Use of Special Purpose Entities and Variable Interest Entities

The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

The Company has entered into resecuritization and financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in accordance with ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. The Company evaluated the following resecuritization or financing transactions: 1) its Residential CDOs; 2) its multi-family CMBS re-securitization transaction and 3) its distressed residential mortgage loan securitization transaction (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company continues to consolidate the Financing VIEs as of June 30, 2017.

The Company invests in multi-family CMBS consisting of PO securities that represent the first loss tranche of the securitizations from which they were issued, and certain IOs and mezzanine CMBS securities issued from Freddie Mac-sponsored multi-family K-Series securitization trusts. The Company has evaluated these CMBS investments in Freddie Mac-sponsored K-Series securitization trusts to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that the Freddie Mac-sponsored multi-family K-Series securitization trusts are VIEs as of June 30, 2017 and December 31, 2016, respectively. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying condensed consolidated financial statements (see Notes 2 and 6). Of the Company’s multi-family CMBS investments included in the Consolidated K-Series, five and four of these investments are not deposited as collateral to any Financing VIE as of June 30, 2017 and December 31, 2016.

In analyzing whether the Company is the primary beneficiary of the Consolidated K-Series and the Financing VIEs, the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:


•	whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and


•	whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.

On May 16, 2016, the Company acquired the remaining outstanding membership interests in RBDHC, resulting in the Company's 100% ownership of RBDHC. RBDHC owns 50% of KRVI, a limited liability company that owns developed land and residential homes under development in Kiawah Island, SC, for which RiverBanc is the manager. The Company has evaluated KRVI to determine if it is a VIE and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that KRVI is a VIE for which RBDHC is the primary beneficiary as the Company, collectively through its wholly-owned subsidiaries RiverBanc and RBDHC, has both the power to direct the activities that most significantly impact the economic performance of KRVI and has a right to receive benefits or absorb losses of KRVI that could be potentially significant to KRVI. Accordingly, the Company has consolidated KRVI in its condensed consolidated financial statements with a non-controlling interest for the third-party ownership of KRVI membership interests.

On March 31, 2017, (the "Changeover Date"), the Company reconsidered its evaluation of its variable interests in Riverchase Landing and The Clusters, two variable interest entities that each own a multi-family apartment community and each in which the Company holds a preferred equity investment. The Company determined that it gained the power to direct the activities of, and became primary beneficiary of, Riverchase Landing and The Clusters on the Changeover Date. Prior to the Changeover Date, the Company accounted for Riverchase Landing as an investment in an unconsolidated entity and for The Clusters as a preferred equity investment. The Company does not have any claims to the assets or obligations for the liabilities of Riverchase Landing and The Clusters.

On the Changeover Date, the Company consolidated Riverchase Landing and The Clusters into its condensed consolidated financial statements. These transactions were accounted for by applying the acquisition method for business combinations.

The estimated Changeover Date fair value of the consideration transferred totaled $12.5 million, which consisted of the estimated fair value of the Company's preferred equity investments in both Riverchase Landing and The Clusters. The Company determined the estimated fair value of its preferred equity investments in Riverchase Landing and The Clusters using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

The following table summarizes the estimated fair values of the assets and liabilities of Riverchase Landing and The Clusters at the Changeover Date (dollar amounts in thousands). The estimated fair values shown below are provisional measurements that are based upon preliminary financial information provided by Riverchase Landing and The Clusters and are subject to change.



Cash	$	112
Operating real estate	62,322
Lease intangibles ⁽¹⁾	5,340
Receivables and other assets	2,260
Total assets	70,034

Mortgages payable	51,570
Accrued expenses and other liabilities	1,519
Total liabilities	53,089

Non-controlling interest ⁽²⁾	4,462
Net assets consolidated	$	12,483


⁽¹⁾	Included in receivables and other assets on the condensed consolidated balance sheets.


⁽²⁾	Represents third party ownership of membership interests in Riverchase Landing and The Clusters. The fair value of the non-controlling interests in Riverchase Landing and The Clusters, both private companies, was estimated using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

The Consolidated K-Series, the Financing VIEs, KRVI, Riverchase Landing and The Clusters are collectively referred to in this footnote as "Consolidated VIEs".

The following tables present a summary of the assets and liabilities of these Consolidated VIEs as of June 30, 2017 and December 31, 2016, respectively. Intercompany balances have been eliminated for purposes of this presentation.

Assets and Liabilities of Consolidated VIEs as of June 30, 2017 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitization ⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS ⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	562	$	562
Investment securities available for sale, at fair value held in securitization trusts	45,400		—		—		—		—		45,400
Residential mortgage loans held in securitization trusts (net)	—		—		85,911		—		—		85,911
Distressed residential mortgage loans held in securitization trust (net)	—		152,621		—		—		—		152,621
Multi-family loans held in securitization trusts, at fair value	1,186,825		—		—		7,281,279		—		8,468,104
Operating real estate held in consolidated variable interest entities, net	—		—		—		—		28,907		28,907
Real estate held for sale in consolidated variable interest entities	—		—		—		—		34,806		34,806
Receivables and other assets	4,238		11,320		882		24,103		23,931		64,474
Total assets	$	1,236,463	$	163,941	$	86,793	$	7,305,382	$	88,206	$	8,880,785

Residential collateralized debt obligations	$	—	$	—	$	82,313	$	—	$	—	$	82,313
Multi-family collateralized debt obligations, at fair value	1,125,911		—		—		6,944,027		—		8,069,938
Securitized debt	28,735		81,237		—		—		—		109,972
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		55,849		55,849
Accrued expenses and other liabilities	4,220		1,811		24		23,877		1,758		31,690
Total liabilities	$	1,158,866	$	83,048	$	82,337	$	6,967,904	$	57,607	$	8,349,762

⁽¹⁾

The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).

⁽²⁾

The Company engaged in this transaction for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of performing, re-performing and, to a lesser extent, non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Balances as of June 30, 2017 were related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company held 5% of the Class A Notes issued as part of the securitization transaction, which were eliminated in consolidation.


⁽³⁾	Five of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series were not held in a Financing VIE as of June 30, 2017.

Assets and Liabilities of Consolidated VIEs as of December 31, 2016 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitization ⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS ⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	186	$	186
Investment securities available for sale, at fair value held in securitization trusts	43,897		—		—		—		—		43,897
Residential mortgage loans held in securitization trusts (net)	—		—		95,144		—		—		95,144
Distressed residential mortgage loans held in securitization trust (net)	—		195,347		—		—		—		195,347
Multi-family loans held in securitization trusts, at fair value	1,196,835		—		—		5,743,009		—		6,939,844
Receivables and other assets	4,420		13,610		912		19,753		17,759		56,454
Total assets	$	1,245,152	$	208,957	$	96,056	$	5,762,762	$	17,945	$	7,330,872

Residential collateralized debt obligations	$	—	$	—	$	91,663	$	—	$	—	$	91,663
Multi-family collateralized debt obligations, at fair value	1,137,002		—		—		5,487,894		—		6,624,896
Securitized debt	28,332		130,535		—		—		—		158,867
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		1,588		1,588
Accrued expenses and other liabilities	4,400		1,336		20		19,753		13		25,522
Total liabilities	$	1,169,734	$	131,871	$	91,683	$	5,507,647	$	1,601	$	6,902,536

⁽¹⁾

⁽²⁾

The Company engaged in this transaction for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of performing, re-performing and, to a lesser extent, non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Balances as of December 31, 2016 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the Class A Notes issued as part of the securitization transaction, which have been eliminated in consolidation.

⁽³⁾

Four of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2016. In October 2016, the Company repaid $55.9 million of outstanding notes from its November 2013 collateralized recourse financing, which was comprised of securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. In connection with the repayment of the notes, the Company terminated and de-consolidated the Financing VIE that facilitated this financing transaction and securities serving as collateral on the notes were transferred back to the Company.

The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS and distressed residential mortgage loans (dollar amounts in thousands):



	Multi-family CMBS Re-securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitizations
Principal Amount at June 30, 2017	$	33,450	$	82,347
Principal Amount at December 31, 2016	$	33,553	$	132,319
Carrying Value at June 30, 2017 ⁽²⁾	$	28,735	$	81,237
Carrying Value at December 31, 2016 ⁽²⁾	$	28,332	$	130,535
Pass-through rate of Notes issued	5.35%		4.00%

⁽¹⁾

The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-family CMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note issued in this re-securitization transaction have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations and warranties. The Company will receive all remaining cash flow, if any, through its retained ownership.


⁽²⁾	Classified as securitized debt in the liability section of the Company’s accompanying condensed consolidated balance sheets, net of debt issuance costs.

The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of June 30, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



Scheduled Maturity (principal amount)	June 30, 2017			December 31, 2016
Within 24 months	$	82,347		$	—
Over 24 months to 36 months	—			132,319
Over 36 months	33,450			33,553
Total outstanding principal	115,797			165,872
Discount	(4,868		)	(5,589		)
Debt Issuance Cost	(957		)	(1,416		)
Carrying value	$	109,972		$	158,867

There is no guarantee that the Company will receive any cash flows from these securitization trusts.

Residential Mortgage Loan Securitization Transaction

The Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussed above) since inception; the first three were accounted for as permanent financings and have been included in the Company’s accompanying condensed consolidated financial statements. The fourth was accounted for as a sale and accordingly, is not included in the Company’s accompanying condensed consolidated financial statements.

Unconsolidated VIEs

The Company has evaluated its multi-family CMBS investments in two Freddie Mac-sponsored K-Series securitizations as of June 30, 2017 and December 31, 2016, respectively, and its mezzanine loan, preferred equity and other equity investments to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that, except for Riverchase Landing and The Clusters, it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. The following tables present the classification and carrying value of unconsolidated VIEs as of June 30, 2017 and December 31, 2016 (dollar amounts in thousands):



	June 30, 2017
	Investment securities, available for sale, at fair value		Receivables and other assets		Mezzanine loan and preferred equity investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	45,400	$	74	$	—	$	—	$	45,474
Mezzanine loan on multi-family properties	—		—		12,300		—		12,300
Preferred equity investment on multi-family properties	—		—		87,907		10,155		98,062
Equity investment in entities that invest in multi-family properties	—		—		—		23,552		23,552
Total assets	$	45,400	$	74	$	100,207	$	33,707	$	179,388



	December 31, 2016
	Investment securities, available for sale, at fair value		Receivables and other assets		Mezzanine loan and preferred equity investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	43,897	$	74	$	—	$	—	$	43,971
Mezzanine loan on multi-family properties	—		—		18,881		—		18,881
Preferred equity investment on multi-family properties	—		—		81,269		18,928		100,197
Equity investment in entities that invest in multi-family properties	—		—		—		22,252		22,252
Total assets	$	43,897	$	74	$	100,150	$	41,180	$	185,301

Our maximum loss exposure on the multi-family CMBS investments, mezzanine loan and equity investments is approximately $179.4 million and $185.3 million at June 30, 2017 and December 31, 2016, respectively. The Company’s maximum exposure does not exceed the carrying value of its investments.