic steps in accordance with our expectations or achieve some or all of the expected benefits of these activities, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. In addition, even if we successfully implement the 2019 strategic steps, we still may not realize their anticipated benefits. Even if we implement the 2019 strategic steps in accordance with our expectations and the anticipated benefits are substantially realized, there may be consequences or business impacts that were not expected. Regardless of whether or not we are successful in implementing the 2019 strategic steps, we may be required, or elect, to initiate Chapter 11 bankruptcy proceedings, which could give rise to one or more of the bankruptcy risks.

Further, as we pursue and implement the 2019 strategic steps, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. The execution of the 2019 strategic steps will require a significant amount of management and other employees’ time and focus, which will divert attention from day-to-day operating activities.

Part of the 2019 strategic steps is for RAIT to continue to sell certain of our assets and continue to divest a portion of our legacy REO holdings and, ultimately, further minimize our REO holdings. Any such disposition or attempted disposition is subject to risks, including risks related to the terms and timing of such disposition, risks related to obtaining necessary government or regulatory approvals, risks related to retained liabilities not subject to our control, and risks related to the need to provide transition services to the disposed business, which may result in the diversion of resources and focus.

If RAIT’s management does not successfully implement plans intended to mitigate conditions and events disclosed in this report, including the going concern considerations included in the financial statements included in this report, our financial condition, liquidity and ability to continue as a going concern may be materially adversely affected.

The financial statements included in this report have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. Part II, Item 8, “Financial Statements —Note 2: Summary of Significant Accounting Policies—Going Concern Considerations” discloses that RAIT’s management considered, as part of its assessment of RAIT’s ability to continue as a going concern within one year after the date of issuance of these financial statements, our 7.125% senior notes which mature in August 2019 and have an unpaid principal balance of approximately $65.0 million as of December 31, 2018, the financial covenant compliance requirements of certain of RAIT’s indebtedness, and RAIT’s recurring costs of operating its business which currently exceed RAIT’s operating income. This footnote describes management’s approved plans that are intended to mitigate those conditions and events and notes that, in applying the required accounting guidance, management’s currently approved plans have not met the probable threshold to alleviate the conditions that initially indicated RAIT will be unable to meet its obligations as they become due over the next twelve months. If these plans or other strategic and financial alternatives are not successfully implemented, RAIT’s financial condition, liquidity and ability to continue as a going concern would likely be materially adversely affected, including, without limitation, that RAIT may not be able to maintain compliance with financial covenants in RAIT indebtedness and that, if RAIT continues to generate operating losses, will further erode the value of interests in RAIT held by its stakeholders. One of such plans being considered, if no better alternative is developed from the 2019 strategic steps, would be for RAIT to monetize its interests in RAIT FL7, by winding it down and selling its underlying collateral, selling RAIT’s retained interests and/or other means, which would have material effects on our financial statements and operating results. Such a transaction could also result in the loss of our position as servicer and/or special servicer for these securitizations and could generate proceeds below the value of these retained interests reflected in our financial statements.

RAIT is restricted in its ability to incur defined debt due to financial covenants in RAIT’s senior notes.

RAIT’s 7.625% senior notes and 7.125% senior notes contain financial covenants consisting of a maximum leverage ratio covenant and a minimum fixed charge ratio covenant. These covenants must be met in the event RAIT or any subsidiary meeting the definition thereof in these notes’ related indentures were to incur debt, as defined in such indentures, and are measured immediately after giving pro forma effect to the incurrence of such debt and the application of the proceeds thereof. If RAIT failed to comply with these financial covenants, that would constitute an event of default under these indentures permitting the acceleration of the applicable senior notes in defined circumstances. If RAIT failed to repay any senior notes that were accelerated, it could trigger cross defaults under, and ultimately the acceleration of, other RAIT indebtedness. RAIT expects that these financial covenants will restrict RAIT’s and these subsidiaries’ ability to incur such debt for the foreseeable future because RAIT does not expect that these financial covenants would be met on such pro forma basis in the event RAIT or such subsidiaries incurred such debt. RAIT and these subsidiaries do not plan to incur any such debt, absent a pro forma use of proceeds that would permit compliance with these covenants.

As we execute on the 2019 strategic steps and divest assets, we may be required to record material asset impairment charges, which, while non-cash in nature, could materially and adversely impact our ability to maintain a required ratio or meet a required test set forth in our debt instruments.

As RAIT continues to move forward with the 2019 strategic steps, it intends to continue to divest various assets. As RAIT identifies assets for divestment, RAIT may be required to record asset impairment charges which may be material. For the year ended December 31, 2018, RAIT incurred asset impairment charges of approximately $47.5 million primarily related to the carrying value of certain legacy properties. If RAIT needs to recognize further asset impairment charges in future quarters, such charges, while non-cash in nature, could materially and adversely impact our ability to maintain a required ratio or meet a required test set forth in our debt instruments.

Our investments are relatively illiquid which may make it difficult for us to sell such investments in connection with our 2019 strategic steps.

Our commercial real estate loans, our investments in real estate and our retained interests in our securitizations are relatively illiquid investments and we may be unable to vary our portfolio promptly in response to changing economic, financial and investment conditions or dispose of these assets quickly or at all in connection with our 2019 strategic steps. A portion of these investments may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell such investments at a satisfactory price or at all. If we are unable to sell such investments at satisfactory prices, we will have even less liquidity to satisfy our obligations as they come due. Any sales of investments may result in our recognizing a loss on the sale.

If RAIT management is unable to successfully divest a portion of RAIT’s remaining real estate assets releasing cash from those sales and/or distributions on our retained interests in our RAIT I securitization, to continue to control costs, to sell certain loans and other assets, and to continue to receive repayments of loans as they become due, RAIT expects that its ability to satisfy its obligations would be materially adversely affected.

If RAIT is unable to raise capital from external sources as a result of actions and/or transactions resulting from the 2019 strategic steps, RAIT’s ability to satisfy its obligations arising over the next twelve months would depend significantly on management’s ability to continue to successfully divest RAIT of a portion of RAIT’s remaining real estate assets releasing cash from those sales and/or distributions on our retained interests in our RAIT I securitization, to continue to control costs, to sell certain loans and other assets, and to continue to receive repayments of loans as they become due. In this respect, if RAIT is unable to significantly access capital from asset sales, its ability to satisfy its obligations would be materially adversely affected. In addition, our disclosure of our business strategies may cause potential buyers of our assets to view us as a distressed seller and cause these buyers to seek substantial discounts to the prices we are seeking, which could adversely affect the proceeds we receive from these sales.

Our failure to comply with the indentures and other instruments or agreements governing any current or future indebtedness, or, if applicable, a failure to maintain a required ratio, meet a required test or comply with a financial covenant thereunder, could result in an event of default and related cross-defaults or an acceleration of our indebtedness that, if not cured or waived, could materially and adversely impact our liquidity, financial condition, results of operations and future prospects.

If an event of default was to be asserted under any of the indentures or any other instruments or agreements governing our current or future indebtedness, or, if applicable, a failure to maintain a required ratio, meet a required test or comply with a financial covenant thereunder, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. It is not likely that our assets or cash flow would be sufficient to fully repay borrowings under such debt instruments if accelerated upon an event of default. In addition, any event of default or declaration of acceleration under any such debt instrument could also result in an event of default under one or more of our other debt instruments.

In addition, there can be no assurance that the lenders under our indentures or any other instruments or agreements governing our current or future indebtedness will not assert that any recent developments, alone or in combination with future developments, give rise to an event of default under such indentures, instruments or other agreements. If an event of default were to be asserted and/or if an event of default was ultimately deemed to have occurred, RAIT's liquidity, financial condition, results of operations and future prospects could be materially and adversely impacted.

Loss of our management team or the ability to attract and retain key employees could harm our business.

The real estate finance business is very labor-intensive. We depend on our management team to manage our investments. The market for skilled personnel is highly competitive and has historically experienced a high rate of turnover. Due to the nature of our business, we compete for qualified personnel not only with companies in our business, but also in other sectors of the financial services industry. Competition for qualified personnel may lead to increased hiring and retention costs. We cannot guarantee that we will be able to attract or retain qualified personnel at costs that we currently can afford or at all. If we are unable to attract or retain a sufficient number of skilled personnel at manageable costs, it could impair our ability to manage our investments and execute our investment strategies successfully, thereby reducing our earnings. RAIT’s ability to carry out the 2019 strategic steps depends on the continued contributions of certain key personnel, each of whom would be difficult to replace. If RAIT were to lose the benefit of the experience, efforts and abilities of one or more of these individuals, operating results could suffer and normal operations could be interrupted and/or delayed.

Our business and operations depend on the commercial real estate industry generally, which in turn depends upon broad economic conditions in the U.S. and abroad. A worsening of economic conditions would likely have a negative impact on the commercial real estate industry generally and on our business and operations specifically. Adverse conditions in the real estate industry could harm our business and financial condition by, among other factors, reducing the value of our existing assets, limiting our access to debt and equity capital and otherwise negatively impacting our operations. Additionally, disruptions in the global economy may also have a negative impact on the commercial real estate market domestically. Adverse conditions in the commercial real estate industry could harm our business and financial condition by, among other factors, reducing the value of our existing assets, limiting our access to debt and equity capital, limiting our ability to sell our assets and otherwise negatively impacting our operations. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends That May Affect Our Business” for a description of some of the specific economic trends that may affect our business.

Actions of activist shareholders against us could be disruptive and costly and the possibility that activist shareholders may wage proxy contests or seek representation on, or control of, our board could cause uncertainty about the strategic direction of our business and an activist campaign that results in a change in control of our board could trigger change in control provisions or payments under certain of our material contracts and agreements.

Shareholders may from time to time engage in proxy solicitations, advance shareholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us. The delisting of our equity securities from the NYSE and our announcement of the 2019 strategic steps may increase the likelihood that activist shareholders may act against us.

While our board and management team strive to maintain constructive, ongoing communications with all of RAIT’s shareholders and welcomes their views and opinions with the goal of enhancing value for all stakeholders and the depth and breadth of our board, an activist campaign could have an adverse effect on us because:

Our succession planning may be insufficient which would reduce the effectiveness of the management of our business and increase exposure to disruption if members of current management become unavailable unexpectedly.

RAIT has a limited number of executive officers and leadership talent within RAIT may not be sufficiently developed and/or, in light of our current financial condition, recruitment outside RAIT may not occur within time frames providing for orderly succession, if needed, in the future which could reduce the effectiveness of the management of our business overall or particular business functions and increase exposure to disruption if members of current management become unexpectedly unavailable.

In addition to other analytical tools, our management team utilizes financial models to evaluate loans and real estate assets, the accuracy and effectiveness of which cannot be guaranteed.

In all cases, financial models are only estimates of future results which are based upon assumptions made at the time that the projections are developed. There can be no assurance that management’s projected results will be obtained; actual results may vary

significantly from the projections. General economic and industry-specific conditions, which are not predictable, can significantly impact the reliability of projections.

Our board of trustees reviews our policies developed by management and, in particular, our investment policies. Our board of trustees may amend our policies or approve transactions that deviate from these policies without a vote of or notice to our shareholders. Policy changes could adversely affect the market price of our shares and our ability to make distributions. Our board of trustees cannot take any action to disqualify us as a REIT or to otherwise revoke our election to be taxed as a REIT without the approval of a majority of our outstanding voting shares, although this could occur in connection with a filing under the Bankruptcy Code.

We operate in a highly competitive market which may harm our business, financial condition, liquidity and results of operations.

Historically, we have been subject to significant competition in all of our business lines. After the adoption of our business strategies described above, our competition is primarily sellers of other assets similar to those in our portfolio. We compete with many third parties engaged in finance and real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms and broker-dealers, property managers, investment advisers, lenders, governmental bodies and other entities. Many 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. As such, they have the ability to reduce the risk of loss from any one loan by having a more diversified loan portfolio. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of, and greater access to, capital and enhanced operating efficiencies. An increase in the general availability of funds to lenders, or a decrease in the amount of borrowing activity, may increase competition for selling loans and may reduce obtainable yields or increase the credit risk inherent in the available loans.

Competition may limit the number of suitable opportunities to sell investments offered by us. It may also result in lower purchase prices offered to us, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to sell investments on attractive terms and reducing the fee income we realize from the management and servicing of securitizations.

We face significant competition in our investments in real estate from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to rent space at lower rental rates than we would or providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could adversely affect our revenues and financial performance.

We engage in transactions with related parties and our policies and procedures regarding these transactions may be insufficient to address any conflicts of interest that may arise.

Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities. These procedures do not guarantee that all potential conflicts will be identified, reviewed or sufficiently addressed.

Our transactions with, and investments in, some securitization vehicles may create perceived or actual conflicts of interest.

We have engaged in transactions with, and invested in, certain of the securitization vehicles under which we also serve as collateral manager, servicer and/or special servicer, and may continue to do so in the future. These transactions have included, and may include in the future, surrendering for cancellation notes we hold issued by these vehicles and exchanges of our or others’ securities with these vehicles for assets collateralizing these vehicles. In addition, we have previously, and may in the future, purchase investments in these vehicles that are senior or junior to, or have rights and interests different from or adverse to, other investors or credit support providers in the debt or other securities of such securitization vehicles. Such situations may create perceived or actual conflicts of interest between us and such other investors or credit support providers for such investors. Our interests in such transactions and investments may conflict with the interests of such other investors or credit support providers at the time of origination, upon the failure of a coverage test or in the event of a default or restructuring of a securitization vehicle or underlying assets.

Furthermore, if we were involved in structuring the securitization vehicles or such securitization vehicles were structured as our subsidiaries, then our managers may have conflicts between us and other entities managed by them that purchase debt or other securities in such securitization vehicles with regard to setting subordination levels, determining interest rates, pricing the securities, providing for divesting or deferring distributions that would otherwise be made to equity interests, or otherwise setting the amounts and priorities of distributions to the holders of debt and equity interests in the securitization vehicles.

Although we seek to make decisions with respect to our securitization vehicles in a manner that we believe is fair and consistent with the operative legal documents governing these vehicles, perceived or actual conflicts may create dissatisfaction among the other investors in such vehicles or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and our reputation could be damaged if we fail to deal appropriately with one or more perceived or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, such conflicts of interest could materially adversely affect our ability to manage or generate income or cash flow from our securitizations business, cause harm to our reputation and adversely affect our ability to attract investors for future vehicles, if any.

Quarterly results may fluctuate and may not be indicative of future quarterly performance.

Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in the timing of repayments of debt financing, variations in the timing of asset sales, variations in the amount of time between our receipt of the proceeds of a securities offering and our investment of those proceeds in loans or other assets, market conditions that result in increased cost of funds or material fluctuations in the fair value of our assets and liabilities, the degree to which we encounter competition in our markets, general economic conditions and other factors referred to elsewhere in this section.

Terrorist attacks and other acts of violence or war may affect the real estate industry generally and our business, financial condition and results of operations.

We cannot predict the severity of the effect that potential future terrorist attacks could have on us. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the United States and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our assets and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. The economic impact of such events could also adversely affect the credit quality of some of our loans and investments and the property underlying our securities. Losses resulting from these types of events may not be fully insurable.

The absence of affordable insurance coverage protecting against terrorist attacks may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable opportunities available to us and the pace at which we are able to acquire assets. If the properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our assets.

We are subject to risks of loss from weather conditions, man-made or natural disasters and climate change.

Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties that collateralize our loans or that we own. Additionally, the value of such properties will potentially be subject to the risks associated with long-term effects of climate change. Future weather conditions, man-made or natural disasters or effects of climate change could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe the properties collateralizing our loan assets and our remaining owned real estate are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants. Any weather conditions, man-made or natural disasters or effect of climate change, whether or not insured, could have a material adverse effect on our financial performance, the market price of our common shares and our ability to pay dividends. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition.

Cyber incidents, cybersecurity threats or deficiencies in cybersecurity, or other security breaches to us or third-party vendors we use could compromise sensitive information belonging to us or our employees, borrowers, lessees, clients and other counterparties and could harm our business and our reputation.

We store sensitive data, including our proprietary business information and that of our borrowers, lessees, clients and other counterparties, and confidential employee information, in our data centers and on our networks. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions that could result in unauthorized disclosure or loss of sensitive information. Because the techniques used to obtain unauthorized access to networks, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Furthermore, in the operation of our business we also use third-party vendors that store certain sensitive data, including confidential information about our employees, and these third parties are subject to their own cybersecurity threats. Any security breach or other significant disruption involving the information technology networks and related systems of any party that provides us with services essential to our operations could have the following consequences, any of which could adversely affect our business:

Although third parties that provide us with services essential to our operations might have industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by any such third parties could, in turn, have an adverse impact on us.

The remediation costs and lost revenues experienced by a subject of an intentional cyberattack or other event which results in unauthorized third party access to systems to disrupt operations, corrupt data or steal confidential information may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. Additionally, any failure to adequately protect against unauthorized or unlawful processing of personal data, or to take appropriate action in cases of infringement may result in significant penalties under privacy laws.

Combination or “Layering” of Multiple Risks May Significantly Increase Risk of Loss

Although the various risks discussed in this Item are generally described separately, you should consider the potential effects of the interplay of multiple risk factors. Where more than one significant risk factor is present, the risk of loss to our investors may be significantly increased.

The chief executive of the United Kingdom Financial Conduct Authority, or FCA, which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is not possible to predict the effect of these changes or the establishment of alternative reference rates.

The Alternative Reference Rate Committee, or ARRC, a committee convened by the Federal Reserve that includes major market participants, and on which the SEC staff and other regulators participate, has proposed an alternative rate to replace U.S. Dollar LIBOR, the Secured Overnight Financing Rate, or SOFR. Any changes announced by the FCA, ARRC, other regulators or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which U.S. Dollar LIBOR, SOFR, or any other alternative rates are determined may result in a sudden or prolonged increase or decrease in the reported

LIBOR rates. If that were to occur, the levels of interest payments we incur and interest payments we receive may change. In addition, although certain of our LIBOR based obligations and investments provide for alternative methods of calculating the interest rate if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher than, lower than or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR rate was available in its current form.

Our reliance on debt to finance investments requires us to make balloon payments upon maturity, upon the exercise of any applicable put rights or otherwise, and an increased risk of loss may reduce our return on investments, reduce our ability to pay distributions to our stakeholders and possibly result in the foreclosure of any assets subject to secured financing.

We have historically incurred debt to finance our investments, which could compound losses and reduce our ability to pay our stakeholders. Our debt service payments could reduce the net income available for distributions to our shareholders and reduce our liquidity available to make distributions to our shareholders each calendar year that are required for REIT qualification. Most of our assets are pledged as collateral for borrowings. In addition, the assets of the securitizations that we consolidate collateralize the debt obligations of the securitizations and are not available to satisfy our other creditors. To the extent that we fail to meet debt service obligations, we risk the loss of some or all of our respective assets to foreclosure or sale to satisfy these debt obligations. Currently, our declaration of trust and bylaws do not impose any limitations on the extent to which we may leverage our respective assets.

In addition to the bankruptcy risks, we are subject to the risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required principal and interest payments and the risk that we will be unable to refinance our existing indebtedness when it becomes due, or that the terms of such refinancing will not be as favorable as the terms of our indebtedness. Included in our debt instruments are provisions providing for the lump sum payment of significant amounts of principal, whether upon maturity, upon the exercise of any applicable put rights or otherwise, which we refer to as balloon payments. Most of our debt provides for balloon payments that are payable at maturity. If collateral underlying any secured credit facility we are party to defaults or otherwise fails to meet specified conditions, we may have to repay that facility to the extent it was secured by that collateral. Our ability to make these payments when due will depend upon several factors, which may not be in our control. These factors include our liquidity or our ability to convert assets owned by us into liquidity on or prior to such put or maturity dates and the amount by which we have been able to reduce indebtedness prior to such put or maturity date through exchanges, refinancing, extensions, collateralization or other similar transactions (any of which transactions may also have the effect of reducing liquidity or liquid assets). Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available interest rate levels, the lease terms for and equity in any related collateral, our financial condition and the operating history of the collateral. If we are unable to pay, redeem, restructure, refinance, extend or otherwise enter into transactions to satisfy any of our debt, this could result in defaults under, and acceleration of, our debt and we may be required to sell assets in significant amounts and at times when market conditions are not favorable, which could result in our incurring significant losses.

We may seek to acquire, redeem, restructure, refinance or otherwise enter into transactions to satisfy our debt which may include any combination of material payments of cash, issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods.

From time to time our collateralized debt obligation, or CDO, notes payable, senior notes and our other indebtedness trade at discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future principal amounts due upon any applicable put dates, at maturity or upon redemption, or to otherwise benefit RAIT, we may, from time to time, purchase such CDO notes payable, senior notes or other indebtedness for cash, in exchange for our equity or debt securities, or for any combination of cash and our equity or debt securities, in each case in open market purchases, privately negotiated transactions, exchange offers and consent solicitations or otherwise. We will evaluate any such transactions in light of then-existing market conditions, contractual restrictions and other factors, taking into account our current liquidity and prospects for future access to capital. The amounts involved in any such transactions, individually or in the aggregate, may be material and may materially reduce our liquidity or reduce or eliminate our ability to convert assets into liquidity. Any material issuances of our equity securities may have a material dilutive effect on our current shareholders.

Our financing arrangements contain covenants that restrict our operations, and any default under these arrangements could materially adversely affect our operations and accelerate our indebtedness and inhibit our ability to pay distributions to our shareholders.

Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. These agreements may contain cross- default provisions so that

an event of default under one agreement will trigger an event of default under other agreements. Defaults generally give our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable and enforce their rights by foreclosing on or otherwise liquidating collateral pledged under these agreements. These restrictions may interfere with our ability to obtain financing or to engage in other business activities. Furthermore, our default under any of our financing arrangements could materially reduce our liquidity and our ability to make distributions to our shareholders. Covenants made by RAIT in its guarantee of its junior subordinated notes, at amortized cost, would restrict RAIT’s ability to declare or pay dividends or take related actions with respect to its equity or make payments or take related actions with respect to debt ranking pari passu or junior to such notes if there is a defined event of default under the indenture for such notes.

We may be subject to repurchases of loans or indemnification on loans and real estate that we have sold if certain representations or warranties in those sales are incorrect.

If loans that we sell or securitize do not comply with representations and warranties that we make about the loans, the borrowers, or the underlying properties, we may be required to repurchase such loans (including from a trust vehicle used to facilitate a structured financing of the assets through a securitization) or replace them with substitute loans. Additionally, in the case of loans and real estate that we have sold, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically will require a significant allocation of working capital to be carried on our books, and our ability to borrow against such assets may be limited or unavailable. Any significant repurchases or indemnification payments could adversely affect our business.

Representations and warranties made by us in connection with loan sales to securitization vehicles may subject us to liability that could result in loan losses and could harm our operating results and, therefore distributions and payments we make to our shareholders and other stakeholders.

In connection with loan sales to securitization vehicles, we are required to make representations and warranties regarding, among other things, the borrowers, guarantors, collateral, originators and servicers of the loans sold to the depositor of such assets into securitization trusts. In the event of a breach of such representations or warranties, we may be required to repurchase the affected loans at their face value or otherwise make payments to the owner of the loan. While we may have recourse to loan originators (if not us), borrowers, guarantors and/or other third parties whose representations, warranties, certifications, reports and/or other statements or work product we relied upon in making our representations and warranties, there can be no guaranty that such parties will be able to fully or partially cover any liability we may have in such circumstances. Furthermore, if we discover, prior to the securitization of an asset, that there is any fraud or misrepresentation with respect to the origination of such asset by a third party and are unable to force that third party to repurchase the loan, then we may not be able to sell the loan to a securitization or we may have to sell it at a discount. In any such case, we may incur losses and our cash flows may be impaired.

Our previous participation in the market for nonrecourse long-term securitizations may expose us to risks that could result in losses.

We have previously participated in the market for nonrecourse long-term securitizations by contributing loans to securitizations led by various large financial institutions and by leading securitizations on mortgage loans we originated and participation interests therein. To date, when we have acted as a mortgage loan seller into, and as an issuer, sponsor and/or depositor of, securitizations, we have been obligated to assume liabilities, including with respect to representations and warranties required to be made for the benefit of investors. In particular, in connection with any particular securitization, we: (i) made certain representations and warranties regarding ourselves and the characteristics of, and origination process for, the mortgage loans that we contribute to the securitization; (ii) undertook to cure, or to repurchase or replace any mortgage loan that we contribute to the securitization that is affected by a material breach of any such representation and warranty or a material loan document deficiency; and (iii) assumed, either directly or through the indemnification of third-parties, potential securities law liabilities for disclosure to investors regarding ourselves and the mortgage loans that we contribute to the securitization. When we lead securitizations as issuer, we assume, either directly or through indemnification agreements, additional potential securities law liabilities and third-party liabilities beyond the liabilities we would assume when we act only as a mortgage loan seller into a securitization.

Pursuant to the Dodd-Frank Act, various federal agencies have promulgated, or are in the process of promulgating, regulations and rules with respect to various issues that affect securitizations, including: (i) a rule requiring that sponsors in securitizations retain 5% of the credit risk associated with securities they issue; (ii) requirements for additional disclosure; (iii) requirements for additional review and reporting (including revisions to Regulation AB); and (iv) restrictions designed to prohibit conflicts of interest. The risk retention rule (as it relates to CMBS) became effective in December 2016 and requires retention of at least 5% of the fair value of all securities issued in connection with a securitization for a certain period of time and can be satisfied by (i) retention of a horizontal tranche (i.e., in one or more subordinate classes), (ii) retention of a vertical security or interest in each class of securities issued in connection with the securitization or (iii) a combination of vertical and horizontal strips. The risk (with respect to CMBS) must be

retained by the sponsor, certain mortgage loan originators or, upon satisfaction of certain requirements, up to two third-party purchasers of interests in the securitization. Other regulations have been and may ultimately be adopted. The risk retention rules and other rules and regulations that have been adopted or may be adopted will alter the structure of securitizations in the future and could pose additional risks to or reduce or eliminate the economic benefits of our current securitizations to us. In addition, such rules and regulations could reduce or eliminate the economic benefits of securitization or discourage traditional issuers, underwriters, subordinated security investors or other participants from participating in future securitizations and affect the availability of securitization platforms into which we can contribute mortgage loans.

RAIT I failed one of its over-collateralization tests which reduced periodic interest distributions on RAIT’s retained interests in RAIT I and if RAIT I was to fail to meet additional over-collateralization tests or interest coverage tests, which we collectively refer to as coverage tests, the timing and/or amounts of our cash flow from RAIT I may be materially affected.

The terms of RAIT I generally provide that the principal amount of assets must exceed the principal balance of the related securities issued by it by a certain amount, commonly referred to as “over-collateralization.” These terms provide that, if defaults and/or losses exceed specified levels based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the securities issued in the securitization, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or defaults did not exceed those levels. In addition, a failure by this securitization to satisfy an over-collateralization test may result in accelerated periodic interest distributions to the holders of the senior debt securities issued by it. Our equity holdings, certain of our debt interests and our subordinated management fees, if any, are subordinate in right of payment to the other classes of debt securities issued by the securitization entity. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive cash distributions from assets collateralizing the securities issued by the securitization entity or our ability to effectively manage the assets held in the securitizations.

RAIT I also contains interest coverage tests. If the interest coverage tests 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 cause of the interest coverage test failure, which may include curing payment defaults, paying down the CDO notes payable, or other actions permitted under the RAIT I indenture. Any failure of a coverage test would likely reduce payments on RAIT’s retained interests in RAIT I.

In January 2019, RAIT I failed its Class F/G/H overcollateralization test which resulted in a significant amount of monthly interest proceeds on Class J Notes and Preference Shares issued by RAIT I that are held by a RAIT subsidiary being redirected to payments on senior classes of notes issued by RAIT I in their order of seniority. RAIT does not expect this overcollateralization test to be satisfied for the foreseeable future and so RAIT expects these periodic interest distributions that would have otherwise been directed to these Class J Notes and Preference Shares to continue to be redirected in this manner, reducing RAIT’s periodic interest distributions from RAIT I though the amount of our ultimate gross total expected cash flows may not be affected. RAIT I may fail to meet additional coverage tests in the future which would further reduce these periodic distributions from RAIT I and the timing and/or amount of other cash flow from RAIT I. If RAIT I fails to meet additional coverage tests for more senior classes of notes than Class F/G/H, we expect that periodic interest distributions on RAIT’s retained interests in RAIT I would be materially reduced. While failures of the Class C/D/E coverage tests or the Class F/G/H coverage tests would not constitute an event of default under the indenture governing the notes issued by RAIT I, for so long as any of the Class B Notes issued by RAIT I remain outstanding (the Class A Notes issued by RAIT I having been previously redeemed), a failure to meet a defined Class A/B overcollateralization ratio of 100% could result in an indenture event of default and an acceleration of the notes issued by RAIT I and other adverse consequences to RAIT.

RAIT I is required to hold auctions of its collateral assets at specified times and under specified conditions and our liquidity, financial performance and our return on the equity we hold in RAIT I may be adversely affected if the proceeds of any auction sales are lower than our valuation of such assets or if we acquire such assets in such auctions on more costly terms than the terms of RAIT I.

Under the indenture for the notes, or the CDO notes, issued to unaffiliated investors by RAIT I, since the CDO notes were not redeemed in full prior to the distribution date occurring in November 2016, an auction of the collateral assets of RAIT I is required to be periodically conducted by the relevant trustee and, if certain conditions set forth in the relevant indenture are satisfied, such collateral assets will be sold at the auction and the relevant CDO notes will be redeemed, in whole, but not in part, on such distribution date. No redemption of the CDO notes may occur unless proceeds of the auction, together with other defined available redemption funds, are sufficient to pay the defined total senior redemption amount. If such conditions are not satisfied and the auction is not successfully conducted on such distribution date, the relevant trustee will conduct auctions on a periodic basis until the relevant CDO notes are redeemed in full. Our liquidity and financial performance may be adversely affected if the proceeds of any auction sales are lower than our valuation of such assets or if we acquire such assets in such auctions on more costly terms than the terms of RAIT I. In

addition, our returns on the preference shares and our other equity we hold in RAIT I may be reduced or eliminated if auctions are held when the total senior redemption amount does not include the payment of an internal rate of return on such preference shares.

Our common shares and preferred shares could be determined to be a “penny stock,” in which case a broker-dealer may find it more difficult to trade our common shares and an investor may find it more difficult to acquire or dispose of our common shares in the secondary market.

Our common shares may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common shares were determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common shares and an investor may find it more difficult to acquire or dispose of our common shares in the secondary market. These factors could significantly negatively affect the market price of our common shares and our ability to raise capital.

Future issuances of our securities as a result of actions or transactions resulting from the 2019 strategic steps or otherwise in the public or private markets or to one or more of our stakeholders in negotiated transactions could adversely affect the trading price of our publicly traded securities and substantially dilute existing shareholders.

Future issuances of our securities as a result of actions or transactions resulting from the 2019 strategic steps or otherwise in the public or private markets or to one or more of our stakeholders in negotiated transactions could result in substantial dilution to existing shareholders, could potentially adversely affect the trading price of our publicly traded securities and could further impair our ability to raise capital or exchange new securities issued by us for other of our securities. This is particularly true if such sales occur at depressed stock prices, such as those currently existing. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which may further reduce the market price of our common shares and preferred shares.

We have suspended paying dividends on our common shares and preferred shares and we cannot assure you of our ability to pay dividends in the future or the amount of any dividends.

The board has determined to suspend paying a dividend on RAIT’s common shares and preferred shares. The board currently expects to continue to review and determine the dividends on RAIT’s common shares and preferred shares on a quarterly basis, but we cannot provide you with any assurances that RAIT will resume paying dividends on its common shares or preferred shares. Our board determines the amount and timing of any distributions. In making this determination, our trustees consider a variety of relevant factors, including, without limitation, REIT minimum distribution requirements, the amount of cash available for distribution, restrictions under Maryland law, capital expenditures and reserve requirements and general operational requirements. We cannot assure you that we will be able to make distributions in the future. Any of the foregoing could adversely affect the market price of our publicly traded securities. If dividends on RAIT’s outstanding preferred shares are in arrears for six or more quarterly periods, those preferred shareholders, voting as a single class, would be entitled to elect a total of two additional trustees to the board, which could have an adverse impact on RAIT’s governance and on the interests of RAIT stakeholders other than the holders of RAIT’s preferred shares if these additional trustees focus primarily on pursuing strategies to benefit holders of our preferred shares.

We implemented a 1-for-50 reverse stock split of our common shares in August 2018 resulting in every fifty of our common shares then issued and outstanding being automatically combined into one issued and outstanding common share, as a result of which the market for our common shares has become, and is expected to remain substantially, less liquid. In addition, our securities were delisted from the New York Stock Exchange in December 2018. Our securities are currently quoted on the OTC Markets Group’s OTCQB Over-the-Counter Bulletin Board. The OTCQB is regarded as a junior trading venue. This may result in limited investor interest and hence lower prices for our securities than might otherwise be obtained. In addition, it may be difficult for holders of our securities to sell their securities without depressing the market price for our securities or at all. As a result of these and other factors, holders of our securities may not be able to sell their securities. Further, an inactive market may also impair our ability to raise capital by selling our common shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common shares as consideration. If an active market for our securities does not develop or is not sustained, it may be difficult for holders of our securities to sell those securities. We cannot assure you that we will continue to meet the requirements for our securities to continue to trade on the OTCQB, in which event RAIT would need to determine if another trading platform would be available for its securities, which trading platform would likely provide less liquidity than the OTCQB.

Since our securities are currently quoted on the OTCQB, our shareholders may face significant restrictions on the resale of our securities due to state “Blue Sky” laws.

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our securities will be registered or exempt from registration under the laws of any state. Since our securities are currently quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our securities. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. Investors should therefore consider the resale market for our securities to be limited, as they may be unable to resell securities without the significant expense of state registration or qualification.

We receive collateral management fees pursuant to a collateral management agreement for services we provide as the collateral manager of RAIT I. If a collateral management agreement is terminated or if the securities serving as collateral for RAIT I are prepaid or go into default, the collateral management fees will be reduced or eliminated.

We receive collateral management fees pursuant to a collateral management agreement for acting as the collateral manager of RAIT I. If all the notes issued by RAIT I are redeemed, or if the collateral management agreement is otherwise terminated, we will no longer receive collateral management fees from that securitization. In general, a collateral management agreement may be terminated both with and without cause at the direction of holders of a specified supermajority in principal amount of the notes issued by the securitization. Furthermore, such fees are based on the total amount of collateral held by the securitizations. If the assets serving as collateral for a securitization are prepaid or go into default, we will receive lower collateral management fees than expected or the collateral management fees may be eliminated.

In addition, collateral management agreements typically provide that if certain over-collateralization tests are failed, the collateral management agreement may be terminated by a vote of the security holders resulting in our loss of management fees from these securitizations.

If any of our securitizations fail to meet over-collateralization tests relevant to the securitization’s most senior existing debt, an event of default may occur. Upon an event of default, our ability to manage the securitization may be terminated and our ability to attempt to cure any defaults in the securitization would be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in those securitizations for an indefinite time.

We expect repayments of loans collateralizing RAIT I and the FL securitizations outside their contractual maturities to continue which we expect will reduce our returns from these securitizations.

We expect repayment of the loans collateralizing RAIT I and the FL securitizations outside their contractual maturities to continue. We expect this will reduce our returns from these securitizations. If we are unable to replace these returns, our financial performance may be adversely affected.

We receive servicing and special servicing fees pursuant to servicing agreements with RAIT I and the FL securitizations for services we provide as the servicer and special servicer. If these or any similar servicing agreements are terminated, if the loans serving as collateral for a securitization are prepaid or go into default or if the notes issued by these securitizations are repaid or redeemed, the servicing fees will be reduced or eliminated.

We receive servicing fees pursuant to servicing agreements for acting as the servicer and special servicer of each of RAIT I and the FL securitizations. If all the notes issued by RAIT I or any of the FL securitizations are repaid or redeemed, or if a servicing agreement is otherwise terminated if conditions under the relevant agreement are met, we will no longer receive servicing fees from RAIT I or the affected FL securitization, as applicable. In general, these servicing agreements may be terminated upon the occurrence of a termination event, which includes our failure to remit required payments, make required advances, material breaches of covenants or representations, defined bankruptcy and insolvency events and a ratings downgrade citing servicing concerns as a material factor. Furthermore, the fees payable by each securitization are based on the total amount of collateral held by the securitization. If the assets serving as collateral for a securitization are prepaid or go into default, we will receive lower servicing fees than expected or the servicing fees may be eliminated.

If we lose our rating as a commercial mortgage loan primary servicer and special servicer by Standard & Poor’s and by Morningstar or if any of the bonds in our FL securitizations are downgraded, qualified or put on a watch list by the relevant rating agency citing servicing concerns as the sole or a material factor, our fee income might be reduced.

We are rated as a commercial mortgage loan primary servicer and special servicer by Standard & Poor’s and by Morningstar. If we were to lose either of these ratings, we might need to incur additional expenses in order to regain our rating or obtain comparable credentials from other persons to continue to provide servicing services generating fee income under our arrangements with securitizations or enter into sub-servicing or other arrangements with third parties in order to continue to earn such fees. Such expenses or arrangements might reduce our fee income. Standard & Poor’s and Morningstar has downgraded our rating and this increases the chance that one or more of these adverse consequences will occur. In addition, if any of the bonds in our FL securitizations are downgraded, qualified or put on a watch list by the relevant rating agency citing servicing concerns as the sole or a material factor, we may be terminated as the servicer and/or special servicer of such securitization and our fee income may also be reduced.

RAIT’s ability to act as servicer and special servicer for RAIT FL8 could be materially adversely affected if RAIT is unable to address DBRS’ concerns.

As described above under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary,” a rating agency, DBRS Limited, or DBRS, announced that it had placed all classes of the Floating Rate Notes issued by RAIT FL8 under review with negative implications citing concerns over RAIT’s ability to continue to effectively service and special service these transactions due to RAIT’s announcement that it was taking described strategic steps. DBRS announced it would revisit the ratings once additional information becomes available. RAIT’s ability to act as servicer and special servicer for the RAIT FL8 securitization could be materially adversely affected if RAIT is unable to address DBRS’ concerns.

Risks relating to financial reporting requirements and fair value determinations

If we deconsolidate any of RAIT I or the FL securitizations, it may have a material effect on our financial statements.

Our consolidated financial statements reflect our accounts and the accounts of our subsidiaries and other entities in which we have a controlling financial interest. If we were to determine that our interests in any of these entities no longer made us have a controlling financial interest, our determination to consolidate such entities would change. If we deconsolidate any of these entities for these or any other reasons, the assets, liabilities, equity and income in our financial statements may be changed significantly. We may consider disposing of part or all of our direct or indirect retained interests in any or all of RAIT I or the FL securitizations as part of the 2019 strategic steps which would likely replace assets, liabilities, equity and income in our financial statements from these securitizations with the proceeds of any such disposition which may materially change our financial condition and operating performance.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, investor confidence in our Company and, as a result, the value of our common shares.

We are required to report on the effectiveness of our internal controls over financial reporting and include in our Annual Reports on Form 10-K management’s assessment of the effectiveness of such controls. In connection with management’s assessment of our internal control over financial reporting for the year ended December 31, 2018, management identified certain material weaknesses in our internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected, on a timely basis.

As described in Part II, Item 9A, “Controls and Procedures - Management’s Report on Internal Control Over Financial Reporting,” in our assessment of our internal controls for the year ended December 31, 2018, management identified a material weakness in our internal control over financial reporting related to the lack of an effective continuous risk assessment process and monitoring activities to modify financial reporting processes and related internal controls impacted by changes in the business operations, which created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.

Management expects to remediate this material weakness by continuing its risk assessment and monitoring activities and testing of the enhanced controls that are further described in Part II, Item 9A, “Controls and Procedures - Changes in Internal Control Over Financial Reporting” section below to ensure that they are designed, implemented and operating effectively. Until our remediation plan is fully implemented, our management will continue to devote time and attention to these efforts. If we do not complete our

remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected. If we are unable to report our results in a timely and accurate manner, we may not be able to comply with the applicable covenants in our financing arrangements and may be required to seek amendments or waivers under these financing arrangements, which, if not agreed to, could adversely impact our liquidity and financial condition.

If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results and may be required to incur substantial costs and divert management resources.

We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected, and our independent registered public accounting firm may be unable to attest to the accuracy of our financial statements. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected, on a timely basis.

Our remediation of the material weakness described above is not complete. In the event we remediate this material weakness, there can be no assurance that significant deficiencies or material weaknesses will not occur in the future. If we fail to maintain effective internal controls over financial reporting and disclosure controls and procedures in the future, it could result in a material misstatement of our financial statements that may not be prevented or detected on a timely basis, which could cause stakeholders to lose confidence in our reported financial information. Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, cause us to fail to file timely our periodic reports with the SEC (which may limit our ability to access the capital markets); prevent us from providing reliable and accurate financial information and forecasts or from avoiding or detecting fraud; or require us to incur additional costs or divert management resources to achieve compliance.

Our financial statements may be materially impacted if our estimates, including loan loss reserves, prove to be inaccurate.

Financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include but are not limited to: (i) assessing the adequacy of the allowance for loan losses; (ii) determining the fair value of financial instruments; and (iii) assessing impairments on real estate held for use or held for sale. As these estimates, judgments and assumptions are inherently uncertain, especially in turbulent economic times, our actual financial results may differ from these estimates.

Accounting standards for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our consolidated financial statements.

Accounting standards for transfers of financial assets, securitization transactions, consolidation of variable interest entities, or VIEs, convertible debt securities that may be settled in cash and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our shareholders. Changes in accounting interpretations or assumptions could impact our consolidated financial statements, result in a need to restate our financial results and affect our ability to timely prepare our consolidated financial statements. Our inability to timely prepare our consolidated financial statements in the future would likely adversely affect the trading prices of our common shares or other securities significantly.

A portion of our assets and liabilities are recorded at fair value using unobservable inputs and, as a result, there may be uncertainty as to the value of these investments.

We reflect certain assets and liabilities at fair value in our balance sheet, with changes in fair value recorded in earnings. All of these assets and liabilities are not publicly traded and as such, their fair value may not be readily determinable. For further discussion of the fair value of our financial instruments, see Part II, Item 8, “Financial Statements and Supplementary Data—Note 2: Summary of Significant Accounting Policies—Fair Value of Financial Instruments.” We value these assets quarterly at fair value. Because such valuations are inherently uncertain, may fluctuate over short periods of time and are based on assumptions and estimates, our

determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. If our determinations regarding the fair value of these assets are not realized, we could record a loss upon their disposal.

When we acquire properties through the foreclosure of commercial real estate loans, we may realize losses if the fair value of the property internally determined upon such acquisition is less than the previous recorded investment of the foreclosed loan.

We periodically acquire properties through the foreclosure of commercial real estate loans. Upon acquisition, we value the property and its related assets and liabilities. We determine the fair values based primarily upon discounted cash flow or capitalization rate models, the use of which requires critical assumptions including discount rates, capitalization rates, vacancy rates and growth rates based, in part, on the properties’ operating history and third-party data. We may realize losses if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan.

Changes in interest rates and changes in interest rate spreads may reduce the value of our investments and reduce our interest income.

Changes in interest rates and changes in interest rate spreads affect the market value of our investment portfolio. In general, the market value of a loan will change in inverse relation to an interest rate change where a loan has a fixed interest rate or only limited interest rate adjustments. Accordingly, in a period of rising interest rates, the market value of such a loan will decrease. Moreover, in a period of declining interest rates, real estate loans with rates that are fixed or variable only to a limited extent may have less value than other income-producing securities due to possible prepayments. Interest rate changes will also affect the return we obtain on new loans. In particular, during a period of declining rates, our reinvestment of loan repayments may be at lower rates than we obtained in prior investments or on the repaid loans. Also, increases in interest rates on debt we incur may not be reflected in increased rates of return on the investments funded through such debt, which would reduce our return on those investments. Accordingly, interest rate changes may materially affect the total return on our investment portfolio, which in turn will affect the amount available for distribution to shareholders. To the extent the spread in interest rates between loans in our portfolio and our underlying sources of capital decreases, the value of our loans and interest income may be adversely affected.

Our investments include loans secured directly or indirectly by real estate, interests in entities whose principal or sole assets are real estate or direct ownership of real estate. As a result, the value of these investments depends primarily upon the value of the real estate underlying these investments which is affected by numerous factors beyond our control including general and local economic conditions, neighborhood values, competitive overbuilding, weather, casualty losses, occupancy rates and other factors beyond our control. The value of this underlying real estate may also be affected by factors such as the costs of compliance with use, occupancy and similar regulations, potential or actual liabilities under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. Operating and other expenses of this underlying real estate, particularly significant expenses such as mortgage payments, insurance, real estate taxes and maintenance costs, generally do not decrease when income decreases and, even if revenue increases, operating and other expenses may increase faster than revenues.

Any investment may also be affected by a borrower’s failure to comply with the terms of our investment, its bankruptcy, insolvency or reorganization or its properties becoming subject to foreclosure proceedings, all of which may require us to become involved in expensive and time-consuming litigation. Some of our investments defer some portion of our return to loan maturity or the mandatory redemption date. The borrower’s ability to satisfy these deferred obligations may depend upon its ability to obtain suitable refinancing or to otherwise raise a substantial amount of cash. These risks may be subject to the same considerations we describe in the “Risks relating to our commercial real estate, or CRE, real estate lending business” section.

RAIT’s increased sale of assets to generate liquidity while suspending new investment activity, which has been part of RAIT’s business strategy since early 2018, has resulted in the reduction of RAIT’s overall assets and an increase in the portion of RAIT’s assets having increased credit risk.

RAIT’s business strategy since early 2018 emphasizing RAIT’s increased sale of assets to generate liquidity while suspending new investment activity has resulted in a reduction of RAIT’s assets and an increase in the portion of RAIT’s assets having an increased credit risk profile in this period. This is due in part to RAIT generally focusing on selling its assets with relatively better credit risk profiles, where practicable, to generate quicker and better proceeds with lower transaction execution risk, rather than trying to sell assets with relatively higher credit risk profiles. As a result, in this period measured year to year RAIT’s assets overall have an increasing risk of requiring loan loss reserves and charge-offs and recognizing impairments related to these credit risks. RAIT does

not expect to be able to reverse this trend unless and until it is able to resume making new investments with historically comparable credit risk profiles, which may not occur.

We have a concentration of investments in the commercial real estate sector and may have concentrations from time to time in certain loan types, property types, locations, tenants and borrowers, which may increase our exposure to the risks of certain economic downturns.

We operate in the commercial real estate sector, including the financing and ownership of multifamily and other property types. Such concentration in one economic sector may increase the volatility of our returns and may also expose us to the risk of economic downturns in this sector to a greater extent than if our portfolio also included other sectors of the economy. Declining real estate values may reduce the level of new mortgage and other real estate-related loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans or refinance our loans if the value of real estate weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our recorded investment in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate/acquire/sell loans, which would materially and adversely affect our results of operations, financial condition, liquidity and business.

In addition, we are not required to observe specific diversification criteria relating to loan types, property types, locations, tenants or borrowers. A limited degree of diversification increases risk because the aggregate return of our business may be adversely affected by the unfavorable performance of a single type of loan, property type, single tenant, single market or even a single investment. Prior to our suspension of new investment activity, RAIT was focusing on the origination of bridge loans relating to properties in transition. To the extent that our portfolio is concentrated in any one type of asset or region, downturns relating generally to such type of asset or region may result in defaults on a number of our assets within a short time period. Additionally, borrower concentration, in which a particular borrower is, or a group of related borrowers are, associated with multiple real properties securing mortgage loans or securities held by us, magnifies the risks presented by the possible poor performance of such borrower(s).

We may have material geographic concentrations related to our investments in commercial real estate loans and properties. The REITs and real estate operating companies in whose securities we have invested in may also have material geographic concentrations related to their investments in real estate, loans secured by real estate or other investments. We also have material concentrations in the property types that comprise our commercial loan portfolio and in the industry sectors that comprise our unsecured securities portfolio. We also may have material concentrations in the sponsors of properties that comprise our commercial loan portfolio. Where we have any kind of concentration risk in our investments, an adverse development in that area of concentration could reduce the value of our investment and our return on that investment and, if the concentration affects a material amount of our investments, impair our ability to execute our investment strategies successfully, reduce our earnings and reduce our ability to make distributions.

Our due diligence efforts before making an investment may not have identified all the risks related to that investment.

Before originating a loan or investment for, or making a loan to or investment in, an entity, we assess the strength and skills of the entity’s management and other factors that we believe will determine the success of the loan or investment. In making the assessment and otherwise conducting customary due diligence, we expect to rely on available resources and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. As a result, there can be no assurance that the due diligence processes we conduct will uncover all relevant facts or that any investment will be successful.

Our investments in securitizations are exposed to greater uncertainty and risk of loss than investments in higher grade securities in these securitizations.

When we securitize assets such as commercial mortgage loans and mezzanine loans, the various tranches of investment grade and non-investment grade debt obligations and equity securities have differing priorities and rights to the cash flows of the underlying assets being securitized. We structured our securitization transactions to enable us to place debt and equity securities with investors in the capital markets at various pricing levels based on the credit position created for each tranche of debt and equity securities. The higher rated debt tranches have priority over the lower rated debt securities and the equity securities issued by the particular securitization entity with respect to payments of interest and principal using the cash flows from the collateral assets. The relative cost of capital increases as each tranche of capital becomes further subordinated, as does the associated risk of loss if cash flows from the assets are insufficient to repay fully interest and principal or pay dividends.

Since, in many cases, we own the non-investment grade and unrated debt and equity classes of securitizations, we are in a subordinated and/or “first loss” position because the rights of the securities that we hold are subordinate in right of payment and in liquidation to the rights of higher rated debt securities issued by the securitization entities. Accordingly, we have incurred and may in the future incur significant losses regarding our investments in these securities. In the event of default, we may not be able to recover any or all of our respective investments in these securities. In addition, we may experience significant losses if the underlying portfolio has been overvalued or if the values subsequently decline and, as a result, less collateral is available to satisfy interest, principal and dividend payments due on the related securities. The prices of lower credit quality securities are generally less sensitive to interest rate changes than higher rated investments but are more sensitive to economic downturns or developments specific to a particular issuer. Current credit market conditions have caused a decline in the price of lower credit quality securities because the ability of obligors on the underlying assets to make principal, interest and dividend payments may be impaired. In addition, existing credit support in a number of the securitizations in which we have invested have been, and may in the future be, insufficient to protect us against loss of our investments in these securities.

Risks relating to our commercial real estate, or CRE, real estate lending business

The commercial mortgage loans in which we have invested and the commercial mortgage loans underlying the CMBS in which we have invested are subject to delinquency, foreclosure and loss, which could result in losses to us that may result in reduced earnings or losses and reduce our ability to pay distributions to our shareholders.

We hold substantial portfolios of commercial mortgage loans and CMBS which are secured by office, retail, industrial and multifamily or other commercial property and are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a non-recourse loan secured by an income-producing property typically depends primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

In the event of any default under a commercial mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a commercial mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a commercial mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. CMBS evidence interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage-backed securities in which we have invested are subject to all of the risks of the underlying mortgage loans.

A defaulted commercial real estate loan may become subject to either substantial workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants with respect to such loan. In addition, such negotiations or restructuring may be quite extensive and protracted over time, and therefore may result in substantial uncertainty with respect to the ultimate recovery on such loan.

If the financial condition and/or results of operations of RAIT’s borrowers deteriorates for any reason, that could adversely affect the business of our borrowers and their ability to repay obligations. In addition, if economic conditions deteriorate, that could impact the tenant’s ability to pay obligations and our borrower’s ability to secure financing and/or sell properties.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results.

We maintain loan loss reserves to protect against probable, incurred losses and conduct a review of the appropriateness of these reserves on a quarterly basis. Our loan loss reserves reflect management’s then-current estimation of the probability and severity of losses within our portfolio, based on this quarterly review. Our determination of loan loss reserves relies on significant estimates

regarding the fair value of loan collateral. The estimation of these fair values is a complex and subjective process. As such, there can be no assurance that management’s judgment will prove to be correct and that reserves will be adequate over time to protect against future losses. Such losses could be caused by factors including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate, markets in which our borrowers or their properties are located or an inability to collect accrued interest receivable on loans which accrue interest at a higher rate than their stated pay rate. If our reserves for loan losses prove inadequate, we will suffer additional losses which may have a material adverse effect on our financial performance and results of operations.

Prepayment rates on mortgage loans cannot be predicted with certainty and prepayments may result in losses to the value of our assets.

The frequency at which prepayments (including voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on our investments can adversely impact our business. Prepayment rates cannot be predicted with certainty, making it impossible to completely insulate us from prepayment or other such risks. Prepayments of our investments in loans may adversely impact our portfolio because investments may experience outright losses in an environment of faster actual or anticipated prepayments or may underperform relative to hedges that the management team may have constructed for such investments (resulting in a loss to our overall portfolio). Additionally, borrowers are more likely to prepay when the prevailing level of interest rates falls, thereby exposing us to the risk that the prepayment proceeds, if reinvested, may be reinvested only at a lower interest rate than that borne by the prepaid obligation.

Our subordinated real estate investments such as mezzanine loans and preferred equity interests in entities owning real estate involve increased risk of loss.

We have invested in mezzanine loans and other forms of subordinated financing, such as investments consisting of preferred equity interests in entities owning real estate. Because of their subordinate position, these subordinated investments carry a greater credit risk than senior lien financing, including a substantially greater risk of non-payment. If a borrower defaults on our subordinated investment or on debt senior to us, our subordinated investment will be satisfied only after the senior debt is paid off, which may result in our being unable to recover the full amount, or any, of our investment. A decline in the real estate market could reduce the value of the property so that the aggregate outstanding balances of senior liens may exceed the value of the underlying property.

Where debt senior to our investment exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. In the event of a default on a senior loan, we may elect to make payments, if we have the right to do so, in order to prevent foreclosure on the senior loans. When we originate or acquire a subordinated investment, we typically do not have the right to service senior loans. The servicers of the senior loans are responsible to the holders of those loans, whose interests will likely not coincide with ours, particularly in the event of a default. Accordingly, the senior loans may not be serviced in a manner advantageous to us. It is also possible that, in some cases, a “due on sale” clause included in a senior mortgage, which accelerates the amount due under the senior mortgage in case of the sale of the property, may apply to the sale of the property if we foreclose, increasing our risk of loss.

Our investments in subordinate loans, subordinate participation interests in loans and subordinate CMBS rank junior to other senior debt and we may be unable to recover our investment in these loans.

Our investments include subordinate loans (including mezzanine loans), subordinate participation interests in loans and subordinate CMBS. In the event a borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on a loan to us or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend loan documents, assign our loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers.

In general, losses on a property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated security holder (generally, the “B-Piece” buyer) and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we may invest, we may not be able to recover all of our investment in the securities we purchased.

In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage-backed securities, the securities in which we have invested may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgage loans underlying the mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal in these securities.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We cannot assure you that such claims will not arise or that we will not be subject to significant liability if a claim of this type were to arise.

The vast majority of the mortgage loans that we have originated or purchased, and those underlying the CMBS in which we have invested, are nonrecourse loans and the assets securing the loans may not be sufficient to protect us from a partial or complete loss if the borrower defaults on the loan.

Except for customary nonrecourse carve-outs for certain actions and environmental liability, most commercial mortgage loans, including those underlying the CMBS in which we have invested, are effectively nonrecourse obligations of the sponsor and borrower, meaning that there is no recourse against the assets of the borrower or sponsor other than the underlying collateral. In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. Even if a mortgage loan is recourse to the borrower (or if a nonrecourse carve-out to the borrower applies), in most cases, the borrower’s assets are limited primarily to its interest in the related mortgaged property. Further, although a mortgage loan may provide for limited recourse to a principal or affiliate of the related borrower, there is no assurance any recovery from such principal or affiliate will be made or that such principal’s or affiliate’s assets would be sufficient to pay any otherwise recoverable claim.

Certain bridge loans may be more illiquid and involve a greater risk of loss than long-term mortgage loans.

We originated and acquired bridge loans generally having maturities of three years or less, that provide interim financing to borrowers seeking short-term capital for the acquisition or transition (for example, lease up and/or rehabilitation) of commercial real estate. Such a borrower under an interim loan often has identified a transitional asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the interim loan, and we bear the risk that we may not recover some or all of our initial expenditure. In addition, borrowers usually use the proceeds of a long-term mortgage loan to repay an interim loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our interim loan, which could depend on market conditions and other factors.

Further, interim loans may be relatively less liquid than loans against stabilized properties due to their short life, the more limited availability of financing through securitizations than for conduit loans, any unstabilized nature of the underlying real estate and the difficulty of recovery in the event of a borrower’s default. This lack of liquidity may significantly impede our ability to respond to adverse changes in the performance of our interim loan portfolio and may adversely affect the value of the portfolio.

Such “liquidity risk” may be difficult or impossible to hedge against and may also make it difficult to effect a sale of such assets as we may need or desire. As a result, if we are required to liquidate all or a portion of our interim loan portfolio quickly, we may realize significantly less than the value at which such investments were previously recorded, which may fail to maximize the value of the investments or result in a loss.

We are subject to additional risks associated with loan participations because our ability to exercise our rights may be restricted by the terms of the participation.

Some of our loans are participation interests or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control.

We may not control the special servicing of the mortgage loans or other debt underlying the debt securities in which we have invested, and, in such cases, the special servicer may take actions that could adversely affect our interest.

In circumstances where we do not maintain a first mortgage position, overall control over the special servicing of the mortgage loans or other debt underlying the debt securities in which we have invested may be held by a directing certificate holder which is typically appointed by the holders of the most subordinate class of such debt security then outstanding. We ordinarily do not have the right to appoint the directing certificate holder. In connection with the servicing of the specially serviced loans, the related special servicer may, at the direction of the directing certificate holder, take actions that could adversely affect our interest.

Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates that differ from current payment terms. We refer to these loans as cash flow loans. Although a cash flow loan accrues interest at a stated rate, pursuant to forbearance or other agreements, the borrower is only required to pay interest each month at a minimum rate (which could be zero) plus additional interest up to the stated rate to the extent of all cash flow from the property underlying the loan after the payment of property operating expenses. Interest income is recognized on our cash flow loans at the specified rates that differ from current payment terms. In the event our borrowers on our cash flow loans do not ultimately pay these accrued interest receivables, our financial performance will be adversely affected.

A significant tenant ceasing to operate at a retail property could adversely affect its value and cash flow.

The value of retail properties is significantly affected by the quality of the tenants as well as fundamental aspects of real estate, such as location and market demographics. The correlation between the success of tenant business and a retail property’s value may be more direct with respect to retail properties than other types of commercial property because a component of the total rent paid by certain retail tenants is often tied to a percentage of gross sales.

There is no guarantee that any tenant will continue to occupy space in the related retail property. The presence of significant tenants or anchor tenants is an important consideration at a retail property. A retail “anchor tenant” or “shadow-anchor tenant” plays a key role in attracting customers to a retail property and making a retail property a desirable location for other tenants, whether or not it is located on the mortgaged property. A significant tenant or anchor tenant ceasing to do business at a retail property could result in realized losses on the mortgage loans or real property that we own. The loss of a significant tenant or anchor tenants may result from the tenant’s voluntary decision not to renew a lease or to terminate it in accordance with its terms, the bankruptcy or economic decline of the tenant, the tenant’s general cessation of business activities or other reasons (including co-tenancy provisions permitting a tenant to terminate a lease prior to its term).

Some tenants at retail properties may be entitled to terminate their leases or pay reduced rent if sales are below certain target levels, or if an anchor tenant or one or more of the larger tenants cease operations at that property or fail to open. If anchor stores in a mortgaged property or real property that we own were to close, the borrower or we may be unable to replace those anchor tenants in a timely manner on similar terms, and customer traffic may be reduced, possibly affecting sales at the remaining retail tenants. The lack of replacement anchors and a reduction in rental income from remaining tenants may adversely affect the borrower’s or our ability to pay current debt service or successfully refinance the mortgage loan or sell the property at or prior to maturity. These risks with respect to an anchored retail property may be increased when the property is a single tenant property.

In addition, various anchor parcels and/or anchor improvements at a mortgaged property may be owned by the anchor tenant (or an affiliate of the anchor tenant) or by a third party, rather than the related borrower or us, and therefore not be part of the related mortgaged property or real property that we own and the related borrower or we may not receive rental income from such anchor tenant.

Current levels of property income may not be maintained due to varying tenant occupancy.

Rental payments from tenants of retail properties typically comprise the largest portion of the net operating income of those mortgaged properties or real property that we own. Tenants at our retail properties may be paying rent but are not yet in occupancy or have signed leases but have not yet started paying rent and/or are not yet in occupancy. Tenants at our retail properties may be in a rent abatement period. There can be no assurance that such tenants will be in a position to pay full rent when the abatement period expires. Risks applicable to anchor tenants (such as bankruptcy, failure to renew leases, early terminations of leases and vacancies) also apply to other tenants. We cannot assure you that the rate of occupancy at the stores will remain at the current levels or that the net operating income contributed by our retail properties will remain at its current or past levels.

Competition may adversely affect the value and cash flow from retail properties.

Retail properties face competition from sources outside their local real estate market. For example, all of the following compete with more traditional retail properties for consumer business:

Continued growth of these alternative retail outlets (which often have lower operating costs) could adversely affect the rents collectible at our retail properties that operate as retail properties as well as the market value of our retail properties. Moreover, additional competing retail properties have been and may in the future be built in the areas where the retail properties are located. Such competition could result in a reduction of income from our retail properties.

In addition, although renovations and expansion at our retail properties will generally enhance the value of those properties over time, in the short term, construction and renovation work at such properties may negatively impact net operating income as customers may be deterred from shopping at or near a construction site.

Economic decline in tenant businesses or changes in demographic conditions could adversely affect the value and cash flow from office properties.

Economic decline in the businesses operated by the tenants of office properties may increase the likelihood that the tenants may be unable to pay their rent, which could result in realized losses on the mortgage loans or real property that we own. A number of economic and demographic factors may adversely affect the value of office properties, including:

Moreover, the cost of refitting office space for a new tenant is often higher than the cost of refitting other types of property.

These risks may be increased if rental revenue depends on a single tenant, on a few tenants, if the property is owner occupied or if there is a significant concentration of tenants in a particular business or industry. In addition, adverse developments in the local, regional and national economies can affect the ability of a landlord to incur the cost of providing services at an office property, and the ability of a landlord to provide services to an office property can have a significant effect on the success of the property. Further, technological developments can affect the viability of office properties by rendering facilities obsolete or by reducing the size of the workforce necessary to perform office tasks, thus reducing demand for office space.

If one or more of the larger tenants at a particular office property were to close or remain vacant, we cannot assure you that such tenants would be replaced in a timely manner or that such replacement tenants would be without incurring material additional costs to the related borrower or us, thus adversely affecting property cash flow.

Reduction in occupancy and rent levels on multifamily properties could adversely affect their value and cash flow.

Occupancy and rent levels at a multifamily property may be adversely affected by:

Risks particular to industrial properties could adversely affect the value and cash flow from industrial properties.

Industrial properties may be adversely affected by reduced demand for industrial space occasioned by a decline in a particular industry segment (for example, a decline in defense spending), and a particular industrial property that suited the needs of its original tenant may be difficult to re-let to another tenant or may become functionally obsolete relative to newer properties. Furthermore, lease terms with respect to industrial properties are generally for shorter periods of time and may result in a substantial percentage of leases expiring in the same year at any particular industrial property. In addition, industrial properties are often more prone to environmental concerns due to the nature of items being stored or type of work conducted at the property. Further, industrial properties may have tenants that are subject to risks unique to their business, such as cold storage facilities. Because of seasonal use, leases at such facilities are customarily for shorter terms, making income potentially more volatile than for properties with longer term leases. In addition, such facilities may require customized refrigeration design, which in those cases would render them less readily convertible to alternative uses.

Site characteristics at industrial properties may impose restrictions that may limit the properties’ suitability for tenants and affect the value of the properties. Site characteristics which affect the value of an industrial property include:

An industrial property also requires availability of labor sources, proximity to supply sources and customers, and accessibility to rail lines, major roadways and other distribution channels.

Properties used for industrial purposes may be more prone to environmental concerns than other property types. Increased environmental risks could adversely affect the value and cash flow from industrial properties.

Risks associated with tenants generally could adversely affect the cash flow from properties

Cash flow from our properties will be affected by the expiration of leases and our ability to renew the leases or to relet the space on comparable terms. We generally rely on periodic lease or rental payments or guest fees from tenants to pay for maintenance and other operating expenses of the building, to fund capital improvements and to service the related obligation and any other debt or obligations it may have outstanding. There can be no assurance that tenants will renew leases upon expiration or that, if renewed, the terms would be similar to or more favorable than the terms of the prior lease or that the tenants will continue operations throughout the term of their leases. Our properties may have significant portions of month-to-month tenants or may have leases of short duration. Such leases do not provide the same stability as longer-term leases. Cash flow from properties would be adversely affected if tenants were unable to pay rent or if space was unable to be rented on favorable terms or at all. Changes in payment patterns by tenants may result from a variety of social, legal and economic factors, including, without limitation, the rate of inflation and unemployment levels and may be reflected in the rental rates offered for comparable space. In addition, upon re-letting or renewing existing leases, we will likely be required to pay leasing commissions and tenant improvement costs, which may adversely affect cash flow from the relevant property.

We cannot assure you that (1) leases that expire can be renewed, (2) the space covered by leases that expire or are terminated can be re-let in a timely manner at comparable rents or on comparable terms or (3) we will have the cash or be able to obtain the financing to fund any required tenant improvements. Further, lease provisions among tenants may conflict in certain instances, or leases may contain restrictions on the use of parcels near the related property for which there is no corresponding restrictive covenant of record, in each case creating termination or other risks. Income from and the market value of the relevant properties would be adversely affected if vacant space in such properties could not be leased for a significant period of time, if tenants were unable to meet their lease obligations or if, for any other reason, rental payments could not be collected or if one or more tenants ceased operations at such property. Upon the occurrence of an event of default by a tenant, delays and costs in enforcing the lessor’s rights could occur.

If we are not able to re-let the expiring or terminated space under as favorable conditions due to a decrease in the market rate for similar space, then cash flow from the relevant property may be adversely affected. Similarly, our inability to fully or favorably re-let the premises may adversely impact our ability to finance or sell the related property in order to make any required balloon payment.

Uninsured and underinsured losses may affect the value of, or our return from, our real estate.

Our properties, and the properties underlying our loans, have comprehensive insurance in amounts we believe are sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. There are, however, certain types of losses, such as earthquakes, sinkholes, floods, hurricanes and terrorism that may be insurable with very high deductibles, uninsurable or not economically insurable. Also, inflation, changes in building codes and ordinances, environmental considerations and other factors might make it impractical to use insurance proceeds to replace a damaged or destroyed property. If any of these or similar events occurs, it may reduce our return from an affected property and the value of our investment. If we suffered substantial losses with applicable deductibles, we may not have sufficient resources to pay such deductibles which would adversely affect our ability to recover from such losses.

Real estate with environmental problems may create liabilities and exposure to losses.

The existence of hazardous or toxic substances on a property will adversely affect its value and our ability to sell or borrow against the property. Contamination of real estate by hazardous substances or toxic wastes not only may give rise to a lien on that property to assure payment of the cost of remediation, but also can result in liability to us as owner, operator or lender for that cost. Many environmental laws can impose liability whether we know of, or are responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit our use of our properties and our ability to make distributions to our shareholders. In addition, future or amended laws, or more stringent interpretations or enforcement policies with respect to existing environmental requirements, may increase our exposure to environmental liability.

If we are unable to improve the performance of commercial real estate properties we take control of in connection with restructurings, workouts and foreclosures of investments, our financial performance may be adversely affected.

We have taken control of properties underlying our commercial real estate investments in connection with restructurings, workouts and foreclosures of these investments. If we are unable to improve the performance of these properties from their performance under their prior owners, our cash flow may be adversely affected if the properties’ cash flow is insufficient to support payments due on any related debt and we may not be able to sell these properties at a price that will allow us to recover our investment.

We may need to make significant capital improvements to our properties in order to remain competitive.

Our investments in real estate may face competition from newer, more updated properties. In order to remain competitive, we may need to make significant capital improvements to these properties. In addition, if we need to re-lease a property, we may need to make significant tenant improvements. Any financing of such improvements may reduce our ability to operate the property profitably and, if financing is not available, we may use our available cash resources which would reduce our cash flow, liquidity and ability to make distributions to shareholders.

Lease expirations, lease defaults and lease terminations may adversely affect our revenue.

Lease expirations, lease defaults and lease terminations may result in reduced revenue from our real estate if the lease payments received from replacement tenants are less than the lease payments received from the expiring, defaulting or terminating tenants. In addition, lease defaults by one or more significant tenants, lease terminations by tenants following events causing significant damage to the property or takings by eminent domain, or the failure of tenants under expiring leases to elect to renew their leases, could cause us to experience long periods with reduced or no revenue from a property and to incur substantial capital expenditures in order to obtain replacement tenants. See Item 2— “Properties,” for a ten-year lease expiration schedule for our non-residential properties as of December 31, 2018.

The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to

tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.

Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our shareholders.

Subject to maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held, compliance with REIT rules, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

Any hedging activity in which we engage may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest rates or credit spreads may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and furthermore may expose us to risk of loss.

In addition, some hedging instruments involve additional risk because they are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, we cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, regulatory requirements with respect to derivatives, including eligibility of counterparties, reporting, recordkeeping, exchange of margin, financial responsibility or segregation of customer funds and positions are still under development and could impact our hedging transactions and how we and our counterparty must manage such transactions.

If we resume hedging activities, we will be subject to associated counterparty risk.

In the event we resume any hedging activities, we would be subject to credit risk with respect to the counterparties to derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of OTC instruments). If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom we enter into a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price.

We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Subject to maintaining our qualification as a REIT, part of our investment strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due with respect to an early termination

would generally be equal to the unrealized loss of such open transaction positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely affect our results of operations and financial condition.

We may fail to qualify for, or choose not to elect, hedge accounting treatment, which could adversely affect our operating results.

We intend to record derivative and hedging transactions in accordance with Topic 815 of the Financial Accounting Standards Board’s Accounting Standard Codification, or Topic 815. Under these standards, we may fail to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the Topic 815 definition of a derivative (such as short sales), we fail to satisfy Topic 815 hedge documentation and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for, or choose not to elect, hedge accounting treatment, our operating results may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or item.

Rules under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank Act, may require that we post cash collateral to secure our hedging transactions and any posting of such collateral could reduce our liquidity or limit our ability to hedge.

The Dodd-Frank Act covers certain hedging instruments we may use in our risk management activities. The Dodd-Frank Act and related SEC and U.S. Commodity Futures Trading Commission, or CFTC, regulations that have been adopted to date include significant provisions regarding the regulation of derivatives (including mandatory clearing and margin requirements). Mandatory central clearing requires that we post cash collateral to secure our hedging transactions. Any posting of such collateral could reduce our liquidity or limit our ability to hedge.

If we enter into certain hedging transactions or otherwise invest in certain derivative instruments, failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements which could materially adversely affect our business and financial condition.

Rules under the Dodd-Frank Act establish a comprehensive regulatory framework for derivative contracts commonly referred to as “swaps.” Under this regulatory framework, mortgage real estate investment trusts, or REITs, that trade in commodity interest positions (including swaps) are considered “commodity pools” and the operators of such REITs would be considered “commodity pool operators,” or CPOs. Absent relief, a CPO must register with the CFTC and become a member of the National Futures Association, or NFA, which requires compliance with NFA’s rules and renders such CPO subject to regulation by the CFTC, including with respect to disclosure, reporting, recordkeeping and business conduct. We may from time to time, directly or indirectly, invest in instruments that meet the definition of “swap” under the new Dodd-Frank Act rules, which may subject us to oversight by the CFTC.

In the event that we invest in commodity interests, absent relief, we would be required to register as a CPO. We believe RAIT and its affiliates that could be considered CPOs have taken and will continue to take all appropriate steps needed to maintain such relief. In addition, RAIT and its affiliates may in the future claim a different exemption from registration as a CPO with the CFTC. Therefore, unlike a registered CPO, we will not be required to provide prospective investors with a CFTC compliant disclosure document, nor will we be required to provide investors with periodic account statements or certified annual reports that satisfy the requirements of CFTC rules applicable to registered CPOs, in connection with any offerings of shares.

As an alternative to an exemption from registration, RAIT or its affiliates may register as a CPO with the CFTC and avail itself of certain disclosure, reporting and record-keeping relief under CFTC Rule 4.7.

The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including anti-fraud and anti-manipulation provisions. Among other things, the CFTC may suspend or revoke the registration of a person who fails to comply, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. Additionally, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event we fail to receive interpretive relief from the CFTC on this matter, are unable to claim an exemption from registration and fail to comply with the regulatory requirements of these new rules, we may be unable to use certain types of hedging instruments or we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could adversely affect our results of operations and financial condition.

During 2016, interest rate swap agreements relating to RAIT I terminated in accordance with their terms which could expose us to increased interest rate risk.

During 2016, interest rate swap agreements relating to RAIT I terminated in accordance with their terms. This could expose us to the risk that interest RAIT I pays on its respective CDO notes will be higher than the interest paid on the assets collateralizing the CDO notes.

If we were to experience an “ownership change,” we could be limited in our ability to use net operating losses arising prior to the ownership change to offset future taxable income.

If we were to experience an "ownership change," as determined under section 382 of the Internal Revenue Code, our ability to offset taxable income arising after the ownership change with net operating losses (NOLs) arising prior to the ownership change would be limited, possibly substantially. An ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate.

We and our REIT affiliates may fail to qualify as a REIT, and such failure to qualify would have significant adverse consequences on the value of our common shares. In addition, if we fail, or any REIT Affiliate fails, to qualify as a REIT, our respective dividends will not be deductible, and the entity will be subject to corporate-level tax on its net taxable income, which would reduce the cash available to make distributions.

We believe that we have been organized and operated in a manner that will allow us to qualify as a REIT. We have not requested, and do not plan to request, a ruling from the IRS that we and our REIT affiliates qualify as a REIT and any statements in our filings or the filings of our REIT affiliates with the SEC are not binding on the IRS or any court. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions, for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may also affect our abilities and those of our REIT affiliates to qualify as a REIT. In order to qualify as a REIT, we and our REIT affiliates must each satisfy a number of requirements, including requirements regarding the composition of our respective assets and sources of our respective gross income. Also, we must each make distributions to our respective shareholders aggregating annually at least 90% of our respective net taxable incomes, excluding net capital gains. In addition, our respective ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership or REIT for U.S. federal income tax purposes. As an example, to the extent we have invested in preferred equity securities of other REIT issuers, our qualification as a REIT will depend upon the continued qualification of such issuers as REITs under the Internal Revenue Code. Accordingly, unlike other REITs, we and our REIT affiliates may be subject to additional risk regarding our respective ability to qualify and maintain our respective qualification as a REIT. The suspension of our origination of new assets pursuant to the 2019 strategic steps, our operations and our liquidity may adversely impact our and our REIT affiliates’ ability to meet REIT requirements and we and our REIT affiliates may be less able to make changes to our respective investment portfolios to adjust our respective REIT qualifying assets and income depending on our respective ability to deploy capital and maintain assets under management. RAIT has entered into three Cooperation Agreements and waivers of the ownership limits in RAIT’s Declaration of Trust permitting the counterparties in those agreements to hold, in the aggregate, up to almost 40% of our outstanding preferred shares and almost 40% of our outstanding common shares. This may increase the chance we may not comply with the Internal Revenue Code requirement that at no time during the last half of any taxable year may 5 or fewer individuals own directly or indirectly more than 50% in value of our outstanding stock.

There can be no assurance that we and our REIT affiliates will be successful in operating in a manner that will allow us to each qualify as a REIT. Because we receive significant distributions from TRFT and may in the future receive significant distributions from other of our REIT affiliates, the failure of one or more of such REIT affiliates to maintain its REIT status could cause us to lose our REIT status. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our respective ability to qualify as a REIT or the desirability of an investment in a REIT relative to other investments.

If we or any of our REIT affiliates fail to qualify as a REIT or lose our respective qualification as a REIT at any time, we, or such REIT affiliate, would face serious tax consequences that would substantially reduce the funds available for distribution to our respective shareholders for each of the years involved because:

In addition, if we, or such REIT affiliate, fail to qualify as a REIT, such entity will not be required to make distributions to its shareholders, and all distributions to shareholders will be subject to tax as regular corporate dividends to the extent of current and accumulated earnings and profits.

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

To qualify as a REIT, we and our REIT affiliates must each 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 our REIT affiliates may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements may hinder our and our REIT affiliates’ investment performance.

In particular, at least 75% of our and our REIT affiliates total assets at the end of each calendar quarter must each consist of real estate assets, government securities, and cash or cash items. For this purpose, “real estate assets” generally include interests in real property, such as land, buildings, leasehold interests in real property, stock of other entities that qualify as REITs, interests in mortgage loans secured by real property, investments in stock or debt instruments during the one-year period following the receipt of new capital and regular or residual interests in a real estate mortgage investment conduit, or REMIC. In addition, the amount of securities of a single issuer that we and each of our REIT affiliates hold must generally not exceed either 5% of the value of our gross assets or 10% of the vote or value of the issuer’s outstanding securities.

Certain of the assets that we or our REIT affiliates hold or intend to hold will not be qualified real estate assets for the purposes of the REIT asset tests. In addition, although preferred equity securities of REITs should generally be treated as qualified real estate assets, this will require that (i) they are treated as equity for U.S. tax purposes, and (ii) their issuers maintain their qualification as REITs. CMBS should generally qualify as real estate assets. However, to the extent that we or our REIT affiliates own non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities issued by corporations that are not secured by mortgages on real property, those securities will likely not be qualifying real estate assets for purposes of the REIT asset tests.

We and our REIT affiliates generally will be treated as the owner of any assets that collateralize a securitization transaction to the extent that we or such affiliates retain all of the equity of the securitization entity and do not make an election to treat such securitization entity as a TRS, as described in further detail below.

As noted above, in order to comply with the REIT asset tests and 75% gross income test, at least 75% of each of our respective total assets and 75% of gross income must be derived from qualifying real estate assets, whether or not such assets would otherwise represent our respective best investment alternative.

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 securitization and to any sale of securitization securities, and therefore may limit our respective ability to sell assets to or equity in securitizations and other assets.

It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, holding non-qualifying REIT assets or engaging in securitization transactions through our TRSs, subject to certain limitations as described below. To the extent that we and our REIT affiliates engage in such activities through TRSs, the income associated with such activities may be subject to full U.S. federal corporate income tax.

We have federal and state tax obligations which could reduce our ability to pay distributions to our shareholders.

Even if we qualify as REITs for U.S. federal income tax purposes, we will be required to pay U.S. federal, state and local taxes on income and property. In addition, our domestic TRSs are fully taxable corporations that will be subject to taxes on their income, and they may be limited in their ability to deduct interest payments made to us. We also will be subject to a 100% penalty tax on certain amounts if the economic arrangements among us and TRSs are not comparable to similar arrangements among unrelated parties or if we receive payments for inventory or property held for sale to customers in the ordinary course of business. We may be

taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to shares held by “disqualified organizations.” In addition, under certain circumstances we could be subject to a penalty tax for failure to meet certain REIT requirements but nonetheless maintains its qualification as a REIT. For example, we may be required to pay a penalty tax with respect to income earned in connection with securitization equity in the event such income is determined not to be qualifying income for purposes of the REIT 95% gross income test but we are otherwise able to remain qualified as a REIT. To the extent that we or the TRSs are required to pay U.S. federal, state or local taxes, we will have less to distribute to shareholders.

Failure to make required distributions would subject us to tax, which would reduce the ability to pay distributions to our shareholders.

In order to qualify as a REIT, we and our REIT affiliates must each distribute to our respective shareholders each calendar year at least 90% of our respective REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we and our REIT affiliates each satisfy the 90% distribution requirement, but distribute less than 100% of net taxable income, we or such affiliate will be subject to U.S. federal corporate income tax. In addition, we or our REIT affiliates will incur a 4% nondeductible excise tax on the amount, if any, by which our respective distributions in any calendar year are less than the sum of:

We and our REIT affiliates each intend to distribute our respective net income to our respective shareholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. There is no requirement that any TRS of ours or our REIT affiliates distribute their after-tax net income to us or our REIT affiliates and such TRSs may, to the extent consistent with maintaining our or our REIT affiliates’ qualification as a REIT, determine not to make any current distributions to us or our REIT affiliates.

Our or our REIT affiliates’ respective taxable income may substantially exceed our or their respective net income as determined by accounting principles generally accepted in the United States, or GAAP, because, for example, expected capital losses will be deducted in determining our respective GAAP net income, but may not be deductible in computing our or their respective taxable income. GAAP net income may also be reduced to the extent we or our REIT affiliates have to “markdown” the value of our respective assets to reflect their current value. Prior to the sale of such assets, those mark-downs do not comparably reduce taxable income. In addition, we or our REIT affiliates have invested in assets including the equity of securitization entities that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. This taxable income may arise for us in the following ways:

Although some types of taxable income are excluded to the extent they exceed 5% of our net income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any taxable income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that we or it regard as unfavorable in order to satisfy the distribution requirement and to avoid U.S. federal corporate income tax and the 4% deductible excise tax in that year.

If we were to make a taxable distribution of shares of our stock, shareholders may be required to sell such shares or sell other assets owned by them in order to pay any tax imposed on such distribution.

We may distribute taxable dividends that are payable in shares of our stock. If we were to make such a taxable distribution of shares of our stock, shareholders would be required to include the full amount of such distribution as income. As a result, a shareholder may be required to pay tax with respect to such dividends in excess of cash received. Accordingly, shareholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a shareholder sells the shares it receives as a dividend in order to pay such tax, the sale proceeds may be less than the amount included in income with respect to the dividend. Moreover, in the case of a taxable distribution of shares of our stock with respect to which any withholding tax is imposed on a non-U.S. shareholder, we may have to withhold or dispose of part of the shares in such distribution and use such withheld shares or the proceeds of such disposition to satisfy the withholding tax imposed. While the IRS in certain private letter rulings has ruled that a distribution of cash or shares at the election of a REIT’s shareholders may qualify as a taxable stock dividend if certain requirements are met, it is unclear whether and to what extent we will be able to pay taxable dividends in cash and shares of common shares in any future period. In addition, if a significant number of our shareholders determine to sell common shares in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common shares.

Legislative, regulatory or administrative changes could adversely affect us or our shareholders.

Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect us and/or our shareholders.

On December 22, 2017 the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations. In addition to reducing corporate and individual tax rates, the TCJA eliminates or restricts various deductions. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The TCJA makes numerous large and small changes to the tax rules that do not affect the REIT qualification rules directly but may otherwise affect us or our shareholders.

While the changes in the TCJA generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our shareholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the Internal Revenue Service will issue administrative guidance on the changes made in the TCJA.

We urge you to consult with your own tax advisor with respect to the status of the TCJA and other legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our stock.

Dividends paid by REITs do not qualify for the reduced tax rates provided under current law.

Dividends paid by REITs are generally not eligible for the reduced 15% maximum tax rate for dividends paid to individuals (20% for those with taxable income above certain thresholds that are adjusted annually under current law). The more favorable rates applicable to regular corporate dividends could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends to which more favorable rates apply, which could reduce the value of the stock of REITs. However, under the TCJA regular dividends from REITs are treated as income from pass-through entity and are eligible for a 20% deduction. As a result, our regular dividends will be taxed at 80% of an individual marginal tax rate. The current maximum rate is 37% resulting in a maximum tax rate of 29.6% on our dividends. Dividends from REITs as well as regular corporate dividends will also be subject to a 3.8% Medicare surtax for taxpayers with modified adjusted gross income above $200,000 (if single) for $250,000 (if married and filing jointly).

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for federal income tax purposes. In the event of our bankruptcy, we may forfeit our qualification as a REIT.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring collateral mortgage obligations (‘‘CMOs’’), which would be treated as prohibited transactions for federal income tax purposes.

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term ‘‘prohibited transaction’’ generally includes a sale or other disposition of property (including agency securities, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us. We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for federal income tax purposes. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, as is the case with our securitization business, although such income will be subject to tax in the hands of the corporation at regular corporate rates.

We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the structures we utilize for our CMO transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held ‘‘primarily for sale to customers in the ordinary course of a trade or business’’ depends on the particular facts and circumstances. We intend to structure our activities to avoid prohibited transaction characterization, but no assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment.

Our taxable income may substantially differ from our net income based on GAAP. For example, interest income on our mortgage related securities does not necessarily accrue under an identical schedule for U.S. federal income tax purposes as for accounting purposes. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 13: Income Taxes” for further information.

Rapid changes in the values of our target assets may make it more difficult for us to maintain our qualification as a REIT or our exemption from the Investment Company Act.

If the fair market value or income potential of our assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, we may need to increase our real estate assets and income or liquidate our non-REIT-qualifying assets to maintain our REIT qualification or our exemption from the Investment Company Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. We may have to make decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that RAIT has acquired or hereafter acquires, if any, and the inaccuracy of any such opinions, advice or statements may adversely affect RAIT’s REIT qualification and result in significant corporate-level tax.

When purchasing securities, if any, RAIT may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies for purposes of the REIT income tests. In addition, when purchasing the equity tranche of a securitization, if any, RAIT may rely on opinions or advice of counsel regarding the qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect RAIT’s REIT qualification and result in significant corporate-level tax.

If our securitizations are subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to distribute to us and pay their creditors.

We own foreign securitizations. There is a specific exemption from U.S. federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We intend that the consolidated securitization subsidiaries and any other non-U.S. securitizations that are TRSs will rely on that exemption or otherwise operate in a manner so that they will not be subject to U.S. federal income tax on their net income at the entity level. If the IRS were to succeed in challenging the tax treatment of our securitizations, it could greatly

reduce the amount that those securitizations would have available to distribute to their shareholders and to pay to their creditors. Any reduced distributions would reduce amounts available for distribution to our shareholders.

Our and our REIT affiliates’ ownership of and relationship with TRSs will be limited, and a failure to comply with the limits would jeopardize our and its REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Any domestic TRSs that we or our REIT affiliates own or that we or our REIT affiliates acquire in the future, if any, will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution but will not be required to be distributed.

The value of the securities that we or our REIT affiliates hold in TRSs may not be subject to precise valuation. Accordingly, there can be no assurance that we or our REIT affiliates will be able to comply with the 25% limitation discussed above or avoid application of the 100% excise tax discussed above.

The REIT provisions of the Internal Revenue Code limit our 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 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 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 might have to limit use of advantageous hedging techniques or implement those hedges through TRSs. This could increase the cost of our 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.

We and our REIT affiliates must satisfy two gross income tests annually to maintain qualification as a REIT. First, at least 75% of a REIT’s gross income for each taxable year must consist of defined types of income that derive, directly or indirectly, from investments relating to real property or mortgages on real property or temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes:

Second, in general, at least 95% of a REIT’s gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, dividends, other types of interest, gain from the sale or disposition of stock or securities, income from certain interest rate hedging contracts, or any combination of the foregoing. Gross income from any origination fees we or our REIT affiliates obtain or from our sale of property that are held primarily for sale to customers in the ordinary course of business is excluded from both income tests.

Any origination fees we or our REIT affiliates receive will not be qualifying income for purposes of the 75% or 95% gross income tests applicable to REITs under the Internal Revenue Code. We have typically received, and our REIT affiliates have received, initial payments, or “points,” from borrowers as commitment fees or additional interest. So long as the payment is for the use of money, rather than for other services provided by us or our REIT affiliates, we believe that this income should not be classified as non-qualifying origination fees. However, the Internal Revenue Service may seek to reclassify this income as origination fees instead

of commitment fees or interest. If we cannot satisfy the Internal Revenue Code’s income tests as a result of a successful challenge of our classification of this income, we may not qualify as a REIT. Any fees for services, such as advisory fees or broker-dealer fees, received by us or our REIT affiliates will not qualify for either income test. Any such fees earned by a TRS of ours or of one of our REIT affiliates would not be subject to tax, and any distributions from TRSs would be qualifying income for purposes of the 95% gross income test but not for the 75% gross income test.

A portion of the dividends we distribute may be deemed a return of capital for federal income tax purposes.

The amount of dividends we distribute to our common and preferred shareholders in a given quarter may not correspond to our taxable income for such quarter. Consequently, a portion of the dividends we distribute may be deemed a return of capital for federal income tax purposes and will not be taxable but will reduce shareholders’ basis in the underlying common or preferred shares.

Our ability to use TRSs, and consequently our ability to establish fee-generating businesses and invest in securitizations, will be limited by the election made by us to be taxed as a REIT, which may adversely affect returns to our shareholders.

Overall, no more than 20% of the value of a REIT’s assets may consist of securities of one or more TRSs. We and TRFT currently own, and we, TRFT and any other REIT affiliates may own in the future, interests in additional TRSs. However, our ability to expand the fee-generating businesses of our and TRFT’s current TRSs and future TRSs we or our REIT affiliates may form, will be limited by our and our REIT affiliates need to meet this 25% test, which may adversely affect distributions we pay to our shareholders.

If TRFT fails to qualify as a REIT, then we also would very likely fail to qualify as a REIT and if any other significant REIT affiliate fails to qualify as a REIT, it would adversely affect our ability to qualify as a REIT.

TRFT is a REIT subject to all of the risks discussed above with respect to RAIT. If TRFT fails to qualify as a REIT, then we also would very likely fail to qualify as a REIT, because the income we receive from, and assets we hold through, TRFT make up a significant portion of our total income and assets and materially affect our ability to meet REIT qualification tests. The same would be true with respect to other REIT affiliates if the income derived from such REIT affiliate becomes a significant part of our income.

Our reputation, business and operations could be adversely affected by regulatory compliance failures.

Potential regulatory action poses a significant risk to our reputation and thereby to our business. Our business is subject to extensive regulation in the United States. We operate our business so as to comply with the Internal Revenue Code’s REIT rules and regulations and so as to remain exempt from registration as an investment company under the Investment Company Act. In addition, we are subject to regulation under the Exchange Act and various other statutes. A number of our investing activities are subject to regulation by various U.S. state regulators. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of our business, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply with the obligations imposed by any of the regulations binding on us or to maintain any of the licenses required to be maintained by us could result in investigations, sanctions, monetary penalties and reputational damage.

may own, may not have a combined value in excess of 40% of the value of our total assets exclusive of government securities and cash items on an unconsolidated basis. Based on the relative value of our investment in TRFT, on the one hand, and our investment in RAIT Partnership, on the other hand, we can comply with the 40% test only if RAIT Partnership itself complies with the 40% test (or an exemption other than those provided by Sections 3(c)(1) or 3(c)(7)). Because the principal exemptions that RAIT Partnership relies upon to allow it to meet the 40% test are those provided by Sections 3(c)(5)(C) or 3(c)(6) (relating to subsidiaries primarily engaged in specified real estate activities), we are limited in the types of businesses in which we may engage through our subsidiaries.

Because RAIT Partnership and the two wholly-owned subsidiaries through which we hold 100% of the partnership interests in RAIT Partnership—RAIT General, Inc. and RAIT Limited, Inc.—will not be relying on Section 3(c)(1) or 3(c)(7) for their respective Investment Company Act exemptions, our investments in these securities will not constitute “investment securities” for purposes of the 40% test if RAIT Partnership is otherwise exempt from the Investment Company Act.

RAIT Partnership, our subsidiary that holds, directly and through wholly-owned or majority-owned subsidiaries, a substantial portion of our assets, intends to conduct its operations so that it is not required to register as an investment company in reliance on the exemption from Investment Company Act regulation provided under Section 3(c)(5)(C). RAIT Partnership may also from time to time rely on the exemption from Investment Company Act regulation provided under Section 3(c)(6).

Any entity relying on Section 3(c)(5)(C) for its Investment Company Act exemption must have at least 55% of its portfolio invested in qualifying assets (which in general must consist of mortgage loans, mortgage backed securities that represent the entire ownership in a pool of mortgage loans and other liens on and interests in real estate) and another 25% of its portfolio invested in other real estate-related assets. Based on no-action letters issued by the staff of the SEC, we classify our investments in mortgage loans as qualifying assets, as long as the loans are “fully secured” by an interest in real estate. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then we consider the loan to be a qualifying asset. We do not consider loans with loan-to-value ratios in excess of 100% to be qualifying assets that come within the 55% basket, but only real estate-related assets that come within the 25% basket. Based on a no-action letter issued by the staff of the SEC, we treat most of our mezzanine loans as qualifying assets because we usually obtain a first lien position on the entire ownership interest of a special purpose entity, or SPE, that owns only real property, or that owns the entire ownership interest in a second SPE that owns only real property, and otherwise comes within the conditions of the no-action letter, and we treat any remaining mezzanine loans as real estate-related assets that come within the 25% basket. The treatment of other investments as qualifying assets and real estate-related assets, including equity investments in subsidiaries, is based on the characteristics of the underlying asset, in the case of a directly held investment, or the characteristics of the assets of the subsidiary, in the case of equity investments in subsidiaries.

Any entity relying on Section 3(c)(6) for its Investment Company Act exemption must be primarily engaged, directly or through majority-owned subsidiaries, in one or more specified businesses, including a business described in Section 3(c)(5)(C), or in one or more of such businesses (from which not less than 25% of its gross income during its last fiscal year was derived), together with an additional business or businesses other than investing, reinvesting, owning, holding or trading in securities.

TRFT, like RAIT, is a holding company that conducts its operations through subsidiaries. Accordingly, we intend to monitor TRFT’s holdings such that it will satisfy the 40% test. Similar to securities issued to us, the securities issued to TRFT by its subsidiaries that are excepted from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities TRFT may own, may not have a combined value in excess of 40% of the value of its total assets on an unconsolidated basis. This requirement limits the types of businesses in which TRFT may engage through these subsidiaries.

We make the determination of whether an entity is a majority-owned subsidiary of RAIT, RAIT Partnership or TRFT. The Investment Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling its owner or holder to vote for the election of trustees of a company. We treat companies, including future securitization subsidiaries, in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. Neither RAIT, RAIT Partnership nor TRFT has requested the SEC to approve our treatment of any company as a majority-owned subsidiary and the SEC has not done so. If the SEC were to disagree with our treatment of one or more companies, including securitizations, as majority-owned subsidiaries, we would need to adjust our respective investment strategies and invest our respective assets in order to continue to pass the 40% test. Any such adjustment in its investment strategy could have a material adverse effect on TRFT and us.

A majority of TRFT’s subsidiaries are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Act with respect to the assets in which they can invest to avoid being regulated as an investment company. In particular, TRFT’s subsidiaries that are securitizations generally rely on Rule 3a-7, an exemption from the Investment Company Act provided for certain structured financing vehicles that pool income-producing assets and issue securities backed by those assets. Such

structured financings may not engage in portfolio management practices resembling those employed by mutual funds. Accordingly, each TRFT securitization subsidiary that relies on Rule 3a-7 is subject to an indenture which contains specific guidelines and restrictions limiting the discretion of the securitization. The indenture prohibits the securitization from acquiring and disposing of assets primarily for the purpose of recognizing gains or decreasing losses resulting from market value changes. Certain sales and purchases of assets, such as dispositions of collateral that has gone into default or is at risk of imminent default, may be made so long as they do not violate the guidelines contained in each indenture and are not based primarily on changes in market value. The proceeds of permitted dispositions may be reinvested in collateral that is consistent with the credit profile of the securitization under specific and predetermined guidelines. In addition, absent obtaining further guidance from the SEC, substitutions of assets may not be made solely for the purpose of enhancing the investment returns of the holders of the equity securities issued by the securitization. As a result of these restrictions, TRFT’s securitization subsidiaries may suffer losses on their assets and TRFT may suffer losses on its investments in its securitization subsidiaries.

If the combined value of the investment securities issued to TRFT by its subsidiaries that are excepted by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities TRFT may own, exceeds 40% of TRFT’s total assets on an unconsolidated basis, TRFT may be required either to substantially change the manner in which it conducts its operations or to rely on Section 3(c)(1) or 3(c)(7) to avoid having to register as an investment company. As a result of the relative values of RAIT Partnership and TRFT, it is likely that TRFT would rely on the Section 3(c)(1) or 3(c)(7) exemptions, which would increase the assets we hold included in the 40% basket for purposes of the 40% test, which would increase the effects that variations in the value of RAIT Partnership’s assets would have on its ability to comply with the 40% test and, accordingly, our ability to remain exempt from registration as an investment company.

None of RAIT, RAIT Partnership or TRFT 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. Any additional guidance from the SEC could provide additional flexibility to us and TRFT, or it could further inhibit the ability of TRFT and our combined company to pursue our respective investment and financing strategies which could have a material adverse effect on us. See Item 1— “Business—Certain REIT and Investment Company Act Limits On Our Strategies-Investment Company Act Limits.”

To qualify as a REIT under the Internal Revenue Code, no more than 50% in value of our outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals during the last half of each taxable year. To preserve our REIT qualification, our declaration of trust generally prohibits any person from owning more than 8.3% or, with respect to our original promoter, Resource America, Inc., 15%, of our outstanding common shares and provides that:

The ownership limitation may discourage a takeover or other transaction that our shareholders believe to be desirable. In the event of our bankruptcy, we may fail to meet the ownership limitation and forfeit our qualification as a REIT.

Our declaration of trust authorizes our board of trustees to issue preferred shares, to establish the preferences and rights of any preferred shares issued, to classify any unissued preferred shares and reclassify any previously classified but unissued preferred shares, without shareholder approval. The issuance of preferred shares could delay or prevent a change in control, apart from the ownership limitation, even if a majority of our shareholders want control to change.

Maryland anti-takeover statutes may restrict business combination opportunities.

As a Maryland REIT, we are subject to various provisions of Maryland law which impose restrictions and require that specified procedures be followed with respect to the acquisition of “control shares” representing at least ten percent of our aggregate voting power and certain takeover offers and business combinations, including, but not limited to, combinations with persons who own one-tenth or more of our outstanding shares. While we have elected to “opt out” of the control share acquisition statute, our board of trustees has the right to rescind the election at any time without notice to our shareholders.

If our subsidiaries that are not registered as investment advisers under the Investment Advisers Act that provide collateral management, servicing or advisory services to securitizations or other investment vehicles were required to so register, it could hinder our operating performance and negatively impact our business and subject us to additional regulatory burdens and costs that we are not currently subject to.

Where our subsidiary provides collateral management, servicing or advisory services solely to one or more entities that do not invest in “securities” or regarding assets that are not “securities portfolios” that provide sufficient “regulatory assets under management”, as such terms are defined in the Investment Advisers Act, such subsidiary will not engage in activities that would require it to register as an investment adviser under the Investment Advisers Act. We have determined that RAIT Partnership does not need to register as an investment adviser for RAIT Partnership’s collateral management services to RAIT I or RAIT Partnership’s affiliates providing servicing to the FL securitizations, and RAIT I. We have not requested the SEC to approve our determination that these subsidiaries do not need to register as investment advisers under the Investment Advisers Act and the SEC has not done so. If the SEC or any applicable state regulatory authority were to disagree with our determination, we would need to register those companies as investment advisers and comply with all applicable requirements, which might require those subsidiaries to adjust the manner in which they provide services which could hinder their respective operating performance and negatively impact their respective business and subject them to additional regulatory burdens and costs that they are not currently subject to.

For our investments in real estate, we had disposed of our remaining multi-family properties by December 31, 2018, which generally had leases with terms of 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, 2018.

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
2019		46		80,959	$	1,945,601	$	24.03		19.2	%		19.2	%
2020		20		181,927		1,882,056		10.35		18.5	%		37.7	%
2021		24		123,012		2,069,401		16.82		20.4	%		58.1	%
2022		18		129,283		1,430,494		11.06		14.1	%		72.2	%
2023		15		88,212		1,591,316		18.04		15.7	%		87.8	%
2024		3		13,552		223,667		16.50		2.2	%		90.0	%
2025		2		24,002		308,307		12.85		3.0	%		93.1	%
2026		4		9,147		154,061		16.84		1.5	%		94.6	%
2027		0		0		0		0.00		0.0	%		94.6	%
2028		1		10,425		160,232		15.37		1.6	%		96.2	%
2029 and thereafter		2		24,352		390,319		16.03		3.8	%		100.0	%
Total		135		684,871	$	10,155,454	$	14.83		100	%

(a)“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.”

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, except as described below.

RAIT Preferred Funding II, Ltd. v. CWCapital Asset Management LLC, et al.–Index No. 651729/2016 (Sup. Ct. N.Y.)

On September 20, 2017, RAIT Preferred Funding II, Ltd., or RAIT II, filed an amended complaint against CWCapital Asset Management, LLC, or CWCapital, Wells Fargo Bank N.A., or Wells Fargo, and U.S. Bank N.A., or U.S. Bank. This action concerns a loan, or the mortgage loan, to a non-party borrower, or the borrower, in 2007. RAIT II purchased $18.5 million of the mortgage loan for which it held a promissory note, or note B. U.S. Bank is the trustee for a securitization trust that purchased the remaining $190.0 million of the mortgage loan and for which it held a promissory note, or note A. CWCapital is the special servicer and Wells Fargo is the master servicer for the mortgage loan (including note A and note B). The parties’ rights and obligations are governed by, among other things, a pooling and servicing agreement and a co-lender agreement. The mortgage loan was repaid in May of 2017, and the defendants have alleged that RAIT II was not entitled to receive any payoff of principal under note B pursuant to the subordination and other provisions of the co-lender agreement. In the amended complaint, RAIT II alleges, among other things, that the defendants breached certain of their obligations under the operative documents and RAIT II should have received, among other things, all of its $18.5 million principal under note B.

On October 11, 2017, CWCapital and U.S. Bank moved to dismiss the amended complaint and on November 13, 2017 Wells Fargo moved to dismiss the amended complaint. RAIT II filed its opposition to the motions to dismiss on November 27, 2017. By Decision and Order dated January 29, 2018, the Court denied the defendants’ motions to dismiss the contract claims, leaving intact RAIT II’s breach of contract claims against all defendants. The Court dismissed RAIT II’s non-contract claims (unjust enrichment, conversion, money had and received, and declaratory judgment) as duplicative of the surviving contract claims. The parties have concluded discovery. Defendants filed a motion for summary judgment on March 18, 2019, and the Court will set a briefing schedule for RAIT’s response and Defendants’ reply. Trial is currently set for June 10, 2019.

On December 17, 2018, RAIT II assigned its interest in note B to TRFT in connection with TRFT’s redemption of RAIT II described below, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary.” In connection therewith, TRFT is in the process of being substituted for RAIT II as the plaintiff in this litigation.

Our common shares trade on the OTCQB Venture Market, or the OTCQB, of the OTC Markets Group under the symbol “RASF.” The OTCQB is not a stock exchange and any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Our common shares were delisted from the NYSE in December 2018. As of March 1, 2019, there were 1,850,441 of our common shares outstanding held by 345 holders of record.

We have adopted a Code of Business Conduct and Ethics, which we refer to as the Code, for our trustees, officers and employees intended to satisfy NYSE listing standards and the definition of a “code of ethics” set forth in Item 406 of Regulation S-K. We have continued to require compliance with the Code after such delisting. The Code is available on our website at http://www.rait.com. Any information relating to amendments to the Code or waivers of a provision of the Code otherwise required to be disclosed pursuant to Item 5.05 of Form 8-K will be disclosed through our website.

The board determined to suspend paying a dividend on RAIT’s common shares on November 1, 2017. The board currently expects to continue to review and determine whether to declare any dividends on RAIT’s common shares on a quarterly basis. For further discussion of our dividend policies, see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations-REIT Taxable Income.”

The board determined that it would suspend the dividend on RAIT’s outstanding preferred shares on June 12, 2018. The board currently expects to continue to review and determine whether to declare any dividends on RAIT’s preferred shares on a quarterly basis. Our Series A Preferred Shares are quoted on the OTCQB and traded under the symbol “RASFP.” As of December 31, 2018, $8.3 million of dividends on these shares were unpaid and in arrears. Our Series B Preferred Shares are quoted on the OTCQB and traded under the symbol “RASFO.” As of December 31, 2018, $4.0 million of dividends on these shares were unpaid and in arrears. Our Series C Preferred Shares are quoted on the OTCQB and traded under the symbol “RASFN.” As of December 31, 2018, $2.9 million of dividends on these shares were unpaid and in arrears.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

We are an internally-managed Maryland real estate investment trust, or REIT, focused on managing a portfolio of commercial real estate, or CRE, loans and properties. As described in “Part I-Item 1. Business” above, or the business description, we are currently engaged in the 2019 strategic steps, which include, without limitation, reviewing potential strategic and financial alternatives for RAIT and engaging in related preliminary negotiations with various third parties, undertaking steps to increase liquidity and reduce costs within our businesses and continuing to opportunistically divest a portion of our owned real estate, or REO, portfolio and certain of our loans, while continuing to service and manage our existing CRE loan portfolio. We were formed in August 1997 and commenced operations in January 1998.

See Part I, Item 1, “Business” above, or the business description, which is incorporated herein by reference, for further description of our company, business strategy, 2018 business developments and financial results and other matters.

For further discussion of RAIT’s liquidity, including its near-term obligations and current and potential future sources of liquidity, see “Liquidity and Capital Resources” below.

Impact of Evolution of Our Business Strategy. We expect that our continued execution of the 2019 strategic steps may result in downward pressure on the price of our common and preferred shares and our recourse indebtedness and may have varying benefits to, or material adverse effects on, our various stakeholders in accordance with their respective interests, including, without limitation, effects resulting from the bankruptcy risks.

Trends relating to capital markets. We are seeing high volatility in the capital markets with respect to our publicly traded common and preferred shares and our senior notes, which are thinly traded.

Trends Relating to Investments in Loans. We are expecting a moderate to high level of loan repayments in 2019 as borrowers continue to take advantage of relatively strong real estate market fundamentals and either sell or refinance their properties.

Trends Relating to Investments in Real Estate. We have sold the majority of our REO property portfolio. From a performance perspective, we expect the occupancy and rental rates of our remaining office properties to remain relatively stable during 2019. The retail property sector has continued to experience challenges in 2018, and we expect that to continue in 2019.

Interest rate environment. Interest rates rose and volatility increased in 2018 as the Federal Reserve began to tighten monetary policies. We believe market participants expect that the future interest rate environment will be higher than 2018. In the event interest rates rise significantly, we may be impacted. We have historically used floating rate facilities and long-term floating rate securitization bonds to finance our investments. As we seek to sell or divest a portion of our remaining REO properties in 2019, a rising interest rate environment may adversely affect the value of the properties we seek to sell if capitalization rates rise as a result and potential purchasers’ borrowing costs increase.

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. See “Securitization Summary” below for a discussion of the impact of prepayments on the returns we receive from our retained interests in our consolidated securitizations. As a result of the relatively low current interest rate environment, there may be an increase in prepayment rates in our commercial loan portfolio, which could decrease our net investment income. Our CRE loan portfolio continues to experience elevated levels of loan payoffs as borrowers are taking advantage of the strong real estate markets to either sell or refinance their properties. These factors have contributed to the decline in our net interest margin through 2018 as loans repay and leverage declines. Loan repayments were $391.2 million during 2018.

Increasing Credit Risk in Our Investment Portfolio. RAIT’s business strategy since early 2018 emphasized RAIT’s increased sale of assets to generate liquidity while suspending new investment activity. This has resulted in a reduction of RAIT’s assets and an increase in the portion of RAIT’s remaining assets having an increased credit risk profile in this period. This is due in part to RAIT generally focusing on selling its assets with relatively better credit risk profiles, where practicable, to generate more immediate returns of investment with lower transaction execution risk, rather than trying to sell assets with relatively higher credit risk profiles. As a

result, a larger portion of RAIT’s remaining assets have an increasing risk of requiring loan loss reserves and charge-offs and recognizing impairments related to these credit risks. RAIT does not expect to be able to reverse this trend unless and until it is able to resume making new investments with historically comparable credit risk profiles, which may not occur.

Overview. We have used securitizations 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 portfolios for the long-term. A securitization is a 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 securitization 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 loans collateralizing the securitization. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the securitization 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. Historically, the stated maturity of the debt issued by a securitization we have sponsored and consolidated has been between 15 and 19 years for our FL securitizations and approximately 40 years for RAIT I and RAIT II. However, we expect the weighted average life of such debt to be shorter than the stated maturity due to the financial condition of the borrowers on the underlying loans and the characteristics of such loans, including the existence and frequency of exercise of any permitted prepayment, the prevailing level of interest rates, the actual default rate and the actual level of any recoveries on any defaulted loans. Debt issued by these securitizations is non-recourse to RAIT and payable solely from the payments by the borrowers on the loans collateralizing these securitizations. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions.

As of December 31, 2018, we had sponsored three outstanding securitizations with varying amounts of retained or residual interests held by us which we consolidate in our financial statements as follows: RAIT I, RAIT 2017-FL7 Trust, or RAIT-FL7 and RAIT 2017-FL8 Trust, or RAIT-FL8. We refer to RAIT FL7 and RAIT FL8 as the FL securitizations. We previously exercised our rights and unwound five other securitizations we had sponsored, RAIT 2013-FL1 Trust, or RAIT FL1, in 2015, RAIT 2014-FL2 Trust, or RAIT FL2, in 2016, RAIT 2014-FL3 Trust, or RAIT FL3, and RAIT 2015-FL4 Trust, or RAIT FL4, in 2017, and RAIT Preferred Funding II, Ltd., or RAIT II, in December 2018. During the year ended December 31, 2018, we deconsolidated RAIT 2015-FL5 Trust or RAIT FL5 and RAIT 2016-FL6 or RAIT FL6 as described above. We originated substantially all the loans collateralizing RAIT I and the FL securitizations. We serve as the collateral manager, servicer and special servicer on RAIT I and as servicer and special servicer for each of the FL securitizations.

Over time, our returns on and cash flows from our retained interests in our securitizations generally decrease as the senior classes of debt bearing relatively lower interest rates are paid down by collateral pool payments and other proceeds leaving more junior classes of debt bearing relatively higher interest rates on the smaller collateral pool. As a result, we continue to evaluate strategies to manage the returns on our capital allocated to our retained interests in each of our securitizations consistent with our rights and obligations under our securitizations and relevant market conditions, which may include, without limitation, unwinding a securitization and rolling the remaining collateral over to a new securitization and may involve, where applicable, selling our properties securing loans included in the collateral pool and repaying such loans. With respect to our floating rate CMBS securitizations described below, we have implemented a process of unwinding the FL securitizations when, because of loan repayments, the securitizations become inefficient and we have the means and desire to do so. Under the terms of FL7 and FL8, the earliest that we could unwind these securitizations are June 2019 and December 2019, respectively.

Securitization Performance. RAIT I contains interest coverage triggers, or IC triggers, and over collateralization triggers, or OC triggers. If the IC triggers 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 cause of the IC trigger or OC trigger failure, which may include curing payment defaults, paying down the CDO notes payable, or other actions permitted under the relevant securitization indenture. Since January 2019, the Class F/G/H OC test for RAIT I has not been met. As a result, certain interest payments that would have otherwise been distributed to the Class J notes and equity, which are owned by us, are instead being redirected to pay principal on the most senior class of CDO notes payable that are outstanding. The failure of this OC test does not represent an event of default under the RAIT I securitization indenture. All other applicable IC triggers and OC triggers continue to be met for RAIT I. The FL securitizations do not have IC triggers or OC triggers.

Repayment of the loans collateralizing RAIT I outside their contractual maturities is expected to be slower than 2018 levels for the foreseeable future. We continue to evaluate our real estate portfolio with regards to identifying other possible properties to sell as part of our previously disclosed debt reduction plan. Because we own properties that are financed, in part, by loans collateralizing

RAIT I, sales of our properties could result in a reduction of our securitization notes payable. These repayments have reduced our returns from this securitization and we expect future repayments to continue to reduce these returns.

If the CDO notes issued by RAIT I have not been redeemed in full prior to the distribution date occurring in May 2019, then an auction of the collateral assets of RAIT I will continue to be conducted by the trustee periodically thereafter and, if certain conditions set forth in the indenture are satisfied, such collateral assets will be sold at the auction and the CDO notes will be redeemed, in whole, but not in part, on such distribution date. Ten auctions for RAIT I have been held but no sales occurred as not all of the conditions precedent were satisfied.

In March 2018, DBRS announced that it had placed all classes of the floating rate notes issued by RAIT FL5, RAIT FL6 and RAIT FL8 under review with negative implications. DBRS did this citing concerns over RAIT’s ability to continue to effectively service and special service these transactions due to RAIT’s announcement of the 2018 strategic steps. DBRS announced it would revisit the ratings once additional information becomes available. RAIT’s ability to act as servicer and special servicer for RAIT FL8 could be materially adversely affected if RAIT is unable to address DBRS’ concerns.

A summary of the investments in our consolidated securitizations as of the most recent payment information is as follows:

We have issued eight non-recourse floating rate CMBS securitizations since 2013 as follows:

The below table summarizes the current outstanding balances in our consolidated securitizations as of the most recent payment date:

To qualify as a REIT, we are required to make annual dividend payments 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 dividend payments to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year. Because we expect to pay dividends based on the foregoing requirements, and not based on our earnings computed in accordance with accounting principles generally accepted in the United States (GAAP), our dividends 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. The board has determined to suspend paying a dividend on RAIT’s common shares and on RAIT’s preferred shares. The board currently expects to continue to review and determine the dividends on RAIT’s common shares and on RAIT’s preferred shares on a quarterly basis. Our board determines the amount and timing of any distributions. In making this determination, our trustees consider a variety of relevant factors, including, without limitation, REIT minimum distribution requirements, the amount of cash available for distribution, restrictions under Maryland law, capital expenditures and reserve requirements and general operational requirements. Our board of trustees reserves the right to change its dividend policy at any time or from time to time in its sole discretion but expects to declare dividends, if any, in at least the amount necessary to maintain RAIT’s REIT status.

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 dividends 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 dividends, if any, 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.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, the Act, was enacted. In accordance with the accounting guidance for income taxes, we recognized the effect of tax law changes in the period of enactment. Among other things, this law reduced the corporate income tax rate from 35% to 21% as well as repealed the corporate Alternative Minimum Tax (“AMT”), both effective as of January 1, 2018. As a result, we adjusted the federal tax rate for calculating deferred tax items to be 21% for the TRS entities and released the valuation allowance on our TRS entities’ AMT credit carryforward as those have become refundable credits under the new tax law. In accordance with the accounting guidance related to the Act, for the year ended December 31, 2018, we recognized 50% of the refundable AMT credit.

The table below reconciles the differences between reported net income (loss), total taxable income and estimated REIT taxable income for the two years ended December 31, 2018 (dollars in thousands):

For the year ended December 31, 2018, there were no dividends on our common shares.

The preferred dividends that we paid in 2018 were classified as 100.0% return of capital.

For the year ended December 31, 2017, the tax classification of our dividends on common shares was as follows:

The preferred dividends that we paid in 2017 were classified as 11.59% ordinary dividend including 6.04% (of total preferred distributions) that was eligible for qualified dividend treatment and 88.41% as return of capital including 86.94% (of total preferred distributions) classified as unrecaptured Internal Revenue Code section 1250 gain.

	For the Year Ended December 31,
	2018			2017			$ Variance			% Variance
Revenue:
Investment interest income	$	48,872		$	70,215		$	(21,343	)		-30	%
Investment interest expense		(31,122	)		(40,932	)		9,810			-24	%
Net interest margin		17,750			29,283			(11,533	)		-39	%
Property income		28,467			64,184			(35,717	)		-56	%
Fee and other income		3,044			6,251			(3,207	)		-51	%
Total revenue		49,261			99,718			(50,457	)		-51	%
Expenses:
Interest expense		23,108			35,544			(12,436	)		-35	%
Real estate operating expense		18,801			37,198			(18,397	)		-49	%
Property management expenses		4,207			8,853			(4,646	)		-52	%
General and administrative expenses:
Compensation expense		10,557			13,426			(2,869	)		-21	%
General and administrative expense		15,930			11,816			4,114			35	%
Total general and administrative expenses		26,487			25,242			1,245			5	%
Acquisition and integration expenses		146			455			(309	)		-68	%
Provision for loan losses		32,875			45,614			(12,739	)		-28	%
Depreciation and amortization expense		9,665			28,173			(18,508	)		-66	%
Shareholder activism expenses		-			2,464			(2,464	)		-100	%
Employee separation expenses		1,825			575			1,250			217	%
IRT internalization and management transition expenses		-			736			(736	)		-100	%
Total expenses		117,114			184,854			(67,740	)		-37	%
Operating (Loss) Income		(67,853	)		(85,136	)		17,283			-20	%
Interest and other income (expense), net		1,116			100			1,016			1016	%
Gains on assets		2,496			23,439			(20,943	)		-89	%
Gains (losses) on deconsolidation of properties and VIEs		(7,304	)		5,855			(13,159	)		-225	%
Gain on sale of retail property manager		1,262			-			1,262		N/M
Gains (losses) on extinguishments of debt		(5,773	)		488			(6,261	)		-1283	%
Asset impairment		(47,492	)		(102,490	)		54,998			-54	%
Goodwill impairment		-			(8,342	)		8,342			-100	%
Change in fair value of financial instruments		276			13,422			(13,146	)		-98	%
Income (loss) before taxes		(123,272	)		(152,664	)		29,392			-19	%
Income tax benefit (provision)		(186	)		861			(1,047	)		-122	%
Net income (loss)		(123,458	)		(151,803	)		28,345			-19	%
(Income) loss allocated to preferred shares		(9,662	)		(32,816	)		23,154			-71	%
(Income) loss allocated to noncontrolling interests		-			(76	)		76			-100	%
Net income (loss) allocable to common shares	$	(133,120	)	$	(184,695	)	$	51,575			-28	%

Net interest margin. Net interest margin decreased $11.5 million, or 39%, to $17.8 million for the year ended December 31, 2018 from $29.3 million for the year ended December 31, 2017 mainly due to the deconsolidation of $266.5 million of loans due to the sale of the FL5 Interests and the FL6 Interests on June 27, 2018 and the $526.6 million of loan repayments and loan sales during the year ended December 31, 2018. An additional decrease of $5.7 million was due to write-offs of accrued interest receivable related to seven loans whose interest was determined to be not probable of collection during the year ended December 31, 2018 based on current valuations of the properties which collateralize the assets for six of the loans and a loan amendment that included a discounted payoff feature for one of the loans.

Property income. Property income decreased $35.7 million, or 56% to $28.5 million for the year ended December 31, 2018 from $64.2 million for the year ended December 31, 2017. The decrease is primarily attributable to the 6 properties disposed of or deconsolidated after December 31, 2017 and the 29 properties disposed of or deconsolidated after December 31, 2016.

Fee and other income. Fee and other income decreased $3.2 million to $3.0 million for the year ended December 31, 2018 from $6.3 million for the year ended December 31, 2017. The decrease is primarily attributable to the sale of our retail property management subsidiary in August 2018 as well as lower property management fees earned by our retail property management subsidiary prior to the sale.

Interest expense. Interest expense decreased $12.4 million, or 35% to $23.1 million for the year ended December 31, 2018 from $35.5 million for the year ended December 31, 2017. This decrease is primarily attributable to $125.9 million of recourse debt reductions since December 31, 2017 and $21.6 million of repayments of loans payable on real estate since December 31, 2017.

Real estate operating expense. Real estate operating expense decreased $18.4 million, or 49%, to $18.8 million for the year ended December 31, 2018 from $37.2 million for the year ended December 31, 2017. The decrease is primarily attributable to the 6 properties disposed of or deconsolidated after December 31, 2017 and the 29 properties disposed of or deconsolidated after December 31, 2016.

Property management expense. Property management expense decreased $4.7 million to $4.2 million for the year ended December 31, 2018 from $8.9 million for the year ended December 31, 2017. The decrease is primarily attributable to sale of our retail property management subsidiary in August 2018 and a decrease in the number of employees at our retail property management subsidiary prior to the sale.

Compensation expense. Compensation expense decreased $2.9 million to $10.6 million for the year ended December 31, 2018 from $13.4 million for the year ended December 31, 2017. This is primarily due to less compensation expense as a result of a decrease in the number of employees.

General and administrative expense. General and administrative expense increased $4.1 million, or 35%, to $15.9 million for the year ended December 31, 2018 from $11.8 million for the year ended December 31, 2017. This increase is primarily due to increase in legal and consulting fees incurred as part of our prior strategic alternatives process, the 2018 strategic steps, and the redemption of the Series D preferred shares.

Acquisition expense. Acquisition expense decreased $0.3 million to $0.2 million for the year ended December 31, 2018 from $0.5 million for the year ended December 31, 2017.

Provision for loan losses. Provision for loan losses decreased $12.7 million, or 28%, to $32.9 million for the year ended December 31, 2018 from $45.6 million for the year ended December 31, 2017. During the year ended December 31, 2018, our provision for loan losses was primarily driven by nine loans, where the borrower and/or property experienced an unfavorable event or events during the period, which resulted in probable, incurred losses.

Depreciation and amortization expense. Depreciation and amortization expense decreased $18.5 million, or 66%, to $9.7 million for the year ended December 31, 2018 from $28.2 million for the year ended December 31, 2017. The decrease is primarily attributable to the 6 properties disposed of or deconsolidated after December 31, 2017 and the 29 properties disposed of or deconsolidated after December 31, 2016.

Shareholder activism expenses. During the year ended December 31, 2017, we incurred $2.5 million of expenses related to shareholder activism. We incurred no such expenses during 2018.

Employee separation expenses. During the year ended December 31, 2018, we incurred a $1.8 million expense related to the settlement agreement with the former chief executive officer. During the year ended December 31, 2017, we incurred a $0.6 million expense related to the settlement agreement with the former chief financial officer.

Interest and other income(expense), net: Interest and other income(expense), net increased $1.0 million to $1.1 million for the year ended December 31, 2018 from $0.1 million for the year ended December 31, 2017.

Gains (losses) on assets: During the year ended December 31, 2018, we incurred a net $2.5 million gain on assets. This includes a $4.2 million net loss related to loans held for sale that were either sold or repaid during 2018, $2.2 million of losses on three held for sale loans measured at the lower of cost or market as of December 31, 2018, a $0.9 million gain on the sale of one office property and an $8.0 million gain on the sale of one multi-family property.

Gains (losses) on deconsolidation of properties and VIEs. During the year ended December 31, 2018, we completed the sale of the FL5 Interests and the FL6 Interests as described in Note 1 and Note 8. As a result of the sale, we are no longer the primary beneficiary of the RAIT Venture VIEs, FL5 and FL6. Therefore, RAIT deconsolidated those entities as of June 27, 2018 and recognized an $8.2 million loss on the deconsolidation as the purchase price of the $54.6 million was less than our net investment in our FL5 and FL6 securitization of $62.8 million. Additionally, during the year ended December 31, 2018, we recognized a $0.9 million gain on the surrender of our ground leasehold interest in one property to the ground lessor.

Gain on sale of retail property manager. During the year ended December 31, 2018, we recognized a $1.3 million gain on sale of our retail property management subsidiary.

Gain on extinguishment of debt. During the year ended December 31, 2018, we recognized a loss on extinguishment of debt of $5.8 million. This includes a $1.9 million loss related to defeasance of mortgage indebtedness upon the sale of one office property and a $4.4 million loss due to the write-off of the unamortized deferred financing cost and discounts associated with the related extinguished indebtedness offset by a net $0.6 million gain on the redemption or repurchase of indebtedness.

Asset impairment. During the year ended December 31, 2018, we recognized non-cash asset impairment charges of $47.5 million, which primarily related to real estate assets where it was more likely than not we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in these assets was determined to not be recoverable.

Change in fair value of financial instruments. During the year ended December 31, 2018, the change in fair value of financial instruments decreased our net income by $0.3 million. The fair value adjustments we recorded were as follows (dollars in thousands):

The changes in the fair value for the year ended December 31, 2018 for the junior subordinated notes for which the fair value option was elected was primarily attributable to changes in interest rates. The changes in the fair value for the year ended December 31, 2017 for the junior subordinated notes for which the fair value option was elected was primarily attributable to changes in interest rates and instrument specific credit risks. The changes in the fair value of derivatives for the year ended December 31, 2018 and 2017 was primarily attributable to changes in interest rates. The changes in the fair value of the warrants and investor SARs for the year ended December 31, 2017 was primarily attributable to changes in the reference stock price and volatility.

Income tax benefit (provision). For the year ended December 31, 2018, the income tax provision was related to insignificant activity in our TRS entities. For the year ended December 31, 2017, the income tax benefit was driven by the release of the valuation allowance on our TRS entities’ AMT credit carryforward as those became refundable credits under the new tax law.

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs.

We may consider selling our retained interests in RAIT FL7 and/or RAIT FL8 to generate liquidity, which we expect would significantly affect our financial position and financial results.

In evaluating RAIT’s potential cash requirements over the next 12 months and pursuant to the 2019 strategic steps, management considered our 7.125% senior notes which mature in August 2019 and have an unpaid principal balance of $65.4 million as of December 31, 2018, the financial covenant compliance requirements that are included in the indentures that govern our 7.625% senior notes and our 7.125% senior notes, and RAIT’s recurring costs of operating its business. Our ability to incur new indebtedness is limited due to the financial covenants that are included in the indentures that govern our 7.625% senior notes and our 7.125% senior notes.

As previously disclosed, RAIT has undertaken steps to increase liquidity and reduce costs within our businesses. As such, RAIT plans to control costs, to sell certain loans, to sell certain real estate properties and to continue to receive repayments of loans as they become due. Consistent with these steps and plans, RAIT has suspended new investment activity and the Board has not declared any dividends on the outstanding common shares since August 2, 2017 or preferred shares since March 13, 2018.

Based on proceeds generated from asset sales and loan repayments that have occurred before the date these financial statements were issued, RAIT’s current financial condition and currently available sources of repayment would not enable RAIT to meet its obligations under the 7.125% senior notes due in August 2019. RAIT’s ability to satisfy its obligations under the 7.125% senior notes depends on management’s ability to sell certain of RAIT’s remaining real estate assets releasing cash from those sales and/or distributions on our retained interests in our RAIT I securitization, to continue to control costs, to sell certain loans, to sell retained interests in RAIT FL7 and to continue to receive repayments of loans as they become due. While controlling costs are within management’s control to some extent, selling real estate assets, selling loans, selling other assets and the timing of loan repayments involve performance by third parties. Since many of the real estate assets, loans and other assets that management plans to sell or receive repayment from to satisfy its obligations are not subject to an executed purchase and sale agreement or other contractual agreement as of the date hereof, the sale of those assets cannot be considered probable of occurring.

If these plans or other alternative plans are not successfully implemented, RAIT’s financial condition, liquidity and ability to continue as a going concern would be materially adversely affected. Subject to the considerations outlined in Part I, Item 1, “Financial Statements —Note 2: Summary of Significant Accounting Policies—Going Concern Considerations” and under this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” if RAIT’s plans are successfully implemented in the normal course of business, we believe our available cash balances, proceeds from the sales of assets, and cash flows from operations will be sufficient to fund our liquidity requirements over the next twelve months.

In connection with the 2019 strategic steps, we have engaged in preliminary discussions with third parties, including various stakeholders, and are pursuing or considering a number of actions, but there can be no assurance that sufficient liquidity can be obtained from one or more of these actions, that these actions can be consummated within the period needed to meet certain obligations or that these actions can be or will be effectuated outside of Chapter 11. We could be required, or elect to seek relief under Chapter 11. We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our liquidity and capital structure in connection with the 2019 strategic steps, including strategic and refinancing alternatives through one or more private restructurings and may include seeking relief under Chapter 11. Seeking bankruptcy relief may be unavoidable and may have a material adverse effect on our business, financial condition, results of operations, liquidity and returns to our stakeholders, depending on the respective interests of these stakeholders.

As a result of these discussions engaged in as a result of the 2019 strategic steps, or otherwise, we may seek to acquire, redeem, repurchase, restructure, refinance or otherwise enter into transactions to satisfy our debt or redeem our preferred shares which may include any combination of material payments of cash, issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods. From time to time our indebtedness and preferred shares may trade at discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future principal amounts due upon any applicable put dates, at maturity or upon redemption, or payments on preferred shares, or to otherwise benefit RAIT, we may, from time to time, purchase such indebtedness or preferred shares for cash, in exchange for our equity or debt securities, or for any combination of cash and our equity or debt securities, in each case in open market purchases, privately negotiated transactions, exchange offers and consent solicitations or otherwise. We will evaluate any such transactions in light of then-existing market conditions, contractual restrictions and other factors, taking into account our current liquidity and prospects for future access to capital. The amounts involved in any such transactions, individually or in the aggregate, may be material and may materially reduce our liquidity or reduce or eliminate our ability to convert assets into liquidity. Any material issuances of our equity securities may have a material dilutive effect on our current shareholders. These transactions may not be sufficient to address the concerns outlined in Part I, Item 1, “Financial Statements —Note 2: Summary of Significant Accounting Policies—Going Concern Considerations” and we could be required to seek or elect to seek relief under Chapter 11 of Title 11.

As disclosed above, the 7.625% senior notes and 7.125% senior notes contain financial covenants consisting of a maximum leverage ratio covenant and a minimum fixed charge ratio covenant. These covenants must be met in the event RAIT or any subsidiary meeting the definition thereof in the indentures related to these notes were to incur debt, as defined in such indentures, and are measured immediately after giving pro forma effect to the incurrence of such debt and the application of the proceeds thereof. If RAIT failed to comply with these financial covenants, that would constitute an event of default under these indentures permitting the acceleration of the applicable senior notes in defined circumstances. If RAIT failed to repay any senior notes that were accelerated, it could trigger cross defaults under, and ultimately the acceleration of, other RAIT indebtedness. RAIT expects that these financial covenants will restrict RAIT’s and these subsidiaries’ ability to incur such debt for the foreseeable future because RAIT does not expect that these financial covenants would be met on such pro forma basis in the event RAIT or such subsidiaries incurred such debt. RAIT and these subsidiaries do not plan to incur any such debt, absent a pro forma use of proceeds that would permit compliance with these covenants.

As of December 31, 2018, and 2017, we maintained cash and cash equivalents of $42.5 million and $53.4 million, respectively. Our cash and cash equivalents, inclusive of cash and cash equivalents related to discontinued operations, were generated or used from the following activities (dollars in thousands):

Cash flows from operating activities for the year ended December 31, 2018, as compared to the same period in 2017, decreased $3.6 million primarily due to our reduced number and amount of loans and properties which contributed to lower cash flows from operations.

The cash inflow for investing activities for the year ended December 31, 2018 was substantially due to proceeds from property dispositions of $95.5 million as well as loan repayments of $393.3 million and loan sales of $108.5 million offset by new investments in loans of $52.8 million. The cash inflow for investing activities for the year ended December 31, 2017 is substantially due to loan repayments of $453.8 million and proceeds from property dispositions of $238.8 million exceeding new investments in loans of $460.7 million.

The cash outflow from our financing activities during the year ended December 31, 2018 was primarily due to repayments and repurchases of indebtedness of $549.8 million, repurchase of the Series D preferred shares of $62.1 million and distributions to shareholders and noncontrolling interests of $11.3 million. The cash outflow from our financing activities during the year ended December 31, 2017 was primarily due to repayments and repurchases of indebtedness of $751.3 million and distributions to shareholders and noncontrolling interests of $49.0 million exceeding proceeds from the issuance of indebtedness of $507.6 million.

As a REIT, we evaluate our dividend coverage based on our cash flow from operating activities, excluding acquisition and integration expenses, the origination and sale of conduit loans, and changes in assets and liabilities. During the year ended December 31, 2018, we paid distributions to our preferred shareholders, common shareholders, and noncontrolling interests of $11.3 million and generated cash flows from operating activities, before acquisition expenses, origination and sale of conduit loans, and changes in assets and liabilities of $(17.0) million. The $28.3 million of excess funds needed to make those distributions was generated through cash flows from the disposition of real estate assets, principal repayments on loans and sales of loans, which are included in cash flows from investing activities in the consolidated statements of cash flows and totaled $95.5 million, $393.3 million, and $108.5 million, respectively, during the year ended December 31, 2018.

A discussion of our capitalization is incorporated by reference to Note 5: Indebtedness, Note 9: Series D Preferred Shares and Note 10: Shareholders’ Equity of Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

Due to the current trading levels of our publicly traded securities and other factors, we do not expect for the foreseeable future to generate liquidity from the proceeds from future offerings of our securities, including through our dividend reinvestment and share purchase plan, the 2014 Preferred ATM agreement or the COD sales agreement. With respect to sales pursuant to the 2014 Preferred ATM agreement or the COD sales agreement, these factors include our need to prepare and file a current prospectus supplement to our current universal shelf registration statement on Form S-3, or the shelf registration statement, to register any such sales. In addition, we do not currently meet the eligibility requirements to use our shelf registration statement to offer securities on our own behalf for cash. As a result, unless and until we are able to satisfy the relevant eligibility requirements to use Form S-3, we expect we would have to follow more expensive and time-consuming alternatives to register any securities we wish to offer publicly or rely on exemptions from such registration.

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. Please see Part II, Item 8, “Financial Statements —Note 2: Summary of Significant Accounting Policies” for information regarding recent accounting pronouncements.

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 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. The items that include significant estimates are fair value of financial instruments and allowance for loan losses. Actual results could differ from those estimates.

Revenue Recognition for Interest Income. We recognize interest income from investments in commercial mortgage loans, mezzanine loans, and preferred equity interests on a yield to maturity basis. Some of our commercial mortgage loans, mezzanine loans and preferred equity interests 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 will cease accruing interest on these loans when it determines that the interest income is not collectible based on the ultimate value of the underlying collateral using discounted cash flow models and market based assumptions.

Allowance for Loan Losses, Impaired Loans and Non-accrual Status. We maintain an allowance for loan losses on our investments in commercial mortgage loans, mezzanine loans and preferred equity interests. 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 under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. 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. 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 loan losses is increased by charges to operations and decreased by charge-offs (net of recoveries). We charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure. We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible.

Investments in Real Estate. Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been evaluated to improve 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 to 40 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.

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. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Transaction costs and fees incurred related to acquisitions are expensed as incurred.

Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term.

The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period.

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.

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.

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:

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.

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 buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market 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.

For further discussion on fair value of our financial instruments, see Item 8- “Financial Statements and Supplementary Data. Note 7: Fair Value of Financial Instruments.”

The table below summarizes our contractual obligations as of December 31, 2018 (dollars in thousands):

	Payment due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Recourse indebtedness:
Senior notes		121,680		65,356		—		—		56,324
Junior subordinated notes		43,771		—		—		—		43,771
Total recourse indebtedness		165,451		65,356		—		—		100,095
Non-recourse indebtedness
CDO notes payable		116,102		—		—		—		116,102
CMBS securitization		320,282		—		—		—		320,282
Loans payable on real estate		40,724		749		39,975		—		—
Total non-recourse indebtedness		477,108		749		39,975		—		436,384
Total indebtedness		642,559		66,105		39,975		—		536,479
Interest payable (1)(2)		414,682		28,215		49,707		46,408		290,352
Operating lease obligations		6,911		479		885		921		4,626
Funding commitments to borrowers (3)		9,431		9,431		—		—		—
Total	$	1,073,583	$	104,230	$	90,567	$	47,329	$	831,457

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

We have audited the accompanying consolidated balance sheets of RAIT Financial Trust and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the two‑year period ended December 31, 2018, and the related notes and financial statement schedules II to IV (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s current liquidity is not sufficient to meet its obligations within one year of the date of issuance of the financial statements, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for changes in instrument-specific credit risk of its junior subordinated notes, at fair value due to the adoption of an accounting standard classified under FASB ASC Topic 825, Financial Instruments.

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

	As of December 31, 2018			As of December 31, 2017
Assets
Investment in mortgage loans, held for investment:
Commercial mortgage loans, mezzanine loans, and preferred equity interests	$	502,397		$	1,270,607
Allowance for loan losses		(22,336	)		(14,883	)
Total investment in mortgage loans, held for investment, net (including $467,656 and $1,174,827 held by consolidated VIEs, respectively)		480,061			1,255,724
Investment in mortgage loans, held for sale		4,873			-
Investments in real estate, net of accumulated depreciation of $8,768 and $28,768, respectively (including $18,020 and $18,634 held by consolidated VIEs, respectively)		107,824			245,904
Investments in real estate, held for sale		4,918			-
Cash and cash equivalents		42,453			53,380
Restricted cash		63,067			157,914
Accrued interest receivable		18,044			29,664
Other assets		10,807			43,871
Intangible assets, net of accumulated amortization of $5,703 and $6,831, respectively		1,717			5,376
Total assets	$	733,764		$	1,791,833
Liabilities and Equity
Indebtedness, net of unamortized discounts, premiums and deferred financing costs of $16,643 and $29,465 respectively (including $440,776 and $1,038,864 held by consolidated VIEs, respectively)	$	625,916		$	1,390,188
Accrued interest payable		2,401			4,688
Accounts payable and accrued expenses		3,330			9,641
Borrowers' escrows		31,343			117,070
Deferred taxes and other liabilities		2,268			12,116
Total liabilities		665,258			1,533,703
Series D cumulative redeemable preferred shares, $0.01 par value per share, 0 and 4,000,000 shares authorized, respectively, 0 and 3,133,720 shares issued and outstanding, respectively		-			78,343
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, 8,069,288 shares authorized, 5,727,500 and 5,344,353 shares issued and outstanding, respectively		57			53
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,508,797 and 2,340,969 shares issued and outstanding, respectively		25			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,758,030 and 1,640,425 shares issued and outstanding, respectively		18			17
Series E cumulative redeemable preferred shares, $0.01 par value per share, 0 and 4,000,000 shares authorized, respectively, 0 and 0 shares issued and outstanding, respectively		-			-
Common shares, $1.50 par value per share, 200,000,000 shares authorized 1,850,451 and 1,860,903 issued and outstanding, respectively, including 6,844 and 24,930 unvested restricted common share awards, respectively		2,776			2,791
Additional paid in capital		2,102,274			2,094,804
Accumulated other comprehensive income (loss)		11,473			-
Retained earnings (deficit)		(2,048,117	)		(1,921,533	)
Total shareholders’ equity		68,506			176,155
Noncontrolling interests		-			3,632
Total equity		68,506			179,787
Total liabilities and equity	$	733,764		$	1,791,833

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

	For the Years Ended December 31
	2018			2017
Revenue:
Investment interest income	$	48,872		$	70,215
Investment interest expense		(31,122	)		(40,932	)
Net interest margin		17,750			29,283
Property income		28,467			64,184
Fee and other income		3,044			6,251
Total revenue		49,261			99,718
Expenses:
Interest expense		23,108			35,544
Real estate operating expense		18,801			37,198
Property management expenses		4,207			8,853
General and administrative expenses:
Compensation expense		10,557			13,426
Other general and administrative expense		15,930			11,816
Total general and administrative expenses		26,487			25,242
Acquisition and integration expenses		146			455
Provision for loan losses		32,875			45,614
Depreciation and amortization expense		9,665			28,173
IRT internalization and management transition expenses		—			736
Shareholder activism expenses		—			2,464
Employee separation expenses		1,825			575
Total expenses		117,114			184,854
Operating (Loss) Income		(67,853	)		(85,136	)
Interest and other income (expense), net		1,116			100
Gains on assets		2,496			23,439
Gains (losses) on deconsolidation of properties and VIEs		(7,304	)		5,855
Gain on sale of retail property manager		1,262			—
Gains (losses) on extinguishments of debt		(5,773	)		488
Asset impairment		(47,492	)		(102,490	)
Goodwill impairment		—			(8,342	)
Change in fair value of financial instruments		276			13,422
Income (loss) before taxes		(123,272	)		(152,664	)
Income tax benefit (provision)		(186	)		861
Net income (loss)		(123,458	)		(151,803	)
(Income) loss allocated to preferred shares		(9,662	)		(32,816	)
(Income) loss allocated to noncontrolling interests		—			(76	)
Net income (loss) allocable to common shares	$	(133,120	)	$	(184,695	)
Earnings (loss) per share-Basic:
Earnings (loss) per share-Basic	$	(72.37	)	$	(100.99	)
Weighted-average shares outstanding-Basic		1,839,544			1,828,778
Earnings (loss) per share-Diluted:
Earnings (loss) per share-Diluted	$	(72.37	)	$	(100.99	)
Weighted average shares outstanding-Diluted		1,839,544			1,828,778

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

	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, December 31, 2016		5,344,353		53		2,340,969		23		1,640,425		17		92,295,478			2,769			2,093,257		—			(1,723,735	)		372,384			5,386			377,770
Net income (loss)	—		—		—		—		—		—		—			—			—			—			(151,879	)		(151,879	)		76			(151,803	)
Preferred dividends	—		—		—		—		—		—		—			—			—			—			(25,998	)		(25,998	)	—				(25,998	)
Preferred Series D discount amortization	—		—		—		—		—		—		—			—			—			—			(6,818	)		(6,818	)	—				(6,818	)
Common dividends declared	—		—		—		—		—		—		—			—			—			—			(13,103	)		(13,103	)	—				(13,103	)
Other comprehensive income (loss), net	—		—		—		—		—		—		—			—			—			—		—			—			—				—
Share-based compensation	—		—		—		—		—		—			930,211			28			2,584		—		—				2,612		—				2,612
Issuance of noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				66			66
Distribution to noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				(1,710	)		(1,710	)
Derecognition of noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				(186	)		(186	)
Disposal of discontinued operations	—		—		—		—		—		—		—			—			—			—		—			—			—			—
Preferred shares issued, net	—		—		—		—		—		—		—			—			—			—		—			—			—				—
Common shares issued for equity compensation	—		—		—		—		—		—			(193,854	)		(6	)		(1,037	)	—		—				(1,043	)	—				(1,043	)
Common shares issued, net	—		—		—		—		—		—			13,317		—			—			—		—			—			—				—
Balance, December 31, 2017		5,344,353		53		2,340,969		23		1,640,425		17		93,045,152			2,791			2,094,804		—			(1,921,533	)		176,155			3,632			179,787
Cumulative effect adjustments from adoption of recently issued accounting pronouncements	—		—		—		—		—		—		—			—			—				9,257		(8,496	)		761		—				761
Adjusted Balance, January 1, 2018		5,344,353		53		2,340,969		23		1,640,425		17		1,860,903			2,791			2,094,804			9,257		(1,930,029	)		176,916			3,632			180,548
Net income (loss)	—		—		—		—		—		—		—			—			—			—			(123,458	)		(123,458	)	—				(123,458	)
Preferred shares issued, net		383,147		4		167,828		2		117,605		1	—			—				4,359		—		—				4,366		—				4,366
Preferred dividends paid	—		—		—		—		—		—		—			—			—			—			(6,405	)		(6,405	)	—				(6,405	)
Impact of Series D redemption (Note 9)	—		—		—		—		—		—		—			—				(11	)	—			11,932			11,921		—				11,921
Common dividends declared	—		—		—		—		—		—		—			—			—			—			(157	)		(157	)	—				(157	)
Other comprehensive income (loss), net	—		—		—		—		—		—		—			—			—				2,216	—				2,216		—				2,216
Share-based compensation	—		—		—		—		—		—		—			—				(58	)	—		—				(58	)	—				(58	)
Issuance of noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				76			76
Distribution to noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				(15	)		(15	)
Acquisition of noncontrolling interests	—		—		—		—		—		—		—			—				3,239		—		—				3,239			(3,582	)		(343	)
Derecognition of noncontrolling interests	—		—		—		—		—		—		—			—			—			—		—			—				(111	)		(111	)
Common shares activity related to equity compensation	—		—		—		—		—		—			(10,452	)		(15	)		(59	)	—		—				(74	)	—				(74	)
Balance, December 31, 2018		5,727,500		57		2,508,797		25		1,758,030		18		1,850,451			2,776			2,102,274			11,473		(2,048,117	)		68,506			—			68,506

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

	For the Year Ended December 31,
	2018			2017
Operating activities:
Net income (loss)	$	(123,458	)	$	(151,803	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for loan losses		32,875			45,614
Share-based compensation expense		(58	)		2,612
Depreciation and amortization expense		9,665			28,173
Amortization of deferred financing costs and debt discounts		9,392			14,650
(Amortization)/Deferral of loan origination fees and costs, net		(1,985	)		744
(Amortization) of above/below market leases		(350	)		(1,148	)
(Gains) Losses on assets		(2,496	)		(23,439	)
(Gains) Losses on extinguishments of debt		5,773			(488	)
(Gains) Losses on deconsolidation of properties and VIEs		7,304			(5,855	)
(Gain) on sale of retail property manager		(1,262	)		—
Asset impairment		47,492			102,490
Goodwill impairment		—			8,342
Change in fair value of financial instruments		(276	)		(13,422	)
Provision (benefit) for deferred taxes		220			(577	)
Changes in assets and liabilities:
Decrease in accrued interest receivable		10,429			6,039
Decrease in other assets		3,163			4,508
(Decrease) increase in accrued interest payable		(1,707	)		3,010
(Decrease) in accounts payable and accrued expenses		(1,602	)		(5,392	)
(Decrease) increase in other liabilities		17			(3,079	)
Proceeds from sale of loans originated for sale		14,265			—
Cash flows provided by (used in) operating activities		7,401			10,979
Investing activities:
Origination of loans for investment		(52,774	)		(460,770	)
Principal repayments on loans		393,343			453,771
Proceeds from sale of interests in floating rate securitizations, net of cash and restricted cash deconsolidated		31,837			—
Investments in real estate		(2,688	)		(9,243	)
Payments related to sale of retail property manager, including cash deconsolidated		(235	)		—
Proceeds from sale of loans originated for investment		108,494			—
Proceeds from the disposition of real estate		95,516			238,770
(Decrease) increase in borrowers' escrows		(63,178	)		9,887
Cash flows provided by (used in) investing activities		510,315			232,415
Financing activities:
Repayments of warrants and SARs obligations		—			(20,500	)
Repayments on secured credit facilities and loans payable on real estate		(1,011	)		(1,295	)
Repayments and repurchase of CDO notes payable and floating rate securitizations		(401,922	)		(678,164	)
Net proceeds from issuance of CDO notes and floating rate securitizations		—			490,550
Repurchase of convertible notes and senior notes		(113,046	)		(17,285	)
Repayments of senior secured notes		(11,500	)		(50,500	)
Net proceeds (repayments) related to floating rate loan repurchase agreements		(22,313	)		(4,109	)
Proceeds from issuance of other indebtedness		—			17,022
Distribution to noncontrolling interests		(15	)		(1,710	)
Acquisition of noncontrolling interests		(343	)		—
Issuance of noncontrolling interests		76			66
Payments for deferred costs		—			(8,494	)
Common share issuance, net of costs incurred		(74	)		(1,043	)
Repurchase of Series D preferred shares		(62,057	)		(10,057	)
Distributions paid to preferred shareholders		(11,129	)		(25,990	)
Distributions paid to common shareholders		(156	)		(21,301	)
Cash flows (used in) provided by financing activities		(623,490	)		(332,810	)
Net change in cash, cash equivalents, and restricted cash		(105,774	)		(89,416	)
Cash, cash equivalents, and restricted cash at the beginning of the period		211,294			300,710
Cash, cash equivalents, and restricted cash at the end of the period	$	105,520		$	211,294

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

RAIT Financial Trust is a self-managed and self-advised Maryland real estate investment trust, or REIT, focused on managing a portfolio of commercial real estate, or CRE, loans and properties. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires.

Beginning in the second half of 2018, RAIT’s management, with direction from the Board, resumed the review of the potential strategic and financial alternatives for RAIT previously considered in the concluded Special Committee review. As part of this resumption, RAIT management began having preliminary discussions with various third parties to explore whether any of them were interested in any potential strategic and/or financial transaction or other action with respect to RAIT, its assets and/or its lending platform. This review and related preliminary discussions have continued through December 31, 2018, conducted with the support of financial and legal advisors, with the goals of seeking to maximize value for RAIT’s stakeholders in accordance with their respective interests. We refer to our continued implementation of the 2018 strategic steps, combined with our resumption of such review and holding these preliminary discussions, including, without limitation, any transactions or other actions contemplated thereby, as the 2019 strategic steps.

Effective after the close of trading on August 13, 2018, we completed a one for fifty reverse stock split, or the Reverse Stock Split of RAIT’s common shares, as previously authorized by RAIT’s board of trustees, or the Board, pursuant to authority granted to the Board by RAIT’s common shareholders. The par value of common shares changed to $1.50 per share after the Reverse Stock Split from $0.03 per share prior to the Reverse Stock Split and every fifty shares issued and outstanding prior to the Reverse Stock Split were combined into one common share after the Reverse Stock Split. The Reverse Stock Split did not change the number of authorized common shares. These financial statements give retroactive effect to such Reverse Stock Split and all share and per share amounts have been adjusted accordingly. The Reverse Stock Split did not affect RAIT’s preferred shares, including the number of authorized or outstanding RAIT preferred shares or the dividend rate per share of any outstanding RAIT preferred shares.

On June 27, 2018, RAIT Asset Holdings IV, LLC, or RAIT IV, a subsidiary of RAIT, completed the sale of its FL5 Interests, as defined below, and FL6 Interests, as defined below (collectively, the Interests), to Melody RE II, LLC, or the FL Purchaser, for an aggregate purchase price of $54,632.

As a result of the sale, RAIT is no longer the primary beneficiary of Holdings 2016 or Holdings 2017 (collectively, the RAIT Venture VIEs), or FL5 or FL6. Therefore, RAIT deconsolidated those entities as of June 27, 2018. See Note 8: Variable Interest Entities for more information. After the sale of the Interests, RAIT retained its role as servicer and special servicer of the loans in FL5 and FL6.

Also on June 27, 2018, RAIT, several of RAIT’s subsidiaries, including RAIT IV, and ARS VI Investor I, LP, or the Investor, entered into a Redemption and Exchange Agreement with the Investor whereby RAIT and RAIT IV redeemed and cancelled the remaining 2,939,190 preferred units of RAIT IV, or the preferred units, and RAIT’s corresponding Series D cumulative redeemable preferred shares, or the Series D preferred shares, for $56,765 of cash received by RAIT IV from the sale of the Interests, defined available cash held by RAIT IV and $16,715 of liquidation preference of RAIT’s publicly traded Series A cumulative redeemable preferred shares, or the Series A preferred shares, Series B cumulative redeemable preferred shares, or the Series B preferred shares, and Series C cumulative redeemable preferred shares, or the Series C preferred shares. See Note 9: Series D Preferred Shares for more information.

On September 7, 2017, we announced that our Board had formed a committee of independent trustees, or the Special Committee, to explore and evaluate a wide range of possible strategic and financial alternatives for RAIT. On February 20, 2018, we announced that the Special Committee had concluded this review and that the Board had determined that this review did not identify a strategic or financial transaction with another counterparty that was preferable to the steps described below. This review, conducted with the support of financial and legal advisors, evaluated a wide range of potential alternatives which included, but were not limited to, (i) refinements of RAIT’s operations or strategy, (ii) financial transactions, such as a recapitalization or other change to RAIT’s capital structure and (iii) strategic transactions, such as a sale of all or part of RAIT. As a result, the Board, after considering the recommendations and advice of the Special Committee, RAIT’s management, and its legal and financial advisors, determined that RAIT should take steps to increase RAIT’s liquidity and better position RAIT to meet its financial obligations as they come due. We refer to these steps as the 2018 strategic steps and they include, but are not limited to: (i) the suspension of RAIT’s loan origination business along with the implementation of other steps to reduce costs within its other operating businesses; (ii) the continuation of the process of selling RAIT’s owned real estate, or REO, portfolio, while continuing to service and manage its existing CRE loan portfolio; and (iii) the engagement of a financial advisor, M-III Advisory Partners, LP, to advise and assist RAIT in its ongoing assessment of its financial performance and financial needs and in evaluating strategic and financial transactions.

The accompanying 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.

Under the accounting guidance related to the presentation of financial statements, an entity is required to evaluate on a quarterly basis whether the entity’s current financial condition, including its liquidity sources at the date that the financial statements are issued, will enable the entity to meet its obligations arising within one year of the date the entity’s financial statements are issued and to make a determination as to whether it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern over the applicable period. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should RAIT be unable to continue as a going concern. As a result of the considerations articulated below, there is substantial doubt about RAIT’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Analysis. In applying the accounting guidance, management considered RAIT’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and RAIT’s conditional and unconditional obligations due over the next twelve months. Management considered the following: i) our 7.125% senior notes which mature in August 2019 and have an unpaid principal balance of $65,356 as of December 31, 2018; ii) the financial covenant compliance requirements of RAIT’s senior notes; and (iii) RAIT’s recurring costs of operating its business.

RAIT plans to control costs, to sell certain loans, to sell certain real estate properties and to continue to receive repayments of loans as they become due. Consistent with these plans, RAIT has suspended new investment activity and the Board has not declared a dividend on RAIT’s outstanding preferred shares for the three quarters ended June 30, 2018, September 30, 2018 and December 31, 2018. Due to the inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and RAIT’s ability to satisfy its financial obligations that may arise over the applicable twelve month period, RAIT is unable to conclude that it is probable that RAIT will be able to meet its obligations arising within twelve months of the date of issuance of these financial statements under the parameters set forth in this accounting guidance.

As a result, management evaluated whether this was mitigated by RAIT’s approved plans and expectations for the applicable period under the second step of this accounting standard.

RAIT’s ability to satisfy its obligations under the 7.125% senior notes, to maintain compliance with its debt covenants and to fund recurring costs of operations depends on management’s ability to sell certain of RAIT’s remaining real estate assets releasing cash from those sales and/or distributions on our retained interests in our RAIT I securitization, to continue to control costs, to sell certain loans, to sell retained interests in certain FL securitizations and to continue to receive repayments of loans as they become due. While controlling costs are within management’s control to some extent, selling real estate assets, selling loans, selling other assets and the timing of loan repayments involve performance by third parties. Since many of the real estate assets, loans and other assets that management plans to sell or receive repayment from to satisfy its obligations are not subject to an executed purchase and sale agreement or other contractual agreement as of the date hereof, the sale of those assets cannot be considered probable of occurring.

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, or FASB, Accounting Standards Codification, or 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 entity. For our commercial mortgage loans, 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 consolidate the VIEs when we are the primary beneficiary. See Note 8: Variable Interest Entities for additional disclosures pertaining to VIEs.

For entities that we do not consolidate, we account for our investment in them either under the equity method pursuant to ASC Topic 323, “Investments-Equity Method and Joint Ventures” or cost method pursuant to ASC Topic 325, “Investments – Other”.

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. The items that include significant estimates are fair value of financial instruments and allowance for loan losses. Actual results could differ from those estimates.

Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution. We attempt to mitigate credit risk by placing cash and cash equivalents with major financial institutions. To date, we have not experienced any losses on cash and cash equivalents.

Restricted cash consists primarily of 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, 2018 and 2017, we had $33,300 and $123,398, respectively, of tenant escrows and borrowers’ funds.

Restricted cash also includes cash received from the sale, repayment and/or other disposition of assets held by the issuers of our securitizations that are awaiting to be distributed to holders of our CDO notes payable and CMBS securitizations, as well as the proceeds from the issuance of CDO notes payable by securitizations that are restricted for the purpose of funding additional investments in securities subsequent to the balance sheet date. As of December 31, 2018 and December 31, 2017, we had $29,767 and $34,516, respectively, of restricted cash held by securitizations.

g. Investments in Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests

We have invested in commercial mortgage loans, mezzanine loans and preferred equity interests. We account for our investments in commercial mortgage loans, mezzanine loans and preferred equity interests that we do not have the intention or ability to sell, 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.

Loans that we have the intention and ability to sell are classified as held for sale and are measured at the lower of amortized cost or fair value. If the amortized cost exceeds the loan’s fair value, we establish a valuation allowance equal to the difference between the amortized cost and fair value.

We maintain an allowance for loan losses on our investments in commercial mortgage loans, mezzanine loans and preferred equity interests. 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. The credit quality of our loans is monitored via quantitative and qualitative metrics. Quantitatively we evaluate items such as the current debt service coverage ratio and annual net operating income of the underlying property. Qualitatively we evaluate items such as recent operating performance of the underlying property and history of the borrower’s ability to provide financial support. These items together are considered in developing our view of each loan’s risk rating which are categorized as either impaired or satisfactory. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. 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. 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 unless it is well secured and in the process of collection, or if the collection of principal and interest in full is not probable. Payments received for non-accrual loans are applied to principal until the loan is removed from non-accrual status. Loans are generally removed from non-accrual status when they are making current interest payments. The allowance for loan losses is increased by the provision for loan losses and decreased by charge-offs (net of recoveries). We charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure. We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible.

Loans which experience a modification to their contractual terms which result in a concession being granted to a borrower experiencing financial difficulties are considered troubled debt restructurings, or TDRs. A concession is deemed granted when, as a result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at the original contractual interest rate. As appropriate, we also consider other qualitative factors in determining whether a concession is deemed granted, including the value of the underlying collateral. We do not consider restructurings that result in a delay in payment, in timing or amount, which is insignificant to be a concession.

Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been determined to improve 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 to 40 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.

Effective January 1, 2018, FASB ASC Topic 805, “Business Combinations” was amended to clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. Prior to January 1, 2018, the properties we acquired were generally considered businesses and were accounted for as business combinations. Subsequent to January 1, 2018, we expect any properties that we acquire to generally not be considered businesses and, therefore, to be accounted for as asset acquisitions.

Under business combination accounting, the fair value of the real estate acquired is allocated to the acquired tangible assets, generally consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based, in each case, on their fair values. Transaction costs and fees incurred related to the acquisition are expensed as incurred. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs related to the acquisition, are accumulated and then allocated to the individual assets and liabilities acquired based upon their relative fair value.

In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to property income over the lease term.

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.

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

Certain components of property income and fee and other income fall within the scope of FASB ASC Topic 606, “Revenue from Contracts with Customers”. This topic requires entities to disaggregate revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. In the following table, revenue from contracts with customers is disaggregated by type of revenue.

There have been no changes in the measurement of revenue from contracts with customers resulting from the adoption of ASC 606.

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. 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, if any, are recognized in earnings.

The Chicago Mercantile Exchange (“CME”) and the London Clearing House (“LCH”) made amendments to their respective rules that resulted in the prospective accounting treatment of variation margin payments (certain daily payments that were historically accounted for as collateral) being considered settlements of their related derivatives. While the CME rule, which became effective in January 2017, is mandatory, the LCH rule allows a clearing member institution the option to adopt the rule changes on an individual contract or portfolio basis. As of December 31, 2018, we had no derivative instruments outstanding. As of December 31, 2017, $12,650 of notional amount of our derivative contracts were cleared on the LCH. During the second quarter of 2017, our LCH clearing member institution adopted the new rule change. As of December 31, 2017, $103 of variation margin payments related to these derivatives had been accounted for as settlements of the derivatives.

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:

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

RAIT, Taberna Realty Finance Trust, or TRFT, and the RAIT Venture REITs 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. In February 2016 and January 2017, in conjunction with the ventures described in Note 5: Indebtedness and Note 8: Variable Interest Entities, we created two new entities that elected to be taxed as REITs, which we refer to as the RAIT Venture VIEs. These entities were created to hold the FL-5 and FL-6 junior notes for the aforementioned ventures. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our dividends 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 dividends to our shareholders. Management believes that all of the criteria to maintain RAIT’s, TRFT’s and the RAIT Venture VIEs 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.

As discussed in Note 1: The Company, we completed the sale of our interests in the RAIT Venture VIEs on June 27, 2018, and, as a result, the purchaser is responsible for their REIT compliance from and after that date.

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 estimates of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

In prior years, our TRS entities generated taxable revenue primarily from (i) advisory fees for services provided to IRT, (ii) property management fees for services provided to RAIT properties, IRT properties and third-party properties, and (iii) fees and other income from our CMBS lending business. In the current year, our TRS entities generated taxable revenue primarily from (i) property management fees for services provided to RAIT properties and third-party properties, and (ii) fees and other income from our CMBS lending business. On August 1, 2018, we sold the TRS entity that generates taxable revenue from property management fees. See item (q.) below for further discussion. In consolidation, the advisory fees and property management fees related to IRT were eliminated through October 5, 2016 and property management fees related to RAIT properties were eliminated in their entirety. 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 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.

As part of our change in strategic direction during the year ended December 31, 2016 and to decrease administrative processes, we moved four of our active TRS entities under a single holding company. We elected a November 30^th taxable year end for the TRS holding company. We estimated the effective tax rate and current income tax liability as of December 31, 2016 by projecting activity for the full taxable year ended November 30, 2017. As we projected ordinary taxable income for the TRS holding company for its taxable year ended November 30, 2017, we recognized a current income tax liability as of December 31, 2016. During the nine months ended September 30, 2017, we updated our projections for 2017, which indicated an ordinary loss position for taxable year 2017 for the TRS holding company. As a result, we reversed the current income tax liability accrued as of December 31, 2016, which generated a current income tax benefit of $249 during the year ended December 31, 2017. During the year ended December 31, 2017, a current income tax benefit of $34 was also recognized related to insignificant activities occurring in our TRS entities during the period. During the year ended December 31, 2017, a deferred income tax benefit of $577 was recognized primarily related to the release of the valuation allowance on our TRS entities’ AMT credit carryforward as those have become refundable credits under the new tax law. During the year ended December 31, 2018, a current income tax benefit of $34 was recognized related to our TRS entities, which was primarily the result of the half of the AMT credit refund becoming realizable in 2018 partially offset by activity related to our TRS entities which generated taxable income. During the year ended December 31, 2018, a deferred income tax expense of $220 was recognized, which was primarily the result of half of the AMT credit refund becoming realizable in 2018.

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 for the entire award on a straight-line basis, over the related vesting period, for the entire award.

Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, in a manner that approximates 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.” The gross carrying amount for our in-place leases and above-market leases, was $7,420 and $12,208 as of December 31, 2018 and December 31, 2017, respectively. The accumulated amortization for our intangible assets was $5,703 and $6,831 as of December 31, 2018 and December 31, 2017, respectively. We recorded amortization expense of $1,491, and $6,775 for the years ended December 31, 2018 and 2017, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible assets of $658 for 2019, $454 for 2020, $250 for 2021, $145 for 2022, $72 for 2023 and $138 thereafter. As a result of the declining profitability of our retail property management subsidiary, which has been a product of the current challenges facing the retail property sector, we recognized impairment charges of $4,903 on our customer relationships and $963 on our retail property manager’s trade name during the year ended December 31, 2017. These impairment charges are presented in asset impairment on our consolidated statements of operations. On August 1, 2018, we completed the sale of our retail property management subsidiary. See Note 2: (u) for further information.

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 a result of the declining profitability of our retail property management subsidiary, which had been a product of the current challenges facing the retail property sector, we concluded that a triggering event had occurred leading to a $8,342 impairment charge on our goodwill, which was recognized during the year ended December 31, 2017. This impairment charge is presented in goodwill impairment on our consolidated statements of operations. As a result of this charge, no goodwill remains on our consolidated balance sheets as of December 31, 2018 or 2017.

During the year ended December 31, 2017, we incurred additional expenses beyond those normally associated with soliciting proxies for our annual meeting of shareholders as a result of responding to an unsolicited and nonbinding externalization of management proposal as well as an activist campaign threatened by an activist investor. On May 26, 2017, we entered into a cooperation agreement with this investor pursuant to which, among other things, the investor agreed to terminate its proxy contest against us and withdraw the notice of proposed trustee candidates it submitted to us and we agreed to reimburse the investor $250 for the out-of-pocket expenses incurred by the investor in connection with its unsolicited and nonbinding externalization of management proposal and its activist campaign against us. Refer to Note 14: Related Party Transactions for further discussion. Our expenses as a result of responding to an unsolicited and nonbinding externalization of management proposal as well as an activist campaign threatened by an activist investor totaled $2,464 for the year ended December 31, 2017 and are presented as shareholder activism expenses in our consolidated statements of operations.

On December 21, 2018, we entered into a settlement agreement and general release with our former chief executive officer, who was previously employed by RAIT as RAIT’s Chief Executive Officer and President pursuant to an employment agreement and whose employment with RAIT ended on February 28, 2018. The settlement agreement was intended to resolve any and all claims arising out of the chief executive officer’s employment with RAIT and separation therefrom. We incurred expenses related to this settlement agreement in the amount of $1,825 during the year ended December 31, 2018, which is presented as employee separation expense in our consolidated statements of operations.

On September 27, 2017, we entered into a settlement agreement and general release with our former chief financial officer, who was previously employed by RAIT as RAIT’s Chief Financial Officer and Treasurer pursuant to an employment agreement executed

on February 17, 2017. The purpose of the settlement agreement, which provided for the termination of our former chief financial officer’s employment from RAIT retroactive to August 20, 2017, was to provide for a complete and final settlement of all existing and potential disputes between RAIT and our former chief financial officer, including, but not limited to, all disputes related to our former chief financial officer’s previous employment by RAIT and the termination of such employment. We incurred expenses related to this settlement agreement in the amount of $575 during the year ended December 31, 2017, which is presented as employee separation expense in our consolidated statements of operations.

On August 1, 2018, we completed the sale of our retail property management subsidiary for nominal consideration. We recognized a gain of $1,262 during the year ended December 31, 2018 related to the sale as the liabilities associated with this business exceeded its assets.

In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance, including industry-specific guidance. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all contracts with customers, except those that are within the scope of other Topics in the FASB ASC. During 2016 and 2017, the FASB issued multiple amendments to this accounting standard that provide further clarification to this accounting standard. In February 2017, the FASB issued an accounting standard classified under FASB ASC Subtopic 610-20, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets”. The amendments in this accounting standard clarify what constitutes an “in substance nonfinancial asset” and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The amendments in this accounting standard also provide further guidance on accounting for the derecognition of non-financial assets by generally requiring the revenue recognition model under FASB ASC Topic 606 to be applied, which may allow for earlier gain recognition for certain sale transactions pursuant to which we have continuing involvement with the asset. These standards were effective for annual reporting periods beginning after December 15, 2017. We have adopted this new standard as of January 1, 2018, and have applied the modified retrospective method. The adoption of FASB ASC Topic 606 did not change our measurement of revenue from contracts with customers. The adoption of FASB ASC Subtopic 610-20 resulted in a cumulative effect adjustment as an increase to shareholders’ equity in the amount of $761 as of the adoption date. This adjustment is related to a previously deferred gain on the sale of two land parcels in 2017 that would have qualified for recognition under this accounting standard.

In January 2016, the FASB issued an accounting standard classified under FASB ASC Topic 825, “Financial Instruments”. This accounting standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, the amendment (i) eliminates certain disclosure requirements for financial instruments measured at amortized cost; (ii) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation, in other comprehensive income, of the change in fair value of a liability, when the fair value option has been elected, resulting from a change in the instrument-specific credit risk; and (iv) requires separate presentation of financial instruments by measurement category and form. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the separate presentation of changes in fair value due to changes in instrument-specific credit risk. We have adopted this new standard as of January 1, 2018, and have applied the modified retrospective method, which resulted in a cumulative effect adjustment as an increase to accumulated other comprehensive income (loss) and a decrease to retained earnings (deficit) in the amount of $9,257 as of the adoption date. This adjustment relates to the separate presentation of changes in instrument-specific credit risk on our junior subordinated notes, at fair value.

In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”. This accounting standard provides guidance on eight specific cash flow issues; (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from

the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This standard did not have an impact on our consolidated financial statements.

In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 740, “Income Taxes”. The amendments in this accounting standard provide that the current and deferred income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized when the transfer occurs rather than when the asset has been sold to an outside party. Two common examples of assets included in the scope of this accounting standard are intellectual property and property, plant, and equipment. The amendments in this standard are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. The amendments in this accounting standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This standard did not have an impact on our consolidated financial statements.

In November 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”. The amendments in this accounting standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have adopted this new standard as of January 1, 2018 and have utilized a retrospective transition method for each period presented in our consolidated financial statements. The adoption of this standard has resulted in the presentation of additional details regarding the changes in restricted cash in the consolidated statements of cash flows.

In January 2017, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations”. The amendments in this accounting standard clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for transactions not yet reflected in the financial statements. We have adopted this new standard as of January 1, 2018 and have accounted for the acquisition of one real estate asset as an asset acquisition in accordance with this new standard.

In May 2017, the FASB issued an accounting standard classified under FASB ASC Subtopic 718, “Compensation – Stock Compensation”. The amendments in this accounting standard are to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in this standard is permitted. This standard did not have an impact on our consolidated financial statements.

In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”. This accounting standard states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a right-of-use (“ROU”) asset. The accounting applied by the lessor is relatively unchanged. During 2017 and 2018, the FASB issued multiple amendments to this accounting standard that provide further clarification to this accounting standard. The new standard is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We have adopted the new standard effective January 1, 2019 and have used the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. We have elected the “package of practical expedients” for all our leases that exist at the date of initial application. This package permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also have elected the practical expedient to not separate lease and non-lease components for

all of our leases. We currently expect to recognize a lease liability as of the adoption date ranging from $2,000 to $4,000 and an offsetting ROU asset for one of our operating leases for which we are the lessee. We do not expect the standard to have a significant impact on any of our real estate leases for which we are the lessor.

In June 2016, the FASB issued an accounting standard classified under FASB ASC Topic 326, “Financial Instruments-Credit Losses”. The amendments in this standard provide an approach based on expected losses to estimate credit losses on certain types of financial instruments. The amendments also modify the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this standard expand the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that this standard will have on our consolidated financial statements.

In July 2017, the FASB issued an accounting standard classified under FASB ASC Subtopic 260, “Earnings per Share”, Subtopic 480, “Distinguishing Liabilities from Equity”, and Subtopic 815, “Derivatives and Hedging”. The amendments in this accounting standard change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features and recharacterize the indefinite deferral of certain provisions of Topic 480 to a scope exception. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments in this standard is permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In August 2017, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard states specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments in this standard is permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

NOTE 3: Investments in Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests held for investment as of December 31, 2018:

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests held for investment as of December 31, 2017:

A loan is placed on non-accrual status if it is delinquent for 90 days or more or if there is uncertainty over full collection of principal and interest, which generally includes our impaired loans that have reserves. The following table summarizes the delinquency statistics of our commercial real estate loans held for investment as of December 31, 2018 and 2017:

(1) Includes five loans that are current but are on non-accrual due to uncertainty over whether we will fully collect principal and interest. Also includes three loans that are 90 days or more past due in accordance with their terms.

(1) Includes five loans that were current in accordance with their terms but are on non-accrual due to uncertainty over whether we will fully collect principal and interest, and two loans that are 90 days or more past due in accordance with their terms.

As of December 31, 2018 and December 31, 2017, all of our commercial mortgage loans, mezzanine loans and preferred equity interests that were 90 days or more past due or in foreclosure were on non-accrual status. It is noted that as of December 31, 2018, $54,621 of our loans are cash flow loans, which provide for the accrual of interest at specified rates which differ from current payment terms, and in some cases, do not require current payments. See Note 2: Summary of Significant Accounting Policies, (k) Revenue Recognition, for further discussion of our cash flow loans. As of December 31, 2018, and December 31, 2017, $92,993 and $98,603, respectively, of our loans were on non-accrual status and had a weighted-average interest rate of 6.9% and 6.1%, respectively. Also, as of December 31, 2018 and December 31, 2017, five, and three loans with unpaid principal balances of $25,703 and $20,624, respectively, and weighted average interest rate of 11.4% and 12.9%, respectively, were not recognizing interest based on the estimated value of the underlying collateral. Additionally, as of December 31, 2018, one loan, with an unpaid principal balance of

$7,948, which had previously been restructured in a troubled debt restricting, or TDR, did not accrue interest in accordance with its restructured terms.

The following table sets forth the maturities of our investments in commercial mortgage loans, mezzanine loans and preferred equity interests by year:

During the year ended December 31, 2018, we recognized provision for loan losses of $32,875. Our provision for loan losses during the year ended December 31, 2018 was primarily driven by nine loans, where the borrower and/or property experienced an unfavorable event or events during the period, which resulted in probable, incurred losses and credit related impairments recognized on the loans transferred to loans held for sale that are further discussed below.

We closely monitor our loans, which require evaluation for loan loss in two categories: satisfactory and watchlist. Loans classified as satisfactory are loans that are performing consistent with our expectations. Loans classified as watchlist are generally loans that have performed below our expectations, have credit weaknesses or in which the credit quality of the collateral has deteriorated. This is determined by evaluating quantitative factors including debt service coverage ratios, net operating income of the underlying collateral and qualitative factors such as current performance of the underlying collateral. We have classified our loans held for investment by credit risk category as of December 31, 2018 and December 31, 2017 as follows:

The following tables provide a roll-forward of our allowance for loan losses for our commercial mortgage loans, mezzanine loans and preferred equity interests for the years ended December 31, 2018 and 2017:

Information on those loans considered to be impaired as of December 31, 2018 and December 31, 2017 was as follows:

The average unpaid principal balance and recorded investment of total impaired loans was $131,889, and $148,261 during the years ended December 31, 2018, and 2017, respectively. We recorded interest income from impaired loans of $1,025, and $968 for the years ended December 31, 2018, and 2017, respectively.

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring, or TDR, under FASB ASC Topic 310, “Receivables”. During the year ended December 31, 2018, there were two restructurings that were considered TDRs. We restructured one preferred equity interest with an unpaid principal balance totaling $7,948 in a TDR as the interest payment rate was decreased to zero percent and the maturity date was extended. Also, we restructured one mezzanine loan with an unpaid principal balance of $8,245 in a TDR as we agreed to accept a discounted payoff if the borrower satisfied certain conditions. During the year ended December 31, 2017, we determined that restructuring of two commercial real estate loans with unpaid principal balances totaling of $13,080 constituted TDRs as the maturity date of the loans were extended and the

borrowers were determined to be experiencing financial difficulty. As of December 31, 2017, there was one TDR that subsequently defaulted for restructurings that had been entered into within the previous 12 months. This loan had an unpaid principal balance of $45,234 as of December 31, 2017 and was greater than 90 days past due.

In February 2019, we determined that a restructuring of one commercial real estate loan with a principal balance of 29,478 constituted a TDR as the minimum payment rate was decreased through September 2019 although interest continues to accrue at the original contractual interest rate.

In February 2018, we began to pursue a sale of certain loans. In March 2018, we sold these loans, which had unpaid principal balance of $90,260 and received proceeds of $43,384 after repayment of $45,850 of secured warehouse facility debt and $349 of interest. We recognized a loss of $930 on the sale of these loans.

During March 2018, we transferred nine additional loans to held for sale as we had the intent and ability to sell these loans. The transfer was made at the lower of cost or fair value for each respective loan. During the year ended December 31, 2018, six of these loans were sold or repaid, resulting in a net loss of $3,280. As of December 31, 2018, the three remaining loans held for sale were measured at the lower of cost or fair value, resulting in a loss of $5,227, an unpaid principal balance of $7,012, and a carrying amount of $4,872.

In May 2018, we began to pursue a sale of one additional loan. In June 2018, we sold this loan, which had unpaid principal balance of $13,000 and received proceeds of $11,577. We recognized a provision for loan loss of $1,423 on the transfer of this loan to loans held for sale.

During the year ended December 31, 2018, we completed the conversion of a portion of a commercial mortgage loan portfolio with a carrying value of $5,096 to real estate owned property. The conversion resulted in approximately $5,096 of real estate related assets being reflected on our consolidated balance sheets. See Note 4: Investments in Real Estate for further information.

As of December 31, 2018, and 2017, our investments in real estate were comprised of land of $36,905 and $73,003, respectively, and buildings and improvements of $79,687 and $201,669, respectively.

As of December 31, 2018, our investments in real estate of $116,592 were financed through $40,724 of mortgage loans or other debt held by third parties and $80,562 of mortgage loans held directly by RAIT or through our RAIT I CDO securitization. As of December 31, 2017, our investments in real estate of $274,672 were financed through $62,297 of mortgage loans or other debt held by third parties and $298,050 of mortgage loans held directly by RAIT or through our RAIT I and RAIT II CDO securitizations.

Together, along with commercial real estate loans held by RAIT I, these mortgage loans serve as collateral for the CDO notes payable issued by the RAIT CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation.

For our investments in real estate, the leases for our multifamily properties (which we had none of as of December 31, 2018) are generally one-year or less and leases for our office and retail properties are operating leases. The following table represents the minimum future rentals under expiring leases for our office and retail properties as of December 31, 2018.

As of December 31, 2018, one of our retail properties, with a carrying amount of $4,918, was considered held-for-sale.

During the year ended December 31, 2017, we completed the conversion of one commercial loan with a carrying value of

During the year ended December 31, 2018, we sold two office properties, one multifamily property, and two retail properties. We also recognized $6 of losses on sales related to properties sold prior to December 31, 2017, as we settled remaining amounts with third parties subsequent to each sale date, respectively. The below table summarizes the current year dispositions recorded at sale and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale:

During the year ended December 31, 2017, we sold five multifamily properties, eight office properties, two retail properties (one sold as two parcels in two separate transactions), and three parcels of land. We also recognized $5 of losses on sales related to properties sold prior to December 31, 2016, as we settled remaining amounts with third parties subsequent to each sale date, respectively. The below table summarizes the current year dispositions recorded at sale and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale:

								Net income (loss) allocable to common shares
Property Name	Property Type	Date of Sale	Sale Price		Gain (loss) on sale			For the Year Ended December 31, 2017
Tuscany Bay	Multifamily	01/06/2017	$	36,650	$	7,657		$	2
Emerald Bay (1)	Multifamily	03/08/2017		23,750		772			135
Tiffany Square (1)	Office	03/09/2017		12,175		113			59
Oyster Point (1)	Multifamily	03/28/2017		11,500		(82	)		1
Executive Center	Office	03/31/2017		10,600		437			123
MGS (1)	Land	03/31/2017		300		—			—
100 E. Lancaster (1)	Office	04/13/2017		4,575		14			70
UBS Tower (1)	Office	05/09/2017		14,150		—			(43	)
South Plaza (2)	Retail	05/24/2017 & 09/29/2017		22,478		1,647			896
South Terrace	Multifamily	06/30/2017		42,950		9,189			250
Trails at Northpointe (1)	Multifamily	07/18/2017		6,450		(54	)		(118	)
Rutherford (1)	Office	09/29/2017		5,700		—			430
Treasure Island/Sunny Shores	Land	10/04/2017		12,125		—			(81	)
McDowell Phase I/II (1)	Office	10/16/2017		53,150		206			1,612
May's Crossing	Retail	11/16/2017		8,150		298			242
Four Resource Square (1)	Office	12/29/2017		17,500		78			(573	)
Reuss Federal Plaza (1)	Office	12/29/2017		19,500		47			995
Total			$	301,703	$	20,322		$	4,000

During the year ended December 31, 2017, we also recognized a gain of $3,122 related to a sale of a multifamily property that occurred during the second quarter of 2015. This gain was deferred as the buyer’s initial investment was insufficient. As our loan, which financed the buyer’s acquisition of this property, was paid off during the year ended December 31, 2017, we recognized the deferred gain.

During the year ended December 31, 2017, we disposed of two land parcels for $12,125 plus the reimbursement of capital expenditures associated with those parcels. The principal consideration received in the sale was a note from the buyer. We deferred a gain on the sale of these assets of $761 which was classified within other liabilities and was to be recognized under the cost recovery method as the buyer’s initial investment was insufficient. As described in Note 2: Summary of Significant Accounting Policies, this deferred gain was recognized upon adoption of the accounting standard classified under FASB ASC Topic 610-20 on January 1, 2018.

During the year ended December 31, 2017, we incurred a net non-cash gain on deconsolidation of properties of $5,158 relating to an industrial real estate portfolio containing ten properties with carrying value of $82,501 of investments in real estate and $81,941 of related cross-collateralized non-recourse debt as of December 31, 2016. During the year ended December 31, 2017, the senior lender foreclosed on the mortgage liens encumbering all of these industrial properties, and disposed of the properties through auction processes. RAIT had no control or influence over the divestiture processes. These properties, including other assets, net of related liabilities, had an aggregate carrying value of $82,046. As a result, the senior lender or its assignee/designee now owns these properties, subject to any redemption rights that we have under applicable state law, if any. Upon foreclosure, we derecognized these

net assets and extinguished related debt and accrued interest of $87,204 based on the proceeds received by and legal stipulations entered into with the senior lender with respect to the auctions.

During the year ended December 31, 2017, we incurred a net non-cash gain on deconsolidation of properties of $697 relating to a real estate portfolio containing two office and two industrial properties with a carrying value of $16,216 and $17,698 of related non-recourse debt. During the year ended December 31, 2017, the senior lender foreclosed on the mortgage liens encumbering these four properties and disposed of the properties through an external foreclosure process. RAIT had no control or influence over the divestiture process. These four properties, including other assets, net of related liabilities, had an aggregate carrying value of $17,625. Upon foreclosure, we derecognized these net assets and extinguished related debt and accrued interest of $18,303 based on the proceeds received by the senior lender through the foreclosure.

In February 2019, we sold the retail property that was classified as held-for-sale for a sales price of $5,100.

During the year ended December 31, 2018, we recognized impairment charges on real estate assets of $47,492 as it was more likely than not that we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in these assets was determined to not be recoverable. These impairment charges are further described below.

During the year ended December 31, 2017, we changed our investment approach on six of our real estate properties. These decisions to change our investment approach led to an expectation that the properties would be disposed of prior to the end of their useful life, which was concluded to be a triggering event requiring further analysis of the recoverability of these properties. As a result of the analysis performed, the aggregate carrying value of these properties was determined not to be fully recoverable, resulting in impairment charges totaling $74,514 as further described below:

Subsequently, during the year ended December 31, 2017, one of the above mentioned real estate properties that was previously determined to be more likely than not to be disposed of before the end of its estimated useful life incurred capital expenditures, which led to additional impairment charges totaling $3,458. In addition, during the year ended December 31, 2017, we also determined that one of the above mentioned real estate properties would be sold at a lower price than previously expected, resulting in an impairment charge totaling $2,945.

During the year ended December 31, 2017, we also continued execution on plans to market certain assets that had been identified for disposal in previous periods. The remaining $15,708 of impairment charges during year ended December 31, 2017 related to nine of these other real estate assets, including one multifamily property, one retail property, five office properties, and two land parcels and was recognized as a result of updated information obtained based upon purchase and sale agreements, letters of intent and broker opinions of value as these assets have progressed through different stages of the marketing and sales negotiation process.

See Note 7: Fair Value of Financial Instruments for further information regarding our non-recurring fair value measurements.

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations.

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2018:

Description	Unpaid Principal Balance		Unamortized Discount/Premium and Deferred Financing Costs			Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.625% senior notes	$	56,324	$	(1,224	)	$	55,100		7.6	%	Apr. 2024
7.125% senior notes		65,356		(359	)		64,997		7.1	%	Aug. 2019
Junior subordinated notes, at fair value (1)		18,671		(12,561	)		6,110		6.4	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		—			25,100		5.0	%	Apr. 2037
Total recourse indebtedness		165,451		(14,144	)		151,307		6.9	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (2)(3)		116,102		—			116,102		3.1	%	Nov. 2046
CMBS securitizations (4)(5)		320,282		(2,274	)		318,008		4.0	%	Jun. 2037 to Dec. 2037
Loans payable on real estate		40,724		(225	)		40,499		4.7	%	Oct. 2021 to Dec. 2021
Total non-recourse indebtedness		477,108		(2,499	)		474,609		3.9	%
Total indebtedness	$	642,559	$	(16,643	)	$	625,916		4.6	%

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2017:

Description	Unpaid Principal Balance		Unamortized Discount/Premium and Deferred Financing Costs			Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	871	$	(38	)	$	833		7.0	%	Apr. 2031 (1)
4.0% convertible senior notes (2)		110,513		(3,713	)		106,800		4.0	%	Oct. 2033 (2)
7.625% senior notes		56,324		(1,457	)		54,867		7.6	%	Apr. 2024
7.125% senior notes		68,408		(934	)		67,474		7.1	%	Aug. 2019
Senior secured notes		11,500		(437	)		11,063		7.3	%	Apr. 2019
Junior subordinated notes, at fair value (3)		18,671		(10,550	)		8,121		5.3	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		—			25,100		3.9	%	Apr. 2037
Secured warehouse facilities		22,313		(570	)		21,743		3.5	%	Jan. 2018 to Jul. 2018
Total recourse indebtedness		313,700		(17,699	)		296,001		5.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		258,063		(3,339	)		254,724		2.2	%	Jun. 2045 to Nov. 2046
CMBS securitizations (6)(7)		744,763		(8,177	)		736,586		3.4	%	Jan. 2031 to Dec. 2037
Loans payable on real estate		62,297		(375	)		61,922		5.2	%	May 2021 to Dec. 2021
Total non-recourse indebtedness		1,065,123		(11,891	)		1,053,232		3.2	%
Other indebtedness (8)		40,830		125			40,955		—			—
Total indebtedness	$	1,419,653	$	(29,465	)	$	1,390,188		3.7	%

Recourse indebtedness refers to indebtedness that is recourse to our general assets. Non-recourse indebtedness consists of indebtedness of consolidated securitizations and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated securitization 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, 2018 is as follows:

7.0% convertible senior notes. On March 21, 2011, we issued and sold in a public offering $115,000 aggregate principal amount of our 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes. After deducting the underwriting discount and the estimated offering costs, we received approximately $109,000 of net proceeds. Interest on the 7.0% convertible senior notes is paid semi-annually and the 7.0% convertible senior notes mature on April 1, 2031.

Prior to April 5, 2016, the 7.0% convertible senior notes were not redeemable at our option, except to preserve RAIT’s status as a REIT. On or after April 5, 2016, we may redeem all or a portion of the 7.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 7.0% convertible senior notes may require us to repurchase all or a portion of the 7.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on April 1, 2021, and April 1, 2026, or upon the occurrence of certain defined fundamental changes.

According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 7.0% convertible senior notes of $8,228. This discount reflects the fair value of the embedded conversion option within the 7.0% convertible senior notes 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 7.0% convertible senior 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 7.0% convertible senior notes were issued. The discount was fully amortized to interest expense through April 1, 2016, the date at which holders of our 7.0% convertible senior notes could require repayment.

During the year ended December 31, 2017, there was no activity other than recurring interest.

During the year ended December 31, 2018, we exercised our right to optionally redeem and cancel the remaining 7.0% convertible senior notes at a redemption price equal to the principal amount of $871 plus accrued and unpaid interest.

4.0% convertible senior notes. On December 10, 2013, we issued and sold in a public offering $125,000 aggregate principal amount of our 4.0% Convertible Senior Notes due 2033, or the 4.0% convertible senior notes. After deducting the underwriting discount and offering costs, we received approximately $121,250 of net proceeds. In January 2014, the underwriters exercised the overallotment option with respect to an additional $16,750 aggregate principal amount of the 4.0% convertible senior notes and we received total net proceeds of $16,300 after deducting underwriting fees and adjusting for accrued interim interest. In the aggregate, we issued $141,750 aggregate principal amount of the 4.0% convertible senior notes in the offering and raised total net proceeds of approximately $137,238 after deducting underwriting fees and offering expenses. Interest on the 4.0% convertible senior notes is paid semi-annually and the 4.0% convertible senior notes mature on October 1, 2033.

Prior to October 1, 2018, the 4.0% convertible senior notes are not redeemable at our option, except to preserve RAIT’s status as a REIT. On or after October 1, 2018, we may redeem all or a portion of the 4.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 4.0% convertible senior notes may require us to repurchase all or a portion of the 4.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on October 1, 2018, October 1, 2023, and October 1, 2028, or upon the occurrence of certain defined fundamental changes.

According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 4.0% convertible senior notes of $8,817. This discount reflects the fair value of the embedded conversion option within the 4.0% convertible senior notes 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 4.0% convertible senior 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 4.0% convertible senior notes were issued. The discount will be amortized to interest expense through October 1, 2018, the date at which holders of our 4.0% convertible senior notes could require repayment.

Concurrent with the offering of the 4.0% convertible senior notes, we used approximately $8,838 of the proceeds and entered into a capped call transaction with an affiliate of the underwriter. The capped call transaction has a cap price of $11.91, which is subject to certain adjustments, and an initial strike price of $9.57, which is subject to certain adjustments and is equivalent to the

conversion price of the 4.0% convertible senior notes. The capped calls expire on various dates ranging from June 2018 to October 2018 and are expected to reduce the potential dilution to holders of our common stock upon the potential conversion of the 4.0% convertible senior notes. The capped call transaction is a separate transaction and is not part of the terms of the 4.0% convertible senior notes and will not affect the holders’ rights under the 4.0% convertible senior notes. The capped call transaction meets the criteria for equity classification and was recorded as a reduction to additional paid in capital. The capped call transaction is excluded from the dilutive EPS calculation as their effect would be anti-dilutive.

During the year ended December 31, 2017, we repurchased a total of $15,585 in aggregate principal amount of 4.0% convertible

During the year ended December 31, 2018, we repurchased $42,291 in aggregate principal amount of 4.0% convertible senior notes for a total consideration of $41,027. We also repurchased $67,943 in principal amount of the 4.0% convertible senior notes at par pursuant to the exercise by the holders of these notes of their redemption option. We exercised our right to optionally redeem and cancel the remaining 4.0% convertible senior notes at a redemption price equal to the principal amount of $279 plus accrued and unpaid interest.

7.625% senior notes. On April 14, 2014, we issued and sold in a public offering $60,000 aggregate principal amount of our 7.625% Senior Notes due 2024, or the 7.625% senior notes. After deducting the underwriting discount and the offering costs, we received approximately $57,500 of net proceeds. Interest on the 7.625% senior notes is paid quarterly with a maturity date of April 15, 2024. The 7.625% senior notes are subject to redemption at our option, in whole or in part, at any time on or after April 15, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are not convertible into equity securities of RAIT. These notes contain financial covenants that are applicable upon the incurrence of debt as defined in the notes’ related indenture including a maximum leverage ratio covenant and a minimum fixed charge ratio covenant. We have not incurred debt, as defined in this indenture, since the three months ended March 31, 2018. As of March 31, 2018, the leverage ratio, calculated in accordance with the indenture, was 74.6% as compared to a maximum leverage ratio not to exceed 80%, and for the preceding four quarters, the fixed charge coverage ratio, calculated in accordance with the indenture, was 1.34x as compared to a minimum fixed charge coverage ratio of no less than 1.20x.

During the year ended December 31, 2017, we repurchased a total of $963 in aggregate principal amount of 7.625% convertible senior notes for a total consideration of $766.

7.125% senior notes. In August 2014, we issued and sold in a public offering $71,905 aggregate principal amount of our 7.125% Senior Notes due 2019, or the 7.125% senior notes. After deducting the underwriting discount and the offering costs, we received approximately $69,209 of net proceeds. Interest on the 7.125% senior notes is paid quarterly with a maturity date of August 30, 2019. The 7.125% senior notes are subject to redemption at our option, in whole or in part, at any time on or after August 30, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are not convertible into equity securities of RAIT. These notes contain financial covenants that are applicable upon the incurrence of debt as defined in the notes’ related indenture including a maximum leverage ratio covenant and a minimum fixed charge ratio covenant. We have not incurred debt, as defined in this indenture, since the three months ended March 31, 2018. As of March 31, 2018, the leverage ratio, calculated in accordance with the indenture, was 74.6% as compared to a maximum leverage ratio not to exceed 80%, and for the preceding four quarters, the fixed charge coverage ratio, calculated in accordance with the indenture, was 1.34x as compared to a minimum fixed charge coverage ratio of no less than 1.20x.

During the year ended December 31, 2017, we repurchased a total of $2,323 in aggregate principal amount of 7.125% senior notes for a total consideration of $2,023.

During the year ended December 31, 2018, we repurchased a total of $3,051 in aggregate principal amount of 7.125% senior notes for a total consideration of $2,852.

Senior secured notes. On October 5, 2011, we entered into an exchange agreement with T8 pursuant to which we issued four senior secured notes, or the senior secured notes, with an aggregate principal amount equal to $100,000 to T8 in exchange for a portfolio of real estate related debt securities, or the exchanged securities, held by T8. The senior secured notes and the exchanged securities were determined to have approximately equivalent fair market value at the time of the exchange.

The senior secured notes were issued pursuant to an indenture agreement dated October 5, 2011 which contains customary events of default, including those relating to nonpayment of principal or interest when due and defaults based upon events of bankruptcy and insolvency. The senior secured notes were each $25,000 principal amount with a weighted average interest rate of 7.0% and had maturity dates ranging from April 2017 to April 2019. Interest is paid quarterly on October 30, January 30, April 30 and July 30 of each year. The senior secured notes are secured and are not convertible into equity securities of RAIT.

During the year ended December 31, 2017, we repaid $7,500 of the senior secured notes.

During the year ended December 31, 2017, we redeemed $15,500 in principal amount of the 6.75% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.

During the year ended December 31, 2017, we redeemed $15,000 in principal amount of the 6.85% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.

During the year ended December 31, 2017, we redeemed $12,500 in principal amount of the 7.15% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.

During the year ended December 31, 2018, we repaid $2,000 of the 7.25% senior secured notes and we redeemed the remaining $9,500 of the 7.25% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest.

Junior subordinated notes, at fair value. On October 16, 2008, we issued two junior subordinated notes with an aggregate principal amount of $38,052 to a third party and received $15,459 of net cash proceeds. One junior subordinated note, which we refer to as the first $18,671 junior subordinated note, has a principal amount of $18,671, 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 second junior subordinated note, which we refer to as the $19,381 junior subordinated note, had a principal amount of $19,381, 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.

On October 25, 2010, pursuant to a securities exchange agreement, we exchanged and cancelled the first $18,671 junior subordinated note for another junior subordinated note, which we refer to as the second $18,671 junior subordinated note, in aggregate principal amount of $18,671 with a reduced interest rate and provided $5,000 of our 6.875% convertible senior notes as collateral for the second $18,671 junior subordinated note. In December 2018, we exchanged the $5,000 of our 6.875% convertible senior notes as collateral with certain notes of RAIT I that we owned, which have a principal balance of $24,000 and whose fair value approximated the fair value of the $5,000 of 6.875% convertible senior notes at the time of the exchange. The second $18,671 junior subordinated note had a fixed rate of interest of 0.5% through March 30, 2015, and thereafter 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 the second $18,671 junior subordinated note at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. The fair value, or carrying amount, of this indebtedness was $6,110 as of December 31, 2018.

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%.

Secured warehouse facilities. On October 27, 2011, we entered into a two year CMBS facility pursuant to which we may sell, and later repurchase, performing whole mortgage loans or senior interests in whole mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in CMBS transactions. The purchase price paid for any asset purchased will be equal to 75% of the lesser of the market value (determined by the purchaser in its sole discretion, exercised in good

faith) or par amount of such asset on the purchase date. On July 28, 2014, we entered into an amended and restated master repurchase agreement, or the Amended MRA. The Amended MRA added defined floating-rate whole loans and senior interests in whole loans as eligible purchased assets which we could sell to the investment bank and later repurchase. All eligible purchased assets must be acceptable to the investment bank in its sole discretion. The Amended MRA increased the aggregate principal amount available under the facility to $200,000 from $100,000 provided that the aggregate outstanding purchase price under the Amended MRA at any time for all floating rate loans cannot exceed $100,000. Fixed rate loans and floating rate loans incur interest at LIBOR plus 250 basis points. The Amended MRA contains standard margin call provisions and financial covenants. On July 28, 2016, this facility was amended decreasing the capacity to $150,000 and extending the maturity date to July 28, 2018. In June 2017, the financial covenants with respect to this facility were amended. This facility was not renewed after its maturity and it has terminated.

On November 23, 2011, we entered into a one year CMBS facility, or the $150,000 CMBS facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in CMBS transactions. Effective November 17, 2015, we extended the maturity of the $150,000 CMBS facility to the earlier of November 16, 2016 or the day on which an event of default occurs. The aggregate principal amount available under the $150,000 CMBS facility is $150,000 and incurs interest at LIBOR plus 250 basis points. The purchase price paid for any asset purchased is up to 75% of the lesser of the unpaid principal balance and the market value (determined by the purchaser in its sole discretion, exercised in good faith) of such purchased asset on the purchase date. The $150,000 CMBS facility contains standard margin call provisions and financial covenants. On November 16, 2016, this facility was amended decreasing the capacity to $100,000 and extending the maturity date to November 16, 2017. On June 27, 2017, this facility was amended decreasing the capacity to $25,000. In June 2017, the financial covenants with respect to this facility were amended. This facility was not renewed after its maturity and it has terminated.

On January 27, 2014, we entered into a two year $75,000 commercial mortgage facility, or the $75,000 commercial mortgage facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans and other assets meeting defined eligibility criteria which are approved by the purchaser in its sole discretion. Effective September 28, 2015, we extended the maturity of the $75,000 commercial mortgage facility to January 22, 2018 or such date as determined by the Buyer in its good faith discretion pursuant to its rights and remedies under the Agreement. The $75,000 commercial mortgage facility incurs interest at LIBOR plus 200 basis points. The $75,000 commercial mortgage facility contains standard margin call provisions and financial covenants. In June 2017, the financial covenants with respect to this facility were amended. In July 2017, the financial covenants with respect to this facility were amended. On January 19, 2018, this facility was amended extending the maturity date to June 18, 2018. This facility was not renewed after its maturity and it has terminated.

On December 23, 2014, we entered into a $150,000 commercial mortgage facility, or the $150,000 commercial mortgage facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans and other assets meeting defined eligibility criteria which are approved by the purchaser in its reasonable discretion. The $150,000 commercial mortgage facility incurs interest at LIBOR plus 200 basis points. The purchase price paid for any asset purchased is based on a defined percentage of the lesser of its unpaid principal balance or its defined market value. On December 20, 2016, we extended the maturity of the $150,000 commercial facility to December 19, 2017 or the day on which an event of default occurs. The $150,000 commercial mortgage facility contains standard margin call provisions and financial covenants. On June 27, 2017, this facility was amended increasing the capacity to $250,000. In June 2017, the financial covenants with respect to this facility were amended. On December 18, 2017, this facility was amended extending the maturity date to June 18, 2018. This facility was not renewed after its maturity and it has terminated.

In February 2018, prior to the termination of this facility, we began to pursue a sale of certain loans that were on our balance sheet as of December 31, 2017. In March 2018, we sold these loans, which had an unpaid principal balance of $44,050 and received gross proceeds of $43,720. We used part of the proceeds received from the sale of these loans to repay the $22,313 of outstanding borrowings that existed on this facility as of December 31, 2017.

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO securitizations which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgage loans and mezzanine 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. Our consolidated CDO securitizations contain interest coverage trigger tests, or IC triggers, and overcollateralization trigger tests, or OC triggers. If the IC triggers or OC triggers are not met in a given period, then the interest distributions 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 interest distributions continue until the triggers are met by curing the underlying cause of the IC trigger or OC trigger failure, which may include curing payment defaults, paying down the CDO notes payable, or other actions permitted under the relevant securitization indenture.

As of December 31, 2018, and 2017, RAIT I is meeting all its OC and IC trigger tests. Beginning in January 2019, the Class F/G/H OC test for RAIT I was not met. As a result, certain interest payments that would have otherwise been directed to the Class J notes and equity, which are owned by us, are instead being redirected to pay principal on the most senior class of CDO notes payable that are outstanding. The failure of this OC test does not represent an event of default under the RAIT I securitization indenture.

During the year ended December 31, 2018, RAIT’s subsidiary, TRFT, exercised its right to unwind RAIT II and satisfied the outstanding notes, all of which were owned by TRFT at the time of the unwind.

CMBS securitizations. On October 29, 2014, we closed a CMBS securitization transaction we refer to as RAIT FL3 that was collateralized by $219,378 of floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2014-FL3 Trust, or the FL3 issuer, issued classes of investment grade senior notes, or the FL3 senior notes, with an aggregate principal balance of approximately $181,261 to investors, representing an advance rate of approximately 82.6%. The FL3 senior notes bore interest at a weighted average rate equal to LIBOR plus 1.86%. The stated maturity of the FL3 notes was December 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL3, we retained the unrated classes of junior notes, or the FL3 junior notes, including a class with an aggregate principal balance of $38,117, and the equity, or the retained interests, of the FL3 issuer. Subject to certain conditions, beginning in October 2016 or upon defined tax events, the FL3 senior notes were able to be redeemed in whole but not in part, at the direction of holders of FL3 junior notes, which we held. During the second quarter of 2017, RAIT exercised its right to unwind RAIT FL3, thereby repaying all of the outstanding notes.

On May 22, 2015, we closed a CMBS securitization transaction we refer to as RAIT FL4 collateralized by $223,034 of floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2015-FL4 Trust, or the FL4 issuer, issued classes of investment grade senior notes, or the FL4 senior notes with an aggregate principal balance of approximately $181,215 to investors, representing an advance rate of approximately 81.2%. The FL4 senior notes bore interest at a weighted average rate equal to LIBOR plus 1.84%. The stated maturity of the FL4 notes was December 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL4, we retained the unrated classes of junior notes, or the FL4 junior notes, including a class with an aggregate principal balance of $41,819, and the equity, or the retained interests, of the FL4 issuer. Subject to certain conditions, beginning in May 2017, or upon defined tax events, the FL4 senior notes were able to be redeemed in whole but not in part, at the direction of holders of FL4 junior notes, which we hold. During the third quarter of 2017, RAIT exercised its right to unwind RAIT FL4, thereby repaying all of the outstanding notes.

On December 23, 2015, we closed a CMBS securitization transaction we refer to as RAIT FL5 collateralized by $347,446 of floating rate commercial mortgage loans and participation interests in floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2015-FL5 Trust, or the FL5 issuer, issued classes of investment grade senior notes, or the FL5 senior notes, with an aggregate principal balance of approximately $263,624 to investors, representing an advance rate of approximately 75.8%. The FL5 senior notes bear interest at a weighted average rate equal to LIBOR plus 3.71%. The stated maturity of the FL5 notes is January 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL5, we retained $23,019 of investment grade notes and all $60,803 of the unrated classes of junior notes, or the FL5 junior notes, and equity of the FL5 issuer. In February 2016, we contributed the $60,803 of junior notes and equity of RAIT FL5 to a venture. We retained a 60% interest in the venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $24,796 of proceeds as a result of this contribution. In April 2016, we sold $23,019 of investment grade notes that we had retained upon closing. Subject to certain conditions, beginning in December 2017 or upon defined tax events, the FL5 issuer may redeem the FL5 senior notes, in whole but not in part, at the direction of holders of FL5 junior notes, which are held by the aforementioned venture.

On November 30, 2016, we closed a CMBS securitization transaction we refer to as RAIT FL6 collateralized by $257,949 of floating rate commercial mortgage loans and participation interests in floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and

covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2016-FL6 Trust, or the FL6 issuer, issued classes of investment grade senior notes, or the FL6 senior notes, with an aggregate principal balance of approximately $216,677 to investors, representing an advance rate of approximately 84.0%. The FL6 senior notes bear interest at a weighted average rate equal to LIBOR plus 2.49%. The stated maturity of the FL6 notes is November 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL6, we retained the unrated classes of junior notes, or the FL6 junior notes, aggregating to a principal balance of $41,272 and the equity, or the retained interests, of the FL6 issuer. In January 2017, we contributed our junior notes and equity of RAIT FL6 to a venture. We retained a 60% interest in the venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $16,893 of proceeds as a result of this contribution. Subject to certain conditions, beginning in December 2018 or upon defined tax events, the FL6 issuer may redeem the FL6 senior notes, in whole but not in part, at the direction of holders of FL6 junior notes, which were held by the aforementioned venture.

During the year ended December 31, 2018, RAIT IV, a subsidiary of RAIT, completed the sale of its FL5 Interests and FL6 Interests to Melody RE II, LLC. As a result of the sale, we determined that RAIT is no longer the primary beneficiary of the RAIT Venture VIEs, FL5 or FL6 (each as defined in Note 8: Variable Interest Entities). Therefore, we deconsolidated those entities as of June 27, 2018. See Note 8: Variable Interest Entities for more information regarding this transaction.

On June 23, 2017, we closed a CMBS securitization transaction we refer to as RAIT FL7 collateralized by $342,373 of floating rate commercial mortgage loans and participation interests in floating rate commercial mortgage loans that we originated and that is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2017-FL7 Trust, or the FL7 issuer, issued classes of investment grade senior notes, or the FL7 senior notes, with an aggregate principal balance of approximately $276,894 to investors, representing an advance rate of approximately 80.9%. The FL7 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.44%. The stated maturity of the FL7 notes is June 2037, unless redeemed or repaid prior thereto. At the closing of RAIT FL7, we retained the less than investment grade classes of junior notes, or the FL7 junior notes, aggregating to a principal balance of $65,479 and the equity, or the retained interests, of the FL7 issuer. As of December 31, 2018, RAIT FL7 had $225,452 of total collateral at par value, $9,000 of which is in default. As of December 31, 2018, RAIT FL7 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $159,972 to investors. We currently own the less than investment grade classes of junior notes, including a class with an aggregate principal balance of $65,479, and the equity, or the retained interests, of RAIT FL7. RAIT FL7 does not have OC triggers or IC triggers.

On November 29, 2017, we closed a CMBS securitization transaction we refer to as RAIT FL8 collateralized by $259,776 of floating rate commercial mortgage loans and participation interests in floating rate commercial mortgage loans that we originated and that is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2017-FL8 Trust, or the FL8 issuer, issued classes of investment grade senior notes, or the FL8 senior notes, with an aggregate principal balance of approximately $215,614 to investors, representing an advance rate of approximately 83%. The FL8 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.30%. The stated maturity of the FL8 notes is December 2037, unless redeemed or repaid prior thereto. At the closing of RAIT FL8, we retained the less than investment grade classes of junior notes, or the FL8 junior notes, aggregating to a principal balance of $44,162 and the equity, or the retained interests, of the FL8 issuer. As of December 31, 2018, RAIT FL8 had $204,472 of total collateral at par value, none of which is defaulted and had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $160,310 to investors. We currently own the less than investment grade classes of junior notes, including a class with an aggregate principal balance of $44,162, and the equity, or the retained interests, of RAIT FL8. RAIT FL8 does not have OC triggers or IC triggers.

The junior notes that we have retained in our CMBS securitizations include the class of junior notes that is subject to the first dollar of loss.

Loans payable on real estate. As of December 31, 2018, and 2017, we had $40,724 and $62,297, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheets.

During the year ended December 31, 2018, we repaid $20,510 of mortgage indebtedness as part of one property disposition. We recognized a $1,943 loss on extinguishment of debt related to this disposition, resulting from a defeasance premium.

During the year ended December 31, 2017, we repaid $22,981 of mortgage indebtedness as part of three property dispositions. We recognized $3,813 gains on extinguishments of debt related to two of these three dispositions as the properties were sold for less than their outstanding indebtedness and the outstanding indebtedness was deemed satisfied in full as a result of such sales.

During the year ended December 31, 2017, we incurred a non-cash gain on deconsolidation of properties of $5,158, relating to an industrial real estate portfolio containing ten properties with carrying value of $82,501 of investments in real estate and $81,941 of related cross-collateralized non-recourse debt as of December 31, 2016. During the year ended December 31, 2017, the senior lender foreclosed on the mortgage liens encumbering all of these industrial properties, and disposed of the properties through auction processes. RAIT had no control or influence over the divestiture process. These properties, including other assets, net of related liabilities, had an aggregate carrying value of $82,046. As a result, the senior lender or its assignee/designee now owns these properties, subject to any redemption rights that we have under applicable state law, if any. Upon foreclosure, we derecognized these net assets and extinguished related debt of $87,204, based on the proceeds received by and legal stipulations entered into with the senior lender with respect to the auctions.

During the year ended December 31, 2017, we incurred a non-cash gain on deconsolidation of properties of $697 relating to a real estate portfolio, or the Indiana portfolio, containing two office and two industrial properties with a carrying value of $16,216 and $17,698 of related non-recourse debt as of December 31, 2016. During the year ended December 31, 2017, the senior lender foreclosed on the mortgage liens encumbering these four properties and disposed of the properties through an external foreclosure process. RAIT had no control or influence over the divestiture process. These four properties, including other assets, net of related liabilities, had an aggregate carrying value of $17,625. Upon foreclosure, we derecognized these net assets and extinguished related debt of $18,303 based on the proceeds received by the senior lender through the foreclosure.

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:

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings or fixed rate assets. 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. While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described. 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.

We have historically 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. We use regression analysis to assess the effectiveness of our hedging relationship and use the hypothetical derivative method to measure any ineffectiveness at each reporting period. As of December 31, 2018, all of our cash flow hedge interest rate swaps had reached maturity. As of December 31, 2018, no new cash flow hedge interest rate swaps have been entered into.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of December 31, 2018 and December 31, 2017:

Changes in fair value on our other interest rate derivatives are reported in change in fair value of financial instruments in the Consolidated Statements of Operations.

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 mortgage loans, mezzanine loans, preferred equity interests, 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, CMBS facilities, and other indebtedness approximates their carrying amount or unpaid principal balance due to the nature of these instruments.

The fair value of mortgage loans held for investment is determined using an exit price notion. Prior to adopting the January 2016 amendment to FASB ASC Topic 825, we measured the fair value of mortgage loans held for investment under an entry price notion. The entry price notion previously applied used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk, and market factors. We determined the fair value on substantially all of our loans for disclosure purposes, on an individual loan basis. The discount rates reflect current market rates for loans with similar terms to borrowers having similar credit quality on an exit price basis.

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2018:

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2017:

The following table summarizes information about our liabilities measured at fair value on a recurring basis as of December 31, 2018, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

(1)During the year ended December 31, 2017, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value. For the fair value of our junior subordinated notes, at fair value, we estimate the fair value of these financial instruments using significant unobservable inputs. For the junior subordinated notes, at fair value, a discounted cash flow model was used as the valuation technique and the significant unobservable inputs as of December 31, 2018 include a discount rate of 27% and as of December 31, 2017 include discount rates ranging from 18.01% to 18.21%. The gains attributable to changes in instrument-specific credit risk were determined by discounting the future cash flows of the notes at base market interest rates and subtracting this amount from the total fair value of the instrument.

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, 2018:

As of December 31, 2018, we measured one of our real estate assets at a fair value of $5,100 in our consolidated balance sheets as it was impaired. The fair value was based on an executed purchase and sale agreement and the status of negotiations to sell the real estate asset and was classified within Level 2 of the fair value hierarchy. The significant input was the purchase price derived by the potential buyer.

As of December 31, 2018, we measured two of our real estate assets at a fair value of $37,200 as they were impaired. The fair values were based on appraisals received on the properties and were classified within Level 3 of the fair value hierarchy. The significant inputs were the terminal capitalization rate of 8.0% and discount rate of 9.50% for one of the assets and comparable sales of similar properties for the second asset.

As of December 31, 2017, we measured one of our real estate assets at a fair value of $32,948 as it was impaired. The fair value was based on our broker’s opinion of fair value for the real estate asset and was classified within Level 3 of the fair value hierarchy. The significant inputs were the terminal capitalization rate of 7.25% and discount rate of 11.6%.

Our other non-recurring fair value measurements relate primarily to our commercial real estate loans that are considered impaired. In evaluating our impaired loans, we estimate the fair value of the underlying collateral of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the underlying collateral of the commercial real estate loan, management uses appraisals, broker opinions of value, discounted cash flow analyses and/or direct capitalization valuation analyses. The significant inputs to these valuations are capitalization rates and discount rates and are based on market information and comparable sales of similar properties. As of December 31, 2018, we measured the underlying collateral of

seven of our loans at a fair value of $68,358 in our consolidated balance sheet as they were impaired. As of December 31, 2017, we measured the underlying collateral of ten of our loans at a fair value of $119,220 in our consolidated balance sheet as they were impaired.

The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not recorded at fair value in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and commercial mortgage facilities and other indebtedness approximates cost due to the nature of these instruments and are not included in the tables below.

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” and derivatives as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

The change in the fair value for the junior subordinated notes for which the fair value option was elected for the year ended December 31, 2018 was primarily attributable to changes in base market interest rates. The change in the fair value for the junior subordinated notes for which the fair value option was elected for the year ended December 31, 2017 was primarily attributable to changes in base market interest rates and instrument specific credit risks. The changes in the fair value of derivatives for the years ended December 31, 2018 and 2017 was primarily due to changes in interest rates. The change in fair value of the warrants and investor SARs for the year ended December 31, 2017 was driven by the investor’s exercise of a put right option with respect to such warrants and investor SARs. As a result, RAIT has no further obligations relating to warrants and investor SARS.

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. We evaluated our investments and determined that, as of December 31, 2018, our consolidated VIEs were: RAIT I, RAIT FL7, RAIT FL8, and the RAIT VIE Properties (Willow Grove and Cherry Hill). As of December 31, 2017, our consolidated VIEs included the aforementioned VIEs as well as RAIT II and the two ventures described in Note 5: Indebtedness (RAIT Venture VIEs).

We consolidate the securitizations that we sponsor for which we have retained interests in and control the significant decisions regarding the collateral in these entities, such as the approval of loan workouts. As of December 31, 2018, we consolidated the VIE properties as we own the entities that possess and control these properties and control the significant capital and operating decisions regarding the properties.

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. Certain amounts included in the tables below are eliminated upon consolidation with our other subsidiaries that maintain investments in the debt or equity securities issued by these entities.

	As of December 31, 2018
	RAIT Securitizations			RAIT VIE Properties			Total
Assets
Investments in commercial mortgage loans, mezzanine loans and preferred equity interests	$	561,101		$	—		$	561,101
Investments in real estate		—			18,020			18,020
Cash and cash equivalents		—			209			209
Restricted cash		29,658			374			30,032
Accrued interest receivable		18,849			—			18,849
Other assets		153			3,854			4,007
Total assets	$	609,761		$	22,457		$	632,218
Liabilities and Equity
Indebtedness, net	$	618,516		$	19,495		$	638,011
Accrued interest payable		1,534			5,883			7,417
Accounts payable and accrued expenses		74			3,315			3,389
Deferred taxes, borrowers’ escrows and other liabilities		2			197			199
Total liabilities		620,126			28,890			649,016
Equity:
Shareholders’ equity:
RAIT investment and Retained earnings (deficit)		(10,365	)		(6,433	)		(16,798	)
Total shareholders’ equity		(10,365	)		(6,433	)		(16,798	)
Total liabilities and equity	$	609,761		$	22,457		$	632,218

	As of December 31, 2017
	RAIT Securitizations		RAIT VIE Properties			RAIT Venture VIE			Total
Assets
Investments in commercial mortgage loans, mezzanine loans and preferred equity interests	$	1,082,528	$	—		$	349,924		$	1,432,452
Investments in real estate		—		18,634			—			18,634
Cash and cash equivalents		—		283			92			375
Restricted cash		1,068		237			10			1,315
Accrued interest receivable		41,639		—			2,462			44,101
Other assets		16,860		3,954			—			20,814
Total assets	$	1,142,095	$	23,108		$	352,488		$	1,517,691
Liabilities and Equity
Indebtedness, net	$	1,034,750	$	19,630		$	354,835		$	1,409,215
Accrued interest payable		1,869		5,356			1,111			8,336
Accounts payable and accrued expenses		23		3,274			—			3,297
Deferred taxes, borrowers’ escrows and other liabilities		—		184			643			827
Total liabilities		1,036,642		28,444			356,589			1,421,675
Equity:
Shareholders’ equity:
RAIT investment and Retained earnings (deficit)		105,453		(5,336	)		(4,140	)		95,978
Total shareholders’ equity		105,453		(5,336	)		(4,140	)		95,977
Noncontrolling Interests		—		—			39			39
Total liabilities and equity	$	1,142,095	$	23,108		$	352,488		$	1,517,691

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. The amounts that eliminate in consolidation include $93,445 of total investments in mortgage loans and $197,235 of indebtedness as of December 31, 2018 and $257,625 of total investments in mortgage loans, $370,351 of indebtedness as of December 31, 2017. We do not have any contractual obligation to provide the VIEs listed above with any financial support. We have not and do not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

On June 27, 2018, RAIT IV completed the sale of its FL5 Interests, as defined below, and FL6 Interests, as defined below (collectively, the Interests), to Melody RE II, LLC, or the FL Purchaser, for an aggregate purchase price of $54,632.

Holdings 2016 and Holdings 2017, have been referred to as the RAIT Venture VIEs. As a result of the sale, RAIT is no longer the primary beneficiary of the RAIT Venture VIEs, FL5 or FL6. Therefore, RAIT deconsolidated those entities as of June 27, 2018.

The following table summarizes the effects of deconsolidating the RAIT Venture VIEs, RAIT FL5 and RAIT FL6 from our balance sheet as of June 27, 2018:

On October 1, 2012, we entered into a Securities Purchase Agreement, or the purchase agreement, with ARS VI Investor I, LLC, or the investor, an affiliate of Almanac Realty Investors, LLC, or Almanac. During the period from the effective date of the purchase agreement through March 2014, we sold to the investor on a private placement basis in four separate sales between October 2012 and March 2014 for an aggregate purchase price of $100,000, or the total commitment, the following securities: (i) 4,000,000 of our Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, or the Series D preferred shares, (ii) common share purchase warrants, or the warrants, initially exercisable for 9,931,000 of our common shares, or the common shares, and (iii) common share appreciation rights, or the investor SARs, with respect to 6,735,667 common shares. We have subsequently repurchased a number of Series D preferred shares in transactions described below. We purchased and cancelled the warrants and the investor SARs in October 2017 pursuant to the investor’s exercise of put rights described below. We used the proceeds received under the purchase agreement to fund our loan origination and investment activities, including CMBS and bridge lending.

We are subject to covenants under the purchase agreement when the investor and its permitted transferees hold specified amounts of the securities issuable under the purchase agreement. These covenants include defined leverage limits on defined financing assets. In addition, commencing on the first draw down and for so long as the investor and its affiliates which are permitted transferees continue to own at least 10% of the outstanding Series D preferred shares or warrants and common shares issued upon exercise of the warrants representing at least 5% of the aggregate amount of common shares issuable upon exercise of the warrants actually issued, the board will include one person designated by the investor. This right is held only by the investor and is not transferable by it. The investor designated Andrew M. Silberstein to serve on our board. The covenants also include our agreement not to declare any extraordinary dividend except as otherwise required for us to continue to satisfy the requirements for qualification and taxation as a REIT. An extraordinary dividend is defined as any dividend or other distribution (a) on common shares other than regular quarterly dividends on the common shares or (b) on our preferred shares other than in respect of dividends accrued in accordance with the terms expressly applicable to the preferred shares.

The Series D preferred shares initially bore a cash coupon rate of 7.5%, which increased to 8.5% on October 1, 2015, and increases again on October 1, 2018 and each anniversary thereafter by 50 basis points. They rank on parity with our existing outstanding preferred shares. Their liquidation preference was equal to $26.25 per share to October 1, 2017 and $25.00 per share thereafter. In defined circumstances, the Series D preferred shares are exchangeable for Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, or the Series E preferred shares. The rights and preferences of the Series E preferred shares will be similar to those of the Series D preferred shares except, among other differences, the Series E preferred shares will be mandatorily redeemable upon a change of control, will have no put right, will not have the right to designate one trustee to the board except in the event of a payment default under the Series E preferred shares, and have defined registration rights.

We had the right in limited circumstances to redeem the Series D preferred shares prior to the October 1, 2017 at a redemption price of $26.25 per share. From and after October 1, 2017, we may redeem all or a portion of the Series D preferred shares at any time at a redemption price of $25.00 per share. We may satisfy all or a portion of the redemption price for an optional redemption with an unsecured promissory note, or a preferred note, with a maturity date of 180 days from the applicable redemption date. From and after the occurrence of a defined mandatory redemption triggering event, each holder of Series D preferred shares may elect to have all or a portion of such holder’s Series D preferred shares redeemed by us. These shares could be redeemed at a redemption price of $26.25 per share prior to October 1, 2017 and $25.00 per share on or after October 1, 2017. We may satisfy all or a portion of the redemption price for certain of the mandatory redemption triggering events with a note. The purchase agreement and certain related documents provide for a subsidiary of RAIT to use the first $38,941 of net proceeds (other than defined CMBS net proceeds) from the sale, transfer, repayment or other disposition of investments held by the subsidiary on the date of disposition from and after October 1, 2017 and defined CMBS net proceeds from and after October 1, 2019 to engage in transactions resulting in the redemption of Series D preferred shares on a dollar-for-dollar basis provided such redemptions are otherwise permitted. Each case is at a redemption price of $25.00 per share. All amounts paid in connection with liquidation or for all redemptions of the Series D preferred shares must also include all accumulated and unpaid dividends to, but excluding, the redemption date.

In September 2015, we amended the purchase agreement with Almanac related to the Series D preferred shares. This amendment changed two of the covenants therein. As consideration for this amendment, we paid Almanac $450. We accounted for this amendment as a modification of the Series D preferred shares.

On December 7, 2016, we entered into a securities repurchase agreement with the investor whereby we agreed to repurchase and cancel 464,000 Series D preferred shares at par for a purchase price of $11,600 which resulted in a decrease from 4,000,000 Series D preferred shares issued and outstanding to 3,536,000 Series D preferred shares issued and outstanding.

On June 22, 2017, we entered into a securities repurchase agreement with the investor whereby we agreed to repurchase and cancel 402,280 Series D preferred shares at par for a purchase price of $10,057 which resulted in a decrease from 3,536,000 Series D preferred shares issued and outstanding to 3,133,720 Series D preferred shares issued and outstanding.

On March 19, 2018, we redeemed and cancelled 194,530 Series D preferred shares at par for a purchase price of $4,863 which resulted in a decrease from 3,133,720 preferred units of RAIT IV and RAIT’s corresponding Series D preferred shares issued and outstanding to 2,939,190 preferred units of RAIT IV and RAIT’s corresponding Series D preferred shares issued and outstanding.

As discussed in Note 1: The Company, on June 27, 2018, we entered into a Redemption and Exchange Agreement with the Investor whereby we redeemed and cancelled the remaining 2,939,190 preferred units of RAIT IV and RAIT’s corresponding Series D preferred shares for $56,765 of cash received by RAIT IV from the sale of the Interests, defined available cash held by RAIT IV and $16,715 of liquidation preference of RAIT’s publicly traded Series A preferred shares, Series B preferred shares and Series C preferred shares. Accordingly, the Investor received 383,147 of RAIT’s Series A preferred shares, 167,828 of RAIT’s Series B preferred shares, and 117,605 of RAIT’s Series C preferred shares. In addition, RAIT paid the Investor an exchange fee of $418. The Redemption and Exchange Agreement also provided for the termination of the Securities Purchase Agreement and mutual releases between RAIT and the Investor of the previously reported dispute between the two parties.

This transaction is accounted for as an extinguishment of Series D preferred shares of RAIT and issuance of Series A, Series B and Series C preferred shares, in each case, of RAIT. Accordingly, the difference between the fair value of the consideration transferred to the Investor (i.e., cash and RAIT’s Series A, Series B and Series C preferred shares) and the carrying amount of the Series D preferred shares that were redeemed and exchanged represents a return from the Investor. The following table summarizes the transaction:

On October 11, 2017, we received a put right notice from the Investor exercising the Investor’s right to require us to purchase for $20,500 all the previous warrants and Investor SARs. On October 17, 2017, RAIT purchased all of the warrants and Investor

SARs. As a result, RAIT had no further obligations beyond October 17, 2017 relating to the warrants and Investor SARs and none remain outstanding, respectively, as of that date.

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. 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. Subject to the board’s declaration of a dividend, 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. 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. Subject to the board’s declaration of a dividend, 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.

In 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. The Series C Preferred Shares accrue cumulative cash dividends at a rate of 8.875% per year of the $25.00 liquidation preference and subject to the board’s declaration of a dividend, dividends 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 June 13, 2014, we entered into an At Market Issuance Sales Agreement, or the 2014 Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the 2014 Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to $150,000 aggregate amount of preferred shares. With respect to each series of preferred shares, the maximum amount issuable is as follows: 4,000,000 Series A Preferred Shares, 1,000,000 Series B Preferred Shares, and 1,000,000 Series C Preferred Shares. Unless the 2014 Preferred ATM agreement is earlier terminated by MLV or us, the 2014 Preferred ATM agreement automatically terminates upon the issuance and sale of all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares subject to the 2014 Preferred ATM agreement. During the period from the effective date of the 2014 Preferred ATM agreement through December 31, 2016, pursuant to the 2014 Preferred ATM agreement, we issued a total of 1,275,065 Series A Preferred Shares at a weighted-average price of $23.50 per share and received $29,109 of net proceeds. We also issued a total of 52,504 Series B Preferred Shares at a weighted-average price of $23.65 per share and received $1,203 of net proceeds and 325 Series C Preferred Shares at a weighted-average price of $22.90 and received $7 of net proceeds. No shares were issued under this agreement in 2017. As of December 31, 2018, 2,724,935, 947,496, and 999,675 Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the 2014 Preferred ATM agreement.

RAIT’s Board determined that it would suspend the dividend on RAIT’s outstanding common shares on November 1, 2017. The Board considers dividends on a quarterly basis.

During the year ended December 31, 2018, we paid $156 of dividends on restricted common share awards that vested in each respective period. These dividends were declared during the vesting period but remained forfeitable prior to vesting and became payable upon vesting in accordance with the terms of these awards.

We have a dividend reinvestment and share purchase plan, or DRSPP, under which we registered and reserved for issuance, in the aggregate, 210,000 common shares, which has been adjusted for the Reverse Stock Split. During the year ended December 31, 2018, we issued a total of zero common shares. As of December 31, 2018, 154,783 common shares, in the aggregate, remain available for issuance under the DRSPP.

On November 21, 2012, 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 200,000 of our common shares, which has been adjusted for the reverse stock split, from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. Unless the COD sales agreement is earlier terminated by JonesTrading or us, the COD sales agreement automatically terminates upon the issuance and sale of all of the common shares subject to the COD sales agreement. During the year ended December 31, 2018, we did not issue any common shares pursuant to this agreement. As of December 31, 2018, while 158,378 common shares, in the aggregate, which has been adjusted for the Reverse Stock Split, had not been issued under the COD sales agreement, we would need to register them for sale under the Securities Act of 1933, as amended, prior to issuing any such securities.

As of December 31, 2018, total shareholders’ equity attributable to common shares was a deficit of $181,352.

The following tables summarize the dividends we declared or paid during the years ended December 31, 2018 and 2017:

March 31,

2017

June 30,

2017

September 30,

2017

December 31,

2017

For the

Year Ended

December 31,

2017

Series A Preferred Shares

Date declared

2/15/2017

5/18/2017

8/2/2017

11/2/2017

Record date

3/1/2017

6/1/2017

9/1/2017

12/1/2017

Date paid

3/31/2017

6/30/2017

10/2/2017

1/2/2018

Total dividend amount

2,589

10,356

Series B Preferred Shares

Date declared

2/15/2017

5/18/2017

8/2/2017

11/2/2017

Record date

3/1/2017

6/1/2017

9/1/2017

12/1/2017

Date paid

3/31/2017

6/30/2017

10/2/2017

1/2/2018

Total dividend amount

1,225

4,900

Series C Preferred Shares

Date declared

2/15/2017

5/18/2017

8/2/2017

11/2/2017

Record date

3/1/2017

6/1/2017

9/1/2017

12/1/2017

Date paid

3/31/2017

6/30/2017

10/2/2017

1/2/2018

Total dividend amount

910

3,640

Series D Preferred Shares

Date declared

2/15/2017

5/18/2017

8/2/2017

11/2/2017

Record date

3/1/2017

6/1/2017

9/1/2017

12/1/2017

Date paid

3/31/2017

6/30/2017

9/29/2017

12/28/2017

Total dividend amount

1,879

1,665

7,088

Common shares

Date declared

5/02/2017

8/02/2017

N/A

Record date

5/26/2017

8/25/2017

N/A

Date paid

6/15/2017

9/15/2017

N/A

Dividend per share

0.09

0.05

—

0.14

Total dividend declared

8,220

4,574

—

12,794

On December 7, 2016, we entered into a securities repurchase agreement whereby we agreed to repurchase and cancel 464,000 Series D preferred shares. The Series D Preferred Shares $2,125 total dividend declared on November 2, 2016 with a record date of December 1, 2016 included a $246 payment on December 7, 2016 and $1,879 payment on January 3, 2017.

On June 22, 2017, we entered into a securities repurchase agreement whereby we agreed to repurchase and cancel 402,280 Series D preferred shares. The Series D Preferred Shares had a $1,879 total dividend declared on May 18, 2017 with a record date of June 1, 2017 which included a $214 payment on June 23, 2017 and a $1,665 payment on June 30, 2017.

On March 13, 2018, our board of trustees declared a first quarter 2018 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, and $0.5312500 per share on our Series D Preferred Shares. The dividends were paid on April 2, 2018 to holders of record on March 23, 2018.

On March 19, 2018, we redeemed and cancelled 194,530 Series D preferred shares. The Series D Preferred Shares had a $1,665 total dividend declared on March 13, 2018 with a record date of March 23, 2018 which included a $103 payment on March 19, 2018 and a $1,562 payment on March 30, 2018.

As discussed in Note 9: Series D Preferred Shares, on June 27, 2018, we redeemed and cancelled the remaining 2,939,190 preferred units of RAIT IV and RAIT’s corresponding Series D preferred shares for $56,765 of cash received by RAIT IV from the sale of the Interests, defined available cash held by RAIT IV and $16,715 of liquidation preference of RAIT’s publicly traded Series A preferred shares, Series B preferred shares, and Series C preferred shares (383,147 of Series A preferred shares, 167,828 of Series B

preferred shares and 117,605 of Series C preferred shares). Upon issuance, the Series A preferred shares had a fair value of $2,498, the Series B preferred shares had a fair value of $1,091 and the Series C preferred shares had a fair value of $776, based on the closing prices of the respective shares on June 27, 2018.

In the second quarter of 2018, the Board elected not to declare a dividend on RAIT’s Series A, B and C preferred shares and has not declared a dividend since. The Board considers dividends on a quarterly basis. As of December 31, 2018, $15,188 of dividends on these shares were unpaid and in arrears. These dividends in arrears are included in (income) loss allocated to preferred shares on our consolidated statements of operations since they represent a claim on earnings superior to common shareholders, but have not been accrued as a liability since they have not been declared.

During the year ended December 31, 2018, the 2017 RAIT Venture VIE, which elected to be taxed as a REIT and that was formed in 2017 to hold the junior subordinated notes of FL-6, sold 125 preferred shares of the 2017 RAIT Venture VIE to unaffiliated purchasers. The price was $1,000 per share and the 2017 RAIT Venture VIE received $76 of net proceeds. During the year ended December 31, 2018, we distributed $15 to the non-controlling interest holders of the RAIT Venture VIEs. Refer to Note 2: Summary of Significant Accounting Policies, (n) Income Taxes, and Note 5: Indebtedness for further discussion about these entities.

On June 27, 2018, RAIT IV, a subsidiary of RAIT, completed the sale of its FL5 Interests and FL6 Interests to Melody RE II, LLC. As a result of the sale, we deconsolidated the RAIT Venture VIEs which resulted in the derecognition of $111 of noncontrolling interests related to the RAIT Venture VIEs. See Note 8: Variable Interest Entities for more information regarding this transaction.

On June 30, 2017, we sold our membership interest in South Terrace, a multifamily real estate property, to a subsidiary of IRT for $42,950 of cash and limited partnership units. The limited partnership units, which had a value of $1,654, were issued to our previous noncontrolling interest holders in South Terrace. This transaction resulted in the distribution of $1,618 of our noncontrolling interests. Refer to Note 14: Related Party Transactions for further discussion.

On March 16, 2018, we acquired the noncontrolling interests related to PlazAmericas Mall, a retail real estate property, for $343, including transaction costs. These noncontrolling interests had a carrying amount of $3,582. As we previously held a controlling financial interest in PlazAmericas Mall, we accounted for the acquisition of the noncontrolling interests as an equity transaction.

Within this footnote, all share and per-share amounts have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented herein.

In 2017, the RAIT Financial Trust 2017 Incentive Award Plan, or the 2017 IAP, that provides for the grants of awards to employees, non-employee trustees, and consultants of RAIT, was amended and restated to increase the maximum aggregate number of common shares that may be issued from 80,000 to 150,000.

On March 31, 2015, the compensation committee adopted a 2015 Annual Incentive Compensation Plan, or the annual cash bonus plan setting forth the basis on which target cash bonus awards are earned. In addition, on March 31, 2015, the compensation committee adopted a 2015 Long Term Incentive Plan, or the 2015 LTIP, setting forth the basis on which the eligible officers could earn equity compensation that was directly linked to long-term performance. Pursuant to the 2015 LTIP, equity awards to eligible officers will consist of performance share unit (PSU) awards issued at the conclusion of a three year performance period based on

RAIT’s performance relative to three long-term performance metrics established by the compensation committee. The 2015 LTIP was adopted pursuant to our 2012 IAP.

The LTIP is an equity program whereby long-term performance awards are granted each year and earned based on our performance over a three year period. Compensation awarded under the LTIP has been based on predefined performance for 75% of the Award. Performance measures and weighting for the performance component of those awards was based on objective performance measures relating to the total shareholder return (stock price appreciation plus aggregate dividends or TSR). The remaining 25% of the compensation award was time-based vesting over three years.

In March 2018, the special committee approved a 2018 Retention and Performance Incentive Plan, or the 2018 Incentive Plan, pursuant to the Annual Cash Bonus Plan for RAIT’s two current executive officers. The 2018 Incentive Plan with executive officers did not rely on equity-based compensation due to the low trading price of our common shares. The 2018 Incentive Plan was comprised of three components as follows: i) 50% of the target cash bonus award was based on a retention component; ii) 37.5% was based on the achievement of Performance Incentive Plan, or PIP, milestones; and iii) 12.5% was based on a discretionary pool. The PIP milestone amounts were based on i) expected contribution to the achievement of the four specific milestones and ii) historical total compensation. The discretionary pool was administered consistent with historical practice determine and approved by the compensation committee.

As of December 31, 2018, 77,681 common shares are available for issuance under the amended and restated 2012 IAP.

As of December 31, 2018, our closing common stock price was $0.56, which was less than the exercise prices of all exercisable SARs. Therefore, the total intrinsic value of SARs outstanding and exercisable at December 31, 2018 was $0. As of December 31, 2018, the unrecognized compensation cost relating to unvested SARs was $107.

The weighted average grant date fair values of the SARs and the assumptions used in computing those fair values at the dates of their respective awards, using the Black-Scholes Option Pricing Model, were as follows:

The stock price used was based on the closing price on the date of the award. The strike price used is the strike price in the respective SAR awards, which was based on the closing price on the date of the award. The risk free rate represents the U.S. Treasury

rate for the 5 year term of the SARs. The dividend yield was the dividend yield at the time of the SAR awards. In estimating volatility, management used recent historical volatility as a proxy for expected future volatility.

The following table summarizes information about the SARs outstanding and exercisable as of December 31, 2018:

A summary of the restricted common share awards of the 2012 IAP and 2015 LTIP as of December 31, 2018 and 2017 is presented below.

As of December 31, 2018, the unrecognized compensation cost relating to unvested restricted common share awards was $241. The estimated fair value of restricted common share awards vested during 2018 and 2017 was $113 and $1,392, respectively.

The following table summarizes the PSUs granted for the year ended December 31, 2017:

Our assumptions used in computing the fair value of the PSUs at the dates of their respective awards, using the Monte Carlo method, were as follows:

c) This represents the dividend yield assumption used for RAIT. The dividend yield assumptions used for our peer group and the NAREIT Mortgage Index ranged from 0% to 17.4%.

RAIT estimates future expenses associated with PSUs outstanding at December 31, 2018 to be $15, which will be recognized over a weighted-average period of 2.0 years.

During the year ended December 31, 2018, we recorded income of $58 associated with our share based compensation which included reversing $571 of expense related to unvested PSUs related to the resignation of executive officers. During the year ended December 31, 2017, we recorded $2,612 associated with our share based compensation.

We maintain a 401(k) profit sharing plan, or the RAIT 401(k) Plan, for the benefit of our eligible employees. 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. We provide a cash match of the employee contributions up to 4% of employee compensation, which is capped at limits set by the Internal Revenue Service, or IRS, and may pay an additional 2% of eligible compensation as discretionary cash profit sharing payments.

During the years ended December 31, 2018 and 2017, we recorded $244 and $376 of contributions which is included in compensation expense on the accompanying consolidated statements of operations. During the years ended December 31, 2018 and 2017, we did not make any discretionary cash profit sharing contributions.

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the two years ended December 31, 2018:

For the years ended December 31, 2018 and 2017, securities convertible into 12,171 and 277,340 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

RAIT and TRFT have elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. In February 2016 and January 2017, in conjunction with the ventures described in Note 5: Indebtedness and Note 8: Variable Interest Entities, we created two new entities that elected to be taxed as a REIT. These entities held the FL-5 and FL-6 junior notes for the aforementioned ventures, respectively. As discussed in Note 1: The Company, we completed the sale of our interests in the RAIT Venture VIEs on June 27, 2018, and, as a result, the purchaser is responsible for their REIT compliance from and after that date.

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 our REIT entities fail to qualify as REITs 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 dividends to shareholders. However, we believe that each of our REIT entities will be organized and operated in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in a manner so that each will qualify as a REIT. We may be subject to certain state and local taxes.

For the year ended December 31, 2018, 100% of dividends were characterized as a return of capital. For the year ended December 31, 2017, 10% of dividends were characterized as ordinary income, 90% as a return of capital.

The components of the provision for income taxes as it relates to our taxable income from domestic TRSs during the years ended December 31, 2018 and 2017 includes the effects of our performance of a portion of 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, 2018 and 2017.

The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the years ended December 31, 2018 and 2017 were as follows:

A reconciliation of the income tax benefit (provision) based upon the statutory tax rates of 21% in 2018, and 35% in 2017, respectively, to the effective rates of our taxable REIT subsidiaries is as follows for the respective periods:

Significant components of our deferred tax assets (liabilities), at our TRSs, are as follows as of December 31, 2018 and 2017:

Federal and State tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. During the period ended December 31, 2018, we conducted an analysis to determine whether such an ownership change had occurred due to significant stock transactions that occurred during that period. The analysis indicated that an ownership change occurred on June 27, 2018, which results in a de minimis annual limitation on our net operating loss carryforwards generated prior to June 27, 2018 for our TRS entities. Accordingly, we have reduced our net operating loss and capital loss carryforwards for the period prior to June 27, 2018 for our TRS entities as there is no ability to utilize them as a result of the annual limitations employed. In recording this entry, we reduced gross DTAs for net operating loss carryforwards by $640 and recorded a corresponding reduction to our valuation allowance. As of December 31, 2018, our remaining DTA consists primarily of net operating losses generated at our TRS entities’ subsequent to June 27, 2018. As these losses are not considered to be more likely than not of realization in a future period, a valuation allowance has been recorded against them.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, was enacted. In accordance with the accounting guidance for income taxes, we have recognized the effect of tax law changes in the period of enactment. Among other things, this law

reduced the corporate income tax rate from 35% to 21% effective as of January 1, 2018 and also repealed the corporate Alternative Minimum Tax (“AMT”) effective as of January 1, 2018. As a result, during the year ended December 31, 2017, we have adjusted the federal tax rate for calculating deferred tax items to be 21% for the TRS entities and we have also released the valuation allowance on our TRS entities’ AMT credit carryforward in the amount of $531 as those became refundable credits under the new tax law. We believe this reassessment to be the final adjustment to these amounts in connection with the passage of H. R.1.

The accounting guidance for income taxes clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides rules on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no uncertain tax positions for the years ending December 31, 2018, 2017, 2016, and 2015. Income tax returns are filed in multiple jurisdictions and are subject to examination by taxing authorities. We have open tax years from 2014 through 2017 with various jurisdictions. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations.

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with the 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 from an unaffiliated third party or otherwise not creating a conflict of interest.

On June 27, 2018, the purchase agreement that previously provided for Andrew M. Silberstein to serve as a trustee on our board was terminated as part of the Redemption and Exchange Agreement that was entered into with the Investor on June 27, 2018. As part of the Redemption and Exchange Agreement, Mr. Silberstein resigned as a trustee. While Mr. Silberstein was a trustee, his trustee fees were paid to the Investor. Mr. Silberstein is an equity owner of Almanac and an officer of the Investor and holds indirect equity interests in the Investor. The transactions completed pursuant to the purchase agreement are described above in Note 9: Series D Preferred Shares. Subsequent to June 27, 2018, Almanac is not considered a related party.

As of June 27, 2017, Justin P. Klein has been appointed as a trustee on our board of trustees. Mr. Klein is a partner at Ballard Spahr LLP. RAIT has paid Ballard Spahr LLP $134 during the year ended December 31, 2017 and $88 during the year ended December 31, 2018 for legal counsel related to various matters. The approximate dollar value of Mr. Klein’s interest in these fees was less than $1 for the year ended December 31, 2017 and less than $1 for the year ended December 31, 2018, based on Mr. Klein’s Ballard partnership interest.

On March 30, 2018, the Libby Frischer Family Partnership, or LFFP, Charles F. Frischer, or Mr. Frischer, and RAIT signed a letter which provided that RAIT would exempt LFFP from RAIT’s common share ownership limit up to an amount equal to 12.5%. Mr. Frischer is the general partner of LFFP.

On April 6, 2018, RAIT, LFFP and Mr. Frischer entered into a cooperation agreement which sets forth certain transfer restrictions and standstill provisions, among other things, for a period of time. Subsequent to entering into the cooperation agreement, on April 6, 2018, LFFP, and Mr. Frischer and RAIT signed a letter agreement which provided that RAIT would exempt LFFP from RAIT’s common share and preferred share ownership limits up to an amount equal to 15.0% with respect to each class of shares.

On May 11, 2018, RAIT, LFFP and Mr. Frischer entered into a letter agreement which provided that RAIT would exempt LFFP from RAIT’s common share and preferred share ownership limits up to an amount equal to 20.0% with respect to each class of shares.

On May 26, 2017, RAIT entered into a previously disclosed cooperation agreement with Highland Capital Management, L.P. and its affiliates (Highland), which remains in effect.

During 2017, RAIT engaged in transactions with a former related party, Independence Realty Trust, or IRT. RAIT ended its last arrangement with IRT as of December 20, 2017 and does not consider IRT to be a related party after that date. The following are the transactions with IRT for the year ended December 31, 2017:

Pursuant to a shared services agreement, IRT reimbursed RAIT $727 for general and administrative services for the year ended December 31, 2017. In addition, during the year ended December 31, 2017, IRT reimbursed RAIT for $155 of general and administrative items that were paid on IRT’s behalf.

Pursuant to property management agreements with IRT with respect to RAIT’s multifamily properties, RAIT paid IRT $261 of property management fees for the year ended December 31, 2017. This is reflected within real estate operating expense in our consolidated statements of operations.

On December 20, 2016, Scott F. Schaeffer resigned from his position as Chief Executive Officer of RAIT and became the full-time Chief Executive Officer of IRT. On the same date, Scott F. Schaeffer entered into a one year consulting agreement with RAIT for which he received compensation of $375. For the year ended December 31, 2017, $375 was earned and paid related to this consulting agreement, which is reflected in general and administrative expenses in our consolidated statements of operations. In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of Scott F. Schaeffer’s resignation, RAIT granted Scott F. Schaeffer 150,000 unvested shares of common stock on December 23, 2016, and made a $500 cash payment in January 2017. The shares vested 50% on the six month anniversary and 50% on the one year anniversary of the grant date.

In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of James J. Sebra’s resignation, he was owed a cash bonus, payable in 2017, equal to 25% of his cash bonus for the year ended December 31, 2016. During the year ended December 31, 2017, this bonus of $110 was paid.

The following are supplemental disclosures to the consolidated statements of cash flows for the years ended December 31, 2018 and 2017:

During the year ended December 31, 2017, we sold one real estate property which resulted in a non-cash decrease of $16,367 to investments in real estate as the property was sold on the last business day of the year and, while titled was transferred, our cash was held by our settlement agent until the next business day, resulting in a receivable as of December 31, 2017.

Also, during the year ended December 31, 2017, we sold two real estate properties whose purchase price was financed by a loan made by RAIT. This resulted in a non-cash decrease of $14,839 to investments in real estate and a non-cash increase of $15,540 to investment in mortgages and loans.

During the year ended December 31, 2018, we transferred nine loans to held for sale as we had the intention and ability to sell these loans. The transfer was made at the lower of cost or fair value for each respective loan. During the year ended December 31, 2018, we sold six loans, which had an unpaid principal balance and carrying amount of $31,277. See Note 3: Investment in Commercial Mortgage Loans, Mezzanine Loans, and Preferred Equity Interests for further discussion.

Also, during the year ended December 31, 2018, we acquired the noncontrolling interests related to PlazAmericas Mall for $343, including transaction costs. See Note 10: Shareholders’ Equity for further discussion.

Also, during the year ended December 31, 2018, we redeemed and cancelled the remaining 2,939,190 preferred units of RAIT IV and the corresponding Series D preferred shares of RAIT for $56,765 of cash from RAIT IV’s sale of the Interests, which includes $2,133 of other cash held by RAIT IV, and $16,715 of liquidation preference of RAIT’s publicly traded Series A preferred shares, Series B preferred shares and Series C preferred shares. See Note 9: Series D Preferred Shares for further discussion

For a discussion of the non-cash changes in indebtedness and investments in real estate, restricted cash, other assets, intangible assets, accounts payable and accrued expenses, and other liabilities that occurred during the year ended December 31, 2018, see Note 4: Investments in Real Estate and Note 5: Indebtedness.

The following table summarizes our cash and cash equivalents and restricted cash balances as of December 31, 2018 and December 31, 2017:

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
2018
Total revenue	$	18,341		$	16,553		$	9,327		$	5,040
Change in fair value of financial instruments		87			111			(410	)		488
Net income (loss)		(27,705	)		(57,023	)		(21,038	)		(17,692	)
Net income (loss) allocable to common shares		(34,094	)		(50,162	)		(26,101	)		(22,763	)
Total Earnings (loss) per share - Basic (a)		(18.55	)		(27.26	)		(14.18	)		(12.37	)
Total Earnings (loss) per share - Diluted (a)		(18.55	)		(27.26	)		(14.18	)		(12.37	)

2017
Total revenue	$	29,603		$	22,813		$	24,603		$	22,699
Change in fair value of financial instruments		(1,153	)		3,093			4,753			6,729
Net income (loss)		(21,539	)		(116,884	)		(15,843	)		2,463
Net income (loss) allocable to common shares		(30,085	)		(125,757	)		(24,230	)		(4,623	)
Total Earnings (loss) per share - Basic (a)		(16.48	)		(68.75	)		(13.23	)		(2.52	)
Total Earnings (loss) per share - Diluted (a)		(16.48	)		(68.75	)		(13.23	)		(2.52	)

As a group, our executive officers act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results of our reportable segments to make decisions about investments and resources and to assess performance for each of these reportable segments. We conduct our business through one reportable segment, our real estate lending, owning and managing segment. This segment is concentrated on lending, owning and managing commercial real estate assets throughout the United States. The form of our investments ranged from first mortgage loans to equity ownership of a commercial real estate property.

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, disputes arising out of our loan portfolio, negligence, discrimination, and similar tort claims related to owned properties or employment related disputes. 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, except as described below.

RAIT Preferred Funding II, Ltd. v. CWCapital Asset Management LLC, et al.–Index No. 651729/2016 (Sup. Ct. N.Y.)

is the master servicer for the mortgage loan (including note A and note B). The parties’ rights and obligations are governed by, among other things, a pooling and servicing agreement and a co-lender agreement. The mortgage loan was repaid in May of 2017, and the defendants have alleged that RAIT II was not entitled to receive any payoff of principal under note B pursuant to the subordination and other provisions of the co-lender agreement. RAIT charged off its $18,500 note B during the year ended December 31, 2017. In the amended complaint, RAIT II alleges, among other things, that the defendants breached certain of their obligations under the operative documents and RAIT II should have received, among other things, all of its $18,500 principal under note B.

On December 17, 2018, RAIT II assigned its interest in note B to TRFT in connection with TRFT’s redemption of RAIT II. In connection therewith, TRFT is in the process of being substituted for RAIT II as the plaintiff in this litigation.

We lease office space in Philadelphia 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, 2018:

Rent expense was $1,274 and $1,365 for the years ended December 31, 2018 and 2017, respectively, and has been included in general and administrative expense or property operating expenses in the accompanying consolidated statements of operations.

As of March 2019, all of our non-Philadelphia office space leases have been terminated or have expired.

Certain of the existing mortgage loans that we previously originated contain commitments to fund certain amounts that were not funded upon the origination of the mortgage loan. Senior participation interests in these loans are held by certain of our FL securitizations and these FL securitizations are required to purchase additional participation interests in these loans that include the funded portions of these funding commitments from us and at our direction as the commitments are funded by us and as funds become available from loan payoffs in the FL securitization. As of December 31, 2018, the total outstanding funding commitment was $9,431.

We have evaluated subsequent events or transactions that have occurred after the consolidated balance sheet date of December 31, 2018, but prior to the filing of the consolidated financial statements with the SEC on this Annual Report on Form 10-K. We have determined that, except as disclosed within this Note and other Notes, there are no subsequent events that require disclosure in this Annual Report on Form 10-K.

			Initial Cost				Cost of Improvements, net of Retirements				Gross Carrying Amount
Property Name	Description	Location	Land		Building		Land		Building		Land (1)		Building (1)		Accumulated Depreciation- Building			Encumbrances (Unpaid Principal)				Year of Acquisition	Life of Depreciation
Willow Grove	Land	Willow Grove, PA	$	307	$	—	$	—	$	—	$	307	$	—	$	—		$	—			2001	N/A
Cherry Hill	Land	Cherry Hill, NJ		307		—		—		—		307		—		—			—			2001	N/A
Corey Landings	Land	St. Pete Beach, FL		9,735		—		—		3,201		9,735		3,201		—			—			2009	N/A
Executive Mews - Willow Grove	Office	Willow Grove, PA		2,280		9,121		—		1,801		2,280		10,922		(3,774	)		(11,246	)	(2)	2010		30
Executive Mews - Cherry Hill	Office	Cherry Hill, NJ		1,980		7,920		—		3,157		1,980		11,077		(4,424	)		(8,410	)	(3)	2010		30
Beachcomber Beach Resort	Land	Daytona Beach, FL		5,151		—		—		43		5,151		43		—			(12,649	)	(2)	2011	N/A
Union Medical	Office	Colorado Springs, CO		2,448		17,595		—		2,458		2,448		20,053		—			(26,085	)	(2)	2014		30
Oakland Square	Retail	Troy, MI		6,031		11,462		—		128		6,031		11,590		(127	)		(16,048	)	(4)	2014		30
Oakland Plaza	Retail	Troy, MI		5,353		15,836		—		491		5,353		16,327		(382	)		(17,848	)	(4)	2014		30
Raritan Shopping Center	Retail	Raritan, NJ		3,313		6,338		—		136		3,313		6,474		(61	)		(29,000	)	(2)	2016		30

			$	36,905	$	68,272	$	—	$	11,415	$	36,905	$	79,687	$	(8,768	)	$	(121,286	)

(1) Summary of Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests:

			Interest Rate							Maturity Date		Principal
Description of mortgages	Number of Loans		Lowest				Highest			Earliest	Latest	Lowest		Highest		Carrying Amount of Mortgages (a) (c)
Commercial mortgages
Multi-family		15		6.2	%			7.5	%	6/1/2019	1/1/2021	$	3,150	$	29,478	$	187,872
Office		5		6.8	%			7.3	%	2/1/2019	11/1/2020		5,250		19,995		72,945
Retail		11		4.6	%			7.5	%	2/1/2019	6/1/2025		-		12,500		109,409
Other		4		6.7	%			7.3	%	4/1/2019	10/1/2020		10,000		47,106		82,991
Subtotal		35											18,400		109,079		453,217
Mezzanine Loans
Multi-family		2		6.0	%			14.5	%	10/1/2020	3/27/2023		530		12,339		13,033
Office		1		12.0	%	(b)		12.0	%	6/24/2020	6/24/2020		554		3,943		8,244
Subtotal		3											1,084		16,282		21,277
Preferred equity interests
Multi-family		4		0.0	%			11.0	%	3/27/2023	6/1/2027		228		7,948		16,060
Office		9		0.0	%			11.0	%	1/2/2029	6/15/2029		750		3,650		12,517
Subtotal		13											978		11,598		28,577

Total commercial mortgages, mezzanine loans and preferred equity interests		51										$	20,462	$	136,959	$	503,071

(2) Summary of Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests by Geographic Location:

			Interest Rate							Principal
Location by State	Number of Loans		Lowest				Highest			Lowest		Highest		Total Carrying Amount of Mortgages
Texas		12		0.0	%			14.5	%	$	228	$	22,440	$	121,846
California		9		0.0	%	(a)		7.3	%		3,150		25,307		89,606
Florida		5		4.6	%			7.5	%		3,116		17,200		40,312
Pennsylvania		2		6.7	%			7.0	%		12,585		47,106		59,691
Georgia		1		7.5	%			7.5	%		12,500		12,500		12,500
Oklahoma		1		7.2	%			7.2	%		29,478		29,478		29,478
Virginia		1		6.8	%			6.8	%		5,600		5,600		5,600
Arizona		3		6.5	%			7.5	%		5,510		8,100		20,515
Wisconsin		8		6.0	%			11.0	%		750		1,685		8,867
Alabama		1		7.3	%			7.3	%		9,400		9,400		9,400
Minnesota		1		7.3	%			7.3	%		19,995		19,995		19,995
North Carolina		1		6.8	%			6.8	%		18,000		18,000		18,000
Oregon		2		6.8	%			6.9	%		5,250		10,120		15,370
Connecticut		1		12.0	%			12.0	%		554		3,943		8,244
Tennessee		1		7.0	%			7.0	%		5,099		5,099		5,099
Various		2		5.6	%			7.5	%		299		10,000		38,548
		51		0.0	%			14.5	%	$	228	$	47,106	$	503,071

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports under our Exchange Act reports 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, or CEO, and our Chief Financial Officer, or CFO, 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. Also, projections of any evaluation of effectiveness of 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 and procedures may deteriorate.

Under the supervision of our CEO and CFO 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 CEO and CFO concluded that our disclosure controls and procedures were not effective as a result of a material weakness in our internal control over financial reporting at December 31, 2018, as described below.

Notwithstanding the material weakness discussed below, RAIT’s management, including the CEO and CFO, has concluded that our consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles.

As of December 31, 2017, we concluded that a material weakness in RAIT’s internal control over financial reporting existed and, as a result, our internal control over financial reporting was not effective. Specifically, RAIT did not conduct an effective continuous risk assessment process and monitoring activities to modify financial reporting processes and related internal controls impacted by changes in the business operations. As a result, RAIT did not have effective process level controls over the accuracy of data inputs used in the valuation of a financial liability and did not investigate and resolve the difference identified by a reconciliation control related to a financial asset.

During the fourth quarter of 2018, RAIT completed its remediation of the previously identified ineffective process level controls over the accuracy of data inputs used in the valuation of a financial liability and resolution of differences identified by a reconciliation control related to a financial asset by changing the design of the controls to be more precise in the review of the inputs to the valuation and more precise in reviewing the resolution of reconciliation differences.

RAIT also is in the process of enhancing its risk assessment process and monitoring activities to ensure timely identification of changes in business operations such that necessary changes in financial reporting processes and related internal controls continue to be implemented. Given the changes that have occurred in the business during 2018, remediation efforts to date are not yet complete and as a result we identified the material weakness described below.

Except for actions taken as described above, there were no other changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our internal control over financial reporting is a process designed by management, under the supervision of, our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii)

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 (iii) 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.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Management, under the supervision of, our CEO and CFO and oversight of our Board of Trustees, assessed the effectiveness of our internal control over financial reporting as of December 31, 2018 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 Framework). As a result of this assessment, management identified the following control deficiencies described below:

RAIT did not conduct an effective continuous risk assessment process and monitoring activities to modify financial reporting processes and related internal controls impacted by changes in the business operations. As a result, RAIT did not have effective process level controls over the accuracy of data inputs used in the measurement of an impairment for a real estate property and did not timely investigate and correct the presentation of proceeds from sales of loans within the consolidated statement of cash flows.

These control deficiencies resulted in (1) an immaterial misstatement to an investment in real estate and impairment of assets in previously reported consolidated financial statements that was corrected as an out-of-period adjustment in the consolidated financial statements during the year ended December 31, 2018 and (2) an immaterial misstatement to cash flows from operating activities and cash flows from investing activities which was recorded as an out-of-period adjustment in the consolidated financial statements during the year ended December 31, 2018. These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore we concluded that the deficiencies represent a material weakness in RAIT’s internal control over financial reporting and our internal control over financial reporting was not effective as of December 31, 2018.

This Annual Report on Form 10-K does not include an audit report of our independent registered public accounting firm regarding internal control over financial reporting. Management's Report on Internal Control Over Financial Reporting was not subject to audit by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission.

During 2019, management will continue its risk assessment and monitoring activities and testing of the enhanced controls that are further described in the “Changes in Internal Control Over Financial Reporting” section above to ensure that they are designed, implemented and operating effectively and to remediate the process level controls deficiencies identified above. As actions or transactions affecting the Company occur as a result of our 2019 strategic steps, as outlined in part I, Item 1, “Business-Business Strategy,” we will need to continue to enhance our continuous risk assessment process and monitoring activities to ensure that additional process level control deficiencies do not result.

The disclosure below is provided, at our option, regarding events which we deem of importance to our securities holders in accordance with Item 8.01 “Other Events” of Form 8-K.

RAIT is correcting a typographical error in RAIT’s disclosure in its Registration Statement on Form S-3 (Registration No. 333-217776) regarding restrictions on ownership and transfer of RAIT’s common shares contained in RAIT’s declaration of trust to assist RAIT in complying with Internal Revenue Code of 1986, as amended, by replacing the reference to “8.5%” with “8.3%” in such disclosure so that the disclosure reads “no person may own more than 8.3% of our outstanding common shares.”

The information required by this item will be set forth in our definitive proxy statement with respect to our 2019 annual meeting of shareholders to be filed on or before April 30, 2019, or if not filed by such date, in an amendment to this report filed by such date and is incorporated herein by reference.

(a) Listed below are all financial statements, financial statement schedules, and exhibits filed as part of this 10-K and herein included.

All other schedules are not applicable or are omitted since either (i) the required information is not material or (ii) the information required is included in the consolidated financial statements and notes thereto.

The exhibits filed as part of this annual report on Form 10-K are identified below.

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Maryland		23-2919819
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
Two Logan Square, 100 N. 18^th Street, 23^rd Floor Philadelphia, PA		19103
(Address of principal executive offices)		(Zip Code)

		Page No.
FORWARD LOOKING STATEMENTS		1

PART I		3
Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	47
Item 2.	Properties	47
Item 3.	Legal Proceedings	47
Item 4.	Mine Safety Disclosures	48

PART II		49
Item 5.	Market for Our Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	49
Item 6.	Selected Financial Data	49
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	131
Item 9A.	Controls and Procedures	131
Item 9B.	Other Information	132

PART III		133
Item 10.	Trustees, Executive Officers and Trust Governance	133
Item 11.	Executive Compensation	133
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	133
Item 13.	Certain Relationships and Related Transactions and Trustee Independence	133
Item 14.	Principal Accounting Fees and Services	133

PART IV		134
Item 15.	Exhibits, Financial Statement Schedules	134
Item 16.	Form 10-K Summary	142


SIGNATURES		143

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial Real Estate (CRE)
Commercial mortgages	$	453,217		6.9	%	Feb. 2019 to Jun. 2025		35
Mezzanine loans		21,278		13.3	%	Jun. 2020 to Mar. 2023		3
Preferred equity interests		28,576		6.0	%	Mar. 2023 to Jun. 2029		13
Total CRE	$	503,071		7.2	%			51

										Average Effective Rent (a)
	Investments in Real Estate		Average Physical Occupancy			Units/ Square Feet/ Acres		Number of Properties		For the Year Ended December 31, 2018		For the Year Ended December 31, 2017
Office real estate properties (b)		48,760		83.6	%		349,999		3		22.92		21.99
Retail real estate properties (b)		49,088		50.8	%		506,737		3		18.83		14.05
Parcels of land		18,744	N/A				9.2		4	N/A		N/A
Total	$	116,592		—					10

($ in millions)	RAIT I		FL 7		FL 8
Total Collateral Outstanding (Par)	$	176.7	$	224.1	$	168.0
Total Bonds Outstanding (Par)	$	181.5	$	224.1	$	168.0
Bonds Held by 3rd Parties Outstanding (Par)	$	107.0	$	158.6	$	123.8
RAIT Investment Grade Bond Ownership (Par) (1)	$	39.3	$	-	$	-
RAIT Below Investment Grade Bond Ownership (Par) (1)	$	35.2	$	65.5	$	44.2
RAIT Equity Interest Ownership (Par)	$	165.0	$	-	$	-

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

Declaration Date	Record Date	Payment Date	Dividend Paid		Ordinary Income		Qualified Dividend		Capital Gain Distribution		Unrecaptured Sec. 1250 Gain		Return of Capital
12/16/2016	1/10/2017	1/31/2017	$	0.0900	$	0.0001	$	0.0001	$	0.0011	$	0.0011	$	0.0888
5/2/2017	5/26/2017	6/15/2017		0.0900	0.0000		0.0000		0.0000		0.0000			0.0900
8/2/2017	8/25/2017	9/15/2017		0.0500	0.0000		0.0000		0.0000		0.0000			0.0500
			$	0.2300	$	0.0001	$	0.0001	$	0.0011	$	0.0011	$	0.2288

Description	For the Year Ended December 31, 2018			For the Year Ended December 31, 2017
Change in fair value of junior subordinated notes	$	(194	)	$	3,701
Change in fair value of derivatives		470			(179	)
Change in fair value of warrants and investor SARs		—			9,900
Change in fair value of financial instruments	$	276		$	13,422

December 31, 2018 Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm		66
Consolidated Balance Sheets as of December 31, 2018 and 2017		67
Consolidated Statements of Operations for the Two Years Ended December 31, 2018		68
Consolidated Statements of Comprehensive Income (Loss) for the Two Years Ended December 31, 2018		69
Consolidated Statements of Changes in Equity for the Two Years Ended December 31, 2018		70
Consolidated Statements of Cash Flows for the Two Years Ended December 31, 2018		71
Notes to Consolidated Financial Statements		72
Supplemental Schedules:
Schedule II: Valuation and Qualifying Accounts		126
Schedule III: Real Estate and Accumulated Depreciation		127
Schedule IV: Mortgage Loans on Real Estate and Mortgage Related Receivables		129

	For the Year Ended December 31,
Revenue from Contracts with customers	2018		2017
Property Management Fee income	$	1,762	$	3,108
Parking		514		1,780
Leasing Commission income		742		2,134
Other miscellaneous		952		2,526
Total	$	3,970	$	9,548

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE)
Commercial mortgage loans	$	453,283		$	(66	)	$	453,217			35		6.9	%	Feb. 2019 to Jun. 2025
Mezzanine loans		21,114			164			21,278			3		13.3	%	Jun. 2020 to Mar. 2023
Preferred equity interests		28,577			(1	)		28,576			13		6.0	%	Mar. 2023 to Jun. 2029
Total CRE (2)		502,974			97			503,071			51		7.2	%
Deferred fees and costs, net (3)		(674	)		-			(674	)
Total	$	502,300		$	97		$	502,397

	As of December 31, 2018
Delinquency Status	Current		30 to 59 days		60 to 89 days		90 days or more		Total		Non-accrual (1)
Commercial mortgage loans	$	414,735	$	—	$	—	$	38,548	$	453,283	$	46,793
Mezzanine loans		12,222		—		—		8,892		21,114		8,892
Preferred equity interests		28,577		—		—		—		28,577		37,308
Total	$	455,534	$	—	$	—	$	47,440	$	502,974	$	92,993

	Commercial		Mezzanine		Preferred equity		Total
2019		206,255		-		-		206,255
2020		225,670		8,775		-		234,445
2021		18,242		-		-		18,242
2022		-		-		-		-
2023		-		12,339		7,947		20,286
Thereafter		3,116		-		20,630		23,746
Total	$	453,283	$	21,114	$	28,577	$	502,974

	As of December 31, 2018
Credit Status	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	314,104		-	$	5,063	$	319,167
Watchlist (1)		139,179		21,114		23,514		183,807
Total	$	453,283	$	21,114	$	28,577	$	502,974

	As of December 31, 2018
Impaired Loans	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Impaired loans expecting full recovery	$	8,579	$	12,869	$	19,334	$	40,782
Impaired loans with reserves		73,438		8,245		4,180		85,863
Total Impaired Loans (1)		82,017		21,114		23,514		126,645
Allowance for loan losses	$	11,912	$	6,496	$	3,928	$	22,336

2019	$	1,946
2020		1,882
2021		2,069
2022		1,430
2023		1,591
2024 and thereafter		1,237
Total	$	10,155

	Recourse indebtedness		Non-recourse indebtedness
2019	$	65,356	$	749
2020		-		779
2021		-		39,196
2022		-		-
2023		-		-
Thereafter		100,095		436,384
Total	$	165,451	$	477,108

	As of December 31, 2018						As of December 31, 2017
	Notional		Fair Value of Assets		Fair Value of Liabilities		Notional		Fair Value of Assets		Fair Value of Liabilities

Interest rate caps	$	—	$	—	$	—	$	—	$	—	$	—
Interest rate swaps		—		—		—		12,650		11		—
Net fair value	$	—	$	—	$	—	$	12,650	$	11	$	—

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Total investment in mortgage loans, held for investment, net	$	480,061	$	444,962
Investment in mortgage loans, held for sale		4,873		4,873
Cash and cash equivalents		42,453		42,453
Restricted cash		63,067		63,067
Liabilities
Recourse indebtedness:
7.625% senior notes		55,100		41,229
7.125% senior notes		64,997		58,010
Junior subordinated notes, at fair value		6,110		6,110
Junior subordinated notes, at amortized cost		25,100		6,550
Non-recourse indebtedness:
CDO notes payable, at amortized cost		116,102		94,513
CMBS securitizations		318,008		320,711
Loans payable on real estate		40,499		40,608

Liabilities	Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2017	$	8,121		$	8,121
Change in fair value of financial instruments		(2,011	)		(2,011	)
Balance, as of December 31, 2018	$	6,110		$	6,110

Liabilities	Warrants and investor SARS			Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2016	$	30,400		$	11,822		$	42,222
Change in fair value of financial instruments		(9,900	)		(3,701	)		(13,601	)
Settlement of liability		(20,500	)		-			(20,500	)
Balance, as of December 31, 2017	$	-		$	8,121		$	8,121

	As of June 27, 2018
Assets
Commercial mortgage loans, mezzanine loans, and preferred equity interests	$	266,502
Cash and cash equivalents		189
Restricted cash		22,569
Accrued interest receivable		1,191
Other assets		1,233
Total assets	$	291,684
Liabilities
Indebtedness, net	$	205,137
Accrued interest payable		502
Accounts payable and accrued expenses		45
Borrowers' escrows		22,549
Deferred taxes and other liabilities		531
Total liabilities		228,764
Equity:
Stockholders' equity:
Noncontrolling interests		111
Total liabilities and equity	$	228,875

RAIT IV's net investment in RAIT FL5 & RAIT FL6	$	62,809
Purchase price for RAIT IV's FL5 Interests & FL6 Interests		54,632
Loss on deconsolidation of RAIT Venture VIEs, RAIT FL5 & RAIT FL6	$	(8,177	)

Liquidation preference of Series D preferred shares of RAIT prior to June 27, 2018					$	73,480

Cash received for sale of RAIT IV's interests in Holdings 2016 and Holdings 2017	$	54,632
Defined available cash held by RAIT IV		2,133
Total par amount of Series D preferred shares of RAIT redeemed	$	56,765

Fair value of Series A preferred shares of RAIT issued in exchange		2,498	(1	)
Fair value of Series B preferred shares of RAIT issued in exchange		1,091	(2	)
Fair value of Series C preferred shares of RAIT issued in exchange		776	(3	)
Total fair value of Series A, Series B and Series C preferred shares exchanged	$	4,365

Cash exchange fee	$	418

Total consideration transferred in redemption and exchange					$	61,548

Net increase to equity as a result of redemption					$	11,932

	March 31, 2018		For the Year Ended December 31, 2018
Series A Preferred Shares
Date declared	3/13/2018
Record date	3/23/2018
Date paid	3/30/2018
Total dividend amount	$	2,589	$	2,589
Series B Preferred Shares
Date declared	3/13/2018
Record date	3/23/2018
Date paid	3/30/2018
Total dividend amount	$	1,225	$	1,225
Series C Preferred Shares
Date declared	3/13/2018
Record date	3/23/2018
Date paid	3/30/2018
Total dividend amount	$	910	$	910
Series D Preferred Shares
Date declared	3/13/2018
Record date	3/23/2018
Date paid	3/30/2018
Total dividend amount	$	1,665	$	1,665

	2018					2017
	SARs			Weighted Average Exercise Price		SARs			Weighted Average Exercise Price
Outstanding, January 1,		72,859		$	284.11		81,020		$	303.07
Granted		—			—		16,650			189.00
Expired		(34,737	)		323.52		(20,081	)		306.01
Exercised		—			—		(1,166	)		119.00
Forfeited		(9,695	)		169.91		(3,563	)		201.23
Outstanding, December 31,		28,427		$	274.90		72,859		$	284.11
SARs exercisable at December 31,		21,379			310.33		41,888			346.46


	2017
Weighted average grant date fair value	$	38.00
Stock Price		189.00
Strike Price		189.00
Risk-free interest rate		1.6	%
Dividend yield		9.5	%
Volatility		43	%
Expected term	3.5 years

	2018					2017
	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Number of Shares			Weighted Average Grant Date Fair Value Per Share
Balance, January 1,		24,930		$	177.96		21,584		$	200.00
Granted		—			—		22,986			159.06
Vested		(10,115	)		197.87		(14,044	)		189.40
Forfeited		(7,954	)		163.62		(5,596	)		173.73
Balance, December 31,		6,861		$	165.38		24,930		$	177.96

Grant Date	Type of PSUs Granted	Number of PSUs Granted		Performance Period Commencement Date	Performance Period End Date	Grant Date Fair Value		Number of PSUs Outstanding as of December 31, 2018
April 26, 2017	3-Year TSR vs NAREIT Mortgage Index		3,017	January 1, 2017	December 31, 2019	$	59.00		318
April 26, 2017	Absolute 3-Year TSR		3,017	January 1, 2017	December 31, 2019	$	45.00		318
June 22, 2017	3-Year TSR vs NAREIT Mortgage Index		3,664	January 1, 2017	December 31, 2019	$	11.50		-
June 22, 2017	Absolute 3-Year TSR		3,664	January 1, 2017	December 31, 2019	$	7.50		-


	2017 a)		2017 b)
Dividend yield	10.7%	c)	14.5%	e)
Volatility	41.0%	d)	39.0%	f)
Expected term	2.7 years		2.5 years

	For the Year Ended December 31, 2018
	Federal			State and Local			Foreign		Total
Current benefit (provision)	$	206		$	(172	)	$	—	$	34
Deferred benefit (provision)		(220	)		—			—		(220	)
Income tax benefit (provision)	$	(14	)	$	(172	)	$	—	$	(186	)

	For the Year Ended December 31, 2017
	Federal			State and Local			Foreign		Total
Current benefit (provision)	$	64		$	220		$	—	$	284
Deferred benefit (provision)		583			(6	)		—		577
Income tax benefit (provision)	$	647		$	214		$	—	$	861

	For the Years Ended December 31
	2018			2017
Federal tax at statutory tax rate	$	25,887		$	53,434
Adjustment for non-taxable earnings for RAIT Financial Trust		(25,620	)		(46,209	)
Subtotal: Federal statutory rate of TRS		267			7,224
State statutory, net of federal benefit		—			214
Loss limited by ownership change		(640	)		(18,795	)
Change in valuation allowance		418			16,746
Permanent items		(21	)		(2,924	)
Change in Tax Rate		(38	)		(1,668	)
Provision to return adjustments		(172	)		64
Other		—			—
Income tax benefit (provision)	$	(186	)	$	861

Deferred tax assets (liabilities):	As of December 31, 2018			As of December 31, 2017
Net operating losses, at TRSs	$	1,647		$	—
Capital losses		—			—
Unrealized losses		—			—
Other		708			2,322
Total deferred tax assets		2,355			2,322
Valuation allowance		(2,328	)		(1,778	)
Net deferred tax assets	$	27		$	544
Identified intangibles		—			—
Advances		—			—
Accrued interest		—			—
Other		(57	)		(91	)
Deferred tax (liabilities)		(57	)		(91	)
Net deferred tax assets (liabilities)	$	(30	)	$	454

	Allowance for Losses
	Balance, Beginning of Period		Provision		Deductions			Balance, End of Period

For the year ended December 31, 2018	$	14,883	$	32,875	$	(25,422	)	$	22,336
For the year ended December 31, 2017	$	12,354	$	45,614	$	(43,085	)	$	14,883

Investments in Real Estate	For the Year Ended December 31, 2018			For the Year Ended December 31, 2017
Balance, beginning of period	$	274,672		$	854,646
Additions during period:
Acquisitions		—			1,118
Improvements to land and building		2,684			9,362
Deductions during period:
Dispositions, impairments and deconsolidation of real estate		(160,764	)		(590,454	)
Balance, end of period:	$	116,592		$	274,672

Accumulated Depreciation	For the Year Ended December 31, 2018			For the Year Ended December 31, 2017
Balance, beginning of period	$	28,768		$	138,214
Depreciation expense		7,356			20,422
Dispositions and deconsolidation of real estate		(27,356	)		(129,868	)
Balance, end of period:	$	8,768		$	28,768