VARIABLE INTEREST ENTITIES

9 Months Ended

Sep. 30, 2013

Variable Interest Entities [Abstract]

VARIABLE INTEREST ENTITIES

VARIABLE INTEREST ENTITIES

In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. The Company has variable interests in VIEs through its management contracts and investments in various securitization entities, including CDO issuers. Since the Company serves as the asset manager for the investment entities it sponsored and manages, the Company is generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by the Company, the Company will perform an additional qualitative analysis to determine if its interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, the Company compares the benefits it would receive (in the optimistic scenario) or the losses it would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by the Company were significant as compared to total benefits and losses absorbed by all variable interest holders, then the Company would conclude it is the primary beneficiary.

VIEs not consolidated

The Company’s investments in the Trapeza entities and asset-backed securities (“Ischus entities”), were all determined to be VIEs that the Company does not consolidate as it does not have the obligation of, or right to, losses or earnings that would be significant to those entities.  Except for those advances, the Company has not provided financial or other support to these VIEs and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at September 30, 2013.

The following table presents the carrying amounts of the assets in the Company's consolidated balance sheets that relate to the Company's variable interests in identified non-consolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at September 30, 2013 (in thousands):

	Receivables from Managed Entities and Related Parties, Net (1)		Investments		Maximum Exposure to Loss in Non-consolidated VIEs
RRE Opportunity REIT	$	208	$	2,549	$	2,757
Trapeza entities	—		898		898
Ischus entities	180		—		180
	$	388	$	3,447	$	3,835

(1) Exclusive of expense reimbursements due to the Company.

Consolidated VIE - RSO

The Company determined that it was the primary beneficiary of RSO, as it has the power to direct the activities of RSO that most significantly impact RSO’s economic performance, and the obligation to absorb losses/right to receive benefits from RSO that could potentially be significant to RSO. As part of its analysis the Company evaluated its duties under the terms of the management agreement and the voting rights provided to RSO’s shareholders which include the right to elect the Company’s board of directors and the ability to terminate the management agreement. The Company concluded that the fee paid to the manager in the event of a termination and the Company’s role in managing the operations of RSO resulted in the Company having the power to direct, as defined in FASB ASC Topic 810. Additionally, the Company prepared a quantitative analysis to measure the management/incentive fees and the Company’s equity ownership position in RSO relative to the anticipated economic performance of RSO. The Company determined its benefits could be significant and therefore concluded that the Company is the primary beneficiary and should consolidate RSO. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse against the assets of the Company.

The following reflects the detail of the assets and liabilities and operations of RSO, which the Company consolidated and included in its consolidated balance sheets and statements of operations.

RSO Balance Sheet detail (in thousands):

	September 30, 2013			December 31, 2012
	(Unaudited)			(Unaudited)
ASSETS (1)
Cash and cash equivalents	$	144,463		$	85,278
Restricted cash	59,195			94,112
Subtotal - Cash and cash equivalents	203,658			179,390
Investment securities, trading	12,099			24,843
Investment securities available-for-sale, pledged as collateral, at fair value	173,994			195,200
Investment securities available-for-sale, at fair value	46,690			36,390
Subtotal - Investments, at fair value	232,783			256,433
Loans held for sale	332,351			48,894
Loans, pledged as collateral and net of allowances of $12.9 million and $17.7 million	1,305,739			1,793,780
Loans receivable–related party	8,067			8,324
Subtotal - Loans before eliminations	1,646,157			1,850,998
Eliminations	(1,570		)	(1,570		)
Subtotal - Loans	1,644,587			1,849,428
Investment in real estate	55,144			75,386
Investments in unconsolidated entities	72,955			45,413
Subtotal - Investments in real estate and unconsolidated entities before eliminations	128,099			120,799
Eliminations	—			(93		)
Subtotal - Investments in real estate and unconsolidated entities	128,099			120,706
Linked transactions, net at fair value	29,978			6,835
Interest receivable	8,078			7,763
Deferred tax asset	3,268			2,766
Principal paydown receivable	7			25,570
Intangible assets	11,728			13,192
Prepaid expenses	4,961			10,396
Other assets	4,347			4,109
Subtotal - Other assets before eliminations	62,367			$	70,631
Eliminations	(26		)	(31		)
Subtotal - Other assets	62,341			$	70,600
Total assets - before eliminations	$	2,273,064		$	2,478,251
Total assets - after eliminations	$	2,271,468		$	2,476,557
LIABILITIES (2)
Borrowings	$	1,422,430		$	1,785,600
Distribution payable	26,796			21,655
Accrued interest expense	2,708			2,918
Derivatives, at fair value	12,208			14,687
Accrued tax liability	4,989			13,641
Deferred tax liability	7,690			8,376
Accounts payable and other liabilities	12,829			18,029
Subtotal - other liabilities before eliminations	67,220			79,306
Eliminations	(4,265		)	(8,067		)
Subtotal - Other liabilities	62,955			71,239
Total liabilities - before eliminations	$	1,489,650		$	1,864,906
Total liabilities - after eliminations	$	1,485,385		$	1,856,839

The following table presents the details of noncontrolling interests attributable to RSO (in thousands):

	September 30, 2013			December 31, 2012
	(Unaudited)			(Unaudited)
Total stockholders' equity per RSO balance sheet	$	783,414		$	613,345
Eliminations	(31,474		)	(31,022		)
Noncontrolling interests attributable to RSO	$	751,940		$	582,323

RSO Balance Sheet detail (in thousands):

	September 30, 2013		December 31, 2012
	(Unaudited)		(Unaudited)
(1) Assets of consolidated VIEs of RSO included in the total assets above:
Restricted cash	$	53,752	$	90,108
Investments securities available-for-sale, pledged as collateral, at fair value	110,993		135,566
Loans held for sale	332,351		14,894
Loans, pledged as collateral and net of allowances of $7.3 million and $15.2 million	981,513		1,678,719
Interest receivable	5,506		5,986
Prepaid expenses	254		328
Principal receivable	7		25,570
Other assets	35		333
Total assets of consolidated RSO VIEs	$	1,484,411	$	1,951,504
(2) Liabilities of consolidated VIEs of RSO included in the total liabilities above:
Borrowings	$	1,166,209	$	1,614,882
Accrued interest expense	2,184		2,666
Derivatives, at fair value	11,766		14,078
Accounts payable and other liabilities	646		698
Total liabilities of consolidated RSO VIEs	$	1,180,805	$	1,632,324

RSO Income Statement Detail

(in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUES
Interest income:
Loans	$	24,374		$	24,130		$	78,370		$	70,757
Securities	3,411			3,564			10,949			10,520
Interest income − other	649			2,218			3,150			8,204
Total interest income	28,434			29,912			92,469			89,481
Interest expense	11,762			8,208			34,061			25,460
Net interest income	16,672			21,704			58,408			64,021
Rental income	4,649			2,689			15,875			6,642
Dividend income	223			17			256			51
Equity in losses of unconsolidated subsidiaries	(505		)	(779		)	(858		)	(1,469		)
Fee income	1,245			1,777			4,182			5,528
Net realized and unrealized gain on sales of investment securities available-for-sale and loans	570			346			3,355			2,148
Net realized and unrealized (loss) gain on investment securities, trading	(229		)	9,782			(864		)	13,350
Unrealized gain (loss) and net interest income on linked transactions, net	1,161			133			(4,343		)	386
Revenues from consolidated VIE - RSO	23,786			35,669			76,011			90,657
OPERATING EXPENSES
Management fees − related party	5,113			5,521			11,006			13,512
Equity compensation − related party	2,120			1,404			7,866			3,412
Professional services	1,396			845			3,745			2,562
Insurance	214			161			588			478
Rental operating expense	3,523			1,827			11,084			4,456
General and administrative	1,288			844			4,428			3,377
Depreciation and amortization	904			1,249			3,041			3,974
Income tax expense	722			3,979			4,221			6,978
Net impairment losses recognized in earnings	255			9			811			180
Provision for loan losses	741			1,370			541			7,801
Total operating expenses	16,276			17,209			47,331			46,730
Reclassification of income tax provision	(722		)	(3,979		)	(4,221		)	(6,978		)
Expenses from consolidated VIE - RSO	15,554			13,230			43,110			39,752
Adjusted operating income	8,232			22,439			32,901			50,905
OTHER REVENUE (EXPENSE)
Gain on the extinguishment of debt	—			—			—			5,464
Gain on sale of real estate	16,607			—			16,607			—
Other income from consolidated VIE - RSO	16,607			—			16,607			5,464
Income from continuing operations	24,839			22,439			49,508			56,369
Income tax provision - RSO	722			3,979			4,221			6,978
NET INCOME	24,117			18,460			45,287			49,391
Net income allocated to preferred shares	(1,996		)	(308		)	(5,107		)	(333		)
NET INCOME ALLOCABLE TO RSO COMMON SHARES	$	22,121		$	18,152		$	40,180		$	49,058

RSO Summarized Cash Flow Detail

(in thousands)

	Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:	(Unaudited)			(Unaudited)
Net income (1)	$	45,287		$	49,391
Line items included in "Change in cash attributable to consolidated VIE - RSO":
Provision for loan losses	541			7,801
Depreciation of investments in real estate and other	1,638			1,264
Amortization of intangible assets	1,463			2,709
Amortization of term facilities	876			710
Accretion of net discounts on loans held for investment	(8,306		)	(10,738		)
Accretion of net discounts on securities available-for-sale	(1,925		)	(2,444		)
Amortization of discount on notes of CDOs	3,937			1,037
Amortization of debt issuance costs on notes of CDOs	2,868			3,330
Amortization of stock-based compensation	7,866			3,412
Amortization of terminated derivative instruments	322			169
Distribution accrued to preferred stockholders	(5,107		)	—
Accretion of interest-only available-for-sales securities	(714		)	(463		)
Deferred income tax provision (benefit)	502			(1,315		)
Purchase of securities, trading	(11,044		)	(8,348		)
Principal payments on securities, trading	4,211			981
Proceeds from sales of securities, trading	18,713			33,579
Net realized and unrealized loss (gain) on investment securities, trading	864			(13,350		)
Net realized gain on sales of investment securities available-for-sale and loans	(3,355		)	(2,148		)
Gain on early extinguishment of debt	—			(5,464		)
Gain on sale of real estate	(16,607		)	—
Net impairment losses recognized in earnings	802			180
Linked transactions fair value adjustments	5,224			—
Equity in losses of unconsolidated subsidiaries	858			1,469
Changes in operating assets and liabilities	17,434			(9,504		)
Subtotal - net cash provided by operating activities (1)	21,061			2,867
Change in consolidated VIE - RSO cash for the period	(59,185		)	(69,616		)
Subtotal -Change in cash attributable to operations of consolidated VIE - RSO before eliminations	(38,124		)	(66,749		)
Elimination of intercompany activity	(291		)	661
Subtotal - Change in cash attributable to operations of consolidated VIE - RSO	(38,415		)	(66,088		)
Non-cash incentive compensation to RAI (1)	484			814
Elimination of intercompany activity	(484		)	(814		)
Non-cash incentive compensation to RAI - after eliminations	—			—
Net cash provided by operating activities (excluding eliminations)	66,832			53,072

	Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM INVESTING ACTIVITIES:	(Unaudited)			(Unaudited)
Purchase of loans	(555,051		)	(479,172		)
Purchase of securities available-for-sale	(120,599		)	(70,654		)
Subtotal - purchase of loans and investment securities by consolidated VIE - RSO	(675,650		)	(549,826		)
Proceeds from sale of loans	314,112			139,708
Principal payments received on loans	487,606			356,866
Principal payments on securities available-for-sale	33,010			36,365
Proceeds from sale of securities available-for-sale	7,025			6,719
Principal payments received on loans – related parties	499			459
Subtotal - principal payments and proceeds from sale of loans and securities by consolidated VIE - RSO	842,252			540,117
Decrease in restricted cash	30,079			85,413
Lines included in "Other - consolidated VIE - RSO":
Investment in unconsolidated entity	(25,508		)	(725		)
Equity contribution to VIE	—			(710		)
Minority interest equity	2,200			1,979
Improvement of  real estate held-for-sale	(404		)	(138		)
Proceeds from sale of real estate held-for-sale	37,001			2,886
Distributions from investments in real estate	522			1,152
Improvements in investments in real estate	(365		)	(852		)
Purchase of furniture and fixtures	(128		)	—
Subtotal - other investing activities of consolidated VIE, before eliminations	13,318			3,592
Eliminations	28			43
Subtotal - other investing activities of consolidated VIE	13,346			3,635
Net cash provided by investing activities (excluding eliminations)	209,999			79,296
CASH FLOWS FROM FINANCING ACTIVITIES:
Items included in "Net borrowings (repayments) of debt by consolidated VIE - RSO":
Proceeds from borrowings:
Repurchase agreements	143,203			33,820
Payments on borrowings:
Collateralized debt obligations	(450,437		)	(156,989		)
Mortgage payable	(13,600		)	—
Retirement of debt	—			(4,850		)
Net repayments of debt by consolidated VIE - RSO:	(320,834		)	(128,019		)
Distributions paid on common stock	(68,010		)	(54,231		)
Elimination of RAI dividend received	1,669			1,543
Distribution paid on RSO common stock, after eliminations	(66,341		)	(52,688		)
Items included in "Net proceeds from issuance of stock by consolidated VIE - RSO":
Net proceeds from issuances of common stock (net of offering costs of $4,265 and $2,165)	114,018			55,502
Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0 and $19)	19,092			50,424
Proceeds from issuance of 8.5% Series A redeemable preferred shares (net of offering costs of $3 and $781)	112			16,411
Proceeds from issuance of 8.25% Series B redeemable preferred shares (net of offering costs of $1,091 and $0)	51,057			—
Subtotal - Net proceeds from issuance of stock by consolidated VIE - RSO	184,279			122,337
Items included in "Other - consolidated VIE - RSO" in financing section:
Payment of debt issuance costs	(1,740		)	(586		)
Payment of equity to third party sub-note holders	(6,952		)	(2,160		)
Distributions paid on preferred stock	(4,389		)	(93		)
Subtotal - Other consolidated VIE -RSO financing activity	(13,081		)	(2,839		)
Net cash used in financing activities (excluding eliminations)	$	(217,646	)	$	(62,752	)

NET INCREASE IN CASH AND CASH EQUIVALENTS	59,185		69,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	85,278		43,116
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	144,463	$	112,732
SUPPLEMENTAL DISCLOSURE:
Interest expense paid in cash	$	28,391	$	24,209

A. RSO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investment Securities

RSO classifies its investment portfolio as trading or available-for-sale.  RSO, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.

RSO’s investment securities, trading are reported at fair value.  To determine fair value, RSO's management uses an independent third-party valuation firm utilizing appropriate prepayment, default, and recovery rates.  These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Any changes in fair value are recorded in RSO’s results of operations as net realized and unrealized gain on investment securities, trading.

RSO’s investment securities available-for-sale are reported at fair value.  To determine fair value, RSO uses an independent third-party valuation firm utilizing market color as well as appropriate prepayment, default, and recovery rates.  These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Based on the market color available for each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.

On a quarterly basis, RSO evaluates its available-for-sale investments for other-than-temporary impairment.  An available-for-sale investment is impaired when its fair value has declined below its amortized cost basis.  An impairment is considered other-than-temporary when the amortized cost basis of the investment or some portion thereof will not be recovered.  In addition, RSO’s intent to sell as well as the likelihood that RSO will be required to sell the security before the recovery of the amortized cost basis is considered.  Where credit quality is believed to be the cause of the other-than-temporary impairment, that component of the impairment is recognized as an impairment loss in the statement of operations.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.

Investment security transactions are recorded on the trade date.  Realized gains and losses on investment securities are determined on the specific identification method.

Investment Interest Income Recognition

Interest income on RSO’s mortgage-backed and other asset-backed securities is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets.  Premiums and discounts are amortized or accreted into interest income over the lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments.  For an investment purchased at par, the effective yield is the contractual interest rate on the investment.  If the investment is purchased at a discount or at a premium, the effective yield is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium.  The effective yield method requires RSO to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium can be amortized, over the estimated remaining life of the investment.  The prepayment estimates that RSO uses directly impact the estimated remaining lives of its investments.  Actual prepayment estimates are reviewed as of each quarter end or more frequently if RSO becomes aware of any material information that would lead it to believe that an adjustment is necessary.  If prepayment estimates are incorrect, the amortization or accretion of premiums and discounts may have to be adjusted, which would have an impact on future income.

Allowance for Loan Loss

RSO maintains an allowance for loan loss.  Loans held for investment are first individually evaluated for impairment so specific reserves can be applied.  Loans for which a specific reserve is not applicable are then evaluated for impairment as a homogeneous pool of loans with substantially similar characteristics so that a general reserve can be established, if needed.  The reviews are performed at least quarterly.

RSO considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that RSO will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  These TDRs may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and / or guarantees made by the borrowers.

When a loan is impaired under either of these two conditions, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value.  Fair value may be determined based on the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs.  When a loan, or a portion thereof, is considered uncollectible and pursuit of collection is not warranted, RSO will record a charge-off or write-down of the loan against the allowance for loan losses.

An impaired loan may remain on accrual status during the period in which RSO is pursuing repayment of the loan; however, the loan would be placed on non-accrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the loan’s underlying collateral approximates RSO’s carrying value for such loan.  While on non-accrual status, RSO recognizes interest income only when an actual payment is received.

Investments in Real Estate

Investments in real estate are carried net of accumulated depreciation.  Costs directly related to the acquisition are expensed as incurred.  Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Costs related to the improvement of the real property are capitalized and depreciated over their useful lives.

Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.”  RSO allocates the purchase price of its investments in real estate to land, building, site improvements, the value of in-place leases and the value of above or below market leases. The value allocated to above or below market leases is amortized over the remaining lease term as an adjustment to rental income. RSO amortizes the value allocated to in-place leases over the weighted average remaining lease term to depreciation and amortization expense.  RSO depreciates real property using the straight-line method over the estimated useful lives of the assets as follows:

Category	Term
Building	25 – 40 years
Site improvements	Lesser of the remaining life of building or useful lives

Long-Lived and Intangible Assets

Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets 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.  If impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.

There were no impairment charges recorded on RSO’s investment in real estate or intangible assets during the three and nine months ended September 30, 2013 and 2012.

B. Variable Interest Entities - RSO

RSO has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes) and its CDOs in order to determine if they qualify as VIEs. RSO monitors these investments and, to the extent it has determined that it owns a material investment in the current controlling class of securities of a particular entity, analyzes the entity for potential consolidation. RSO will continually analyze investments and liabilities, including when there is a reconsideration event, to determine whether such investments or liabilities are VIEs and whether any such VIE should be consolidated. This analysis requires considerable judgment in determining the primary beneficiary of a VIE and could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would have otherwise been consolidated.

Consolidated VIEs (RSO is the primary beneficiary)

Based on management’s analysis, RSO is the primary beneficiary of seven VIEs at September 30, 2013: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1 and Whitney CLO I. In performing the primary beneficiary analysis for six of these VIEs (other than Whitney CLO I, which is discussed below), it was determined that the persons that have the power to direct the activities that are most significant to each of these VIEs and RSO who has the right to receive benefits and the obligation to absorb losses that could potentially be significant to these VIEs, are a related party group. It was then determined that RSO was the party within that group that is more closely associated to each such VIE because of its preferred equity (and in some cases debt) interest in them.

These CDO and CLO entities were formed on behalf of RSO (except for Whitney CLO I, referred to below) to invest in real estate-related securities, CMBS, property available-for-sale, bank loans, corporate bonds and asset-backed securities, ("ABS"), and were financed by the issuance of debt securities. CVC Credit Partners manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of CDO and CLO bonds, RSO seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception.

Whitney CLO I, the seventh consolidated VIE, is one in which RSO acquired the rights to manage the assets held by the entity as collateral for its CLOs in February 2011. For a discussion on the primary beneficiary analysis for Whitney CLO I see the section "Resource Capital Asset Management CLOs" below.

For CLOs in which RSO does not own 100% of the subordinated notes, RSO imputes an interest rate using expected cash flows over the life of the CLO and records the third party's share of the cash flows as interest expense on the RSO consolidated statement of income.

RSO has exposure to CDO and CLO losses to the extent of its subordinated debt and preferred equity interests in them. RSO is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the CDO or CLO, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these CDOs and CLOs have been eliminated, and RSO’s consolidated balance sheet reflects both the assets held and debt issued by the CDOs and CLOs to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to CDO and CLO assets and liabilities as opposed to RSO's net economic interests in the CDO and CLO entities. Assets and liabilities related to the CDOs and CLOs are disclosed, in the aggregate, on RSO's consolidated balance sheets.

The creditors of RSO’s seven consolidated VIEs have no recourse to the general credit of RSO. However, in its capacity as manager, RSO has voluntarily supported two credits in one of its commercial real estate CDOs as the credits went through a restructuring in order to maximize their future cash flows. For the three and nine months endedSeptember 30, 2012, RSO has provided financial support of $0 and $199,000, respectively. For the three and nine months endedSeptember 30, 2013, RSO has provided no financial support. RSO has provided no financial support to any of its other VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by RSO. There are no explicit arrangements or implicit variable interests that obligate RSO to provide financial support to any of its consolidated VIEs, although RSO may choose to do so in the future.

The following table shows the classification and carrying value of assets and liabilities of consolidated RSO VIEs as of September 30, 2013 (in thousands):

	Apidos I			Apidos III		Apidos Cinco		Apidos VIII		Whitney CLO I			RREF 2006		RREF 2007		Total
ASSETS
Restricted cash (1)	$	10,253		$	2,943	$	18,368	$	16,152	$	5,586		$	20	$	430	$	53,752
Investment securities available-for-sale, pledged as collateral, at fair value	8,097			6,217		16,622		1,975					11,658		66,424		110,993
Loans, pledged as collateral	100,268			148,660		308,128		7,874		635			158,659		257,289		981,513
Loans held for sale	—			183		3,688		325,675		2,805			—		—		332,351
Interest receivable	(148		)	597		1,094		752		(18		)	1,388		1,841		5,506
Prepaid assets	14			14		26		7		23			99		71		254
Principal receivable	—			—		7		—		—			—		—		7
Other assets	—			—		35		—		—			—		—		35
Total assets (2)	$	118,484		$	158,614	$	347,968	$	352,435	$	9,031		$	171,824	$	326,055	$	1,484,411
LIABILITIES
Borrowings	101,827			145,875		320,997		321,360		2,424			95,151		178,575		$	1,166,209
Accrued interest expense	263			63		325		1,386		—			41		106		2,184
Derivatives, at fair value	—			—		—		—		—			1,379		10,387		11,766
Accounts payable and other liabilities	154			18		23		384		43			22		2		646
Total liabilities	$	102,244		$	145,956	$	321,345	$	323,130	$	2,467		$	96,593	$	189,070	$	1,180,805

(1)    Includes $16.7 million available for reinvestment in certain of the CDOs.

(2)    Assets of each of the consolidated VIEs may only be used to settle the obligations of each respective VIE.

Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest)

Based on analysis by RSO's management, RSO is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in RSO’s consolidated financial statements as of September 30, 2013. RSO’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Risk Exposure” column in the table below.

LEAF

In the November 16, 2011 formation of LEAF, in exchange for its prior interests in its lease related investments, RSO received 31,341 shares of Series A Preferred Stock (the “Series A Preferred Stock”), 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock (the “Series B Preferred Stock”) and 2,364 shares of newly issued Series D Redeemable Preferred Stock (the “Series D Preferred Stock”), collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction. These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions. On January 18, 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,682 shares of newly issued Series A-1 Preferred Stock (the "Series A-1 Preferred Stock") for $3.7 million. During the second quarter of 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,323 shares of newly issued Series E Preferred Stock (the "Series E Preferred Stock") for $3.3 million. The Series E Preferred Stock has priority over all other classes of preferred stock. RSO's fully-diluted interest in LEAF assuming conversion is 27.5%. RSO’s investment in LEAF was held at $40.8 million and $33.1 million as of September 30, 2013 and December 31, 2012, respectively.

RSO determined that it is not the primary beneficiary of LEAF because it does not participate in any management or portfolio decisions, holds only two of six board positions, and only controls 27.5% of the voting rights in the entity. Furthermore, Eos Partners, L.P. holds consent rights with respect to significant LEAF actions, including incurrence of indebtedness, consummation of a sale of the entity, liquidation or initiating a public offering.

Unsecured Junior Subordinated Debentures

RSO has a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), valued at $1.5 million in the aggregate (or 3% of each trust). RCT I and RCT II were formed for the purposes of providing debt financing to RSO, as described below. RSO completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest and protection of collateral through servicing rights. Accordingly, neither trust is consolidated into RSO’s financial statements.

RSO records its investments in RCT I and RCT II’s common shares as investments in unconsolidated trusts using the cost method and records dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which RSO is the obligor in the amount of $25.8 million for RCT I and $25.8 million for RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.

Resource Capital Asset Management CLOs

In February 2011, RSO purchased a company that managed $1.9 billion of bank loan assets through five CLOs. As a result, RSO is entitled to collect senior, subordinated and incentive management fees from these CLOs. The purchase price of $22.5 million resulted in an intangible asset that was allocated to each of the five CLOs and is being amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $11.7 million and $13.1 million at September 30, 2013 and December 31, 2012, respectively. RSO recognized fee income of $1.2 million and $4.2 million for the three and nine months ended September 30, 2013, respectively, and $1.8 million and $5.5 million for the three and nine months ended September 30, 2012, respectively. With respect to four of these CLOs, RSO determined that it does not hold a controlling interest and, therefore, is not the primary beneficiary. One of the CLOs was liquidated in January 2013. With respect to the fifth CLO, Whitney CLO I, in October 2012, RSO purchased 66.6% of its preferred equity, which was determined to be a reconsideration event. Based upon that purchase, RSO determined that it does have an obligation to absorb losses and/or the right to receive benefits that could potentially be significant to Whitney CLO I and that a related party has the power to direct the activities that are most significant to the VIE. As a result, together with the related party, RSO has both the power to direct and the right to receive benefits and the obligation to absorb losses. It was then determined that, between RSO and the related party, RSO was the party within that group that is more closely associated with Whitney CLO I because of its preferred equity interest in Whitney CLO I. RSO, therefore, consolidated Whitney CLO I. In May 2013, RSO purchased additional equity in this CLO which increased its equity ownership to 68.3% of the outstanding preferred equity of Whitney CLO I. In September 2013, RSO liquidated Whitney CLO I, and as a result substantially all of the assets were sold. Total proceeds from the sale of these assets, plus proceeds from previous sales and paydowns in the CLO were used to pay down the remaining balance on the outstanding notes of $103.7 million.

Real Estate Joint Ventures

On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (a VIE that holds interests in a real estate joint venture) from Resource America. This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value. RSO acquired the membership interests for $2.1 million. The joint venture agreement requires RSO to contribute 3% to 5% (depending on the terms of the agreement pursuant to which the particular asset is being acquired) of the total funding required for each asset acquisition as needed up to a specified amount. RSO provided funding of $20,000 and $157,000 for the three and nine months ended September 30, 2013 and $145,000 and $465,000 for the three and nine months ended September 30, 2012, respectively, for these investments. Resource Real Estate Management, LLC (“RREM”), an indirect subsidiary of the Company, acts as asset manager of the venture and receives a monthly asset management fee. For the three and nine months ended September 30, 2013, RSO recorded losses of $521,000 and $735,000, respectively. For the three and nine months ended September 30, 2012, RSO recorded income of $346,000 and $931,000, respectively. Using the equity method of accounting, the income/losses were recorded in equity in earnings of unconsolidated subsidiaries on the RSO's consolidated statement of income. RSO’s investment in RRE VIP Borrower, LLC at September 30, 2013 and December 31, 2012 was $(330,000) and $2.3 million, respectively.

On June 19, 2012, RSO entered into a second joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments. RSO purchased a 7.5% equity interest in the venture. RSO may be subject to a capital call based on its pro rata share of equity interest in the venture up to the earlier of the end of the investment period, ending in May 2015, or the date the aggregate of all capital contributions exceeds $500.0 million. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RSO’s investment in the joint venture at September 30, 2013 and December 31, 2012 was $575,000 and $526,000, respectively. Using the equity method of accounting, RSO recognized equity in earnings related to this investment of $6,000 and $49,000 for the three and nine months ended September 30, 2013, respectively. RSO recorded a loss of $100,000 for both the three and nine months ended September 30, 2012.

RSO has determined that it does not have the power to direct the activities that most significantly impact the economic performance of each of these ventures, which include asset underwriting and acquisition, lease review and approval, and loan asset servicing, and, therefore, RSO is not the primary beneficiary of either.

CVC Global Credit Opportunities Fund

In May, June, and July 2013, RSO invested a total of $15.0 million in CVC Global Credit Opportunities Fund, a fund which seeks to generate returns targeting corporate credit through a master-feeder fund structure. Because CVC Global Credit Opportunities Fund is not a VIE and RSO owns only 34.4%, RSO will not consolidate it. RSO records its investment in the fund using the equity method. For the three and nine months ended September 30, 2013, RSO recognized $433,000 and $526,000 of income in equity in net losses of unconsolidated entities on the RSO income statement. The investment balance of $15.5 million at September 30, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet.

Life Care Funding

In 2013, Long Term Care Conversion, Inc. ("LTCC"), a wholly-owned subsidiary of RSO invested $2.0 million into Life Care Funding, LLC ("LCF") for the purpose of originating and acquiring life settlement contracts. Although the Investment Committee and Board are controlled by the joint venture partner, the joint venture partner must obtain LTCC's approval to make any investments and the joint venture partner must obtain LTCC approval for all material business operations. As a result, RSO's management determined that there was joint control and RSO will not consolidate LCF. Using the equity method, RSO recognized a loss of $107,000 and $349,000 during the three and nine months ended September 30, 2013, respectively, as equity in net losses of unconsolidated subsidiaries. RSO's investment in LCF was $1.7 million at September 30, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet.

Harvest CLO VII Limited

In September 2013, RSO invested $5.3 million in the subordinated notes of a European CLO, which represented 9.52% of the subordinated notes. The CLO is managed by an independent third party and therefore RSO does not have control and is not deemed to be the primary beneficiary. Therefore, the CLO is not consolidated onto RSO's financial statements. RSO records its investment in the CLO by imputing an interest rate using expected cash flows over the expected life of the CLO and records the income as equity in net losses of unconsolidated subsidiaries on RSO's consolidated statement of income.

    The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of September 30, 2013 (in thousands):

	Unconsolidated Variable Interest Entities
	LEAF Commercial Capital, Inc.		Unsecured Junior Subordinated Debentures			Resource Capital Asset Management CLOs		RRE VIP Borrower, LLC			Värde Investment Partners, LP		Life Care Funding		CVC Global Opps Fund		Harvest CLO VII		Total		Maximum Exposure to Loss (1)
Investment in unconsolidated entities	$	40,820	$	1,548		$	—	$	(330	)	$	575	$	1,651	$	15,526	$	4,999	$	64,789	$	64,789
Intangible assets	—		—			11,687		—			—		—		—		—		11,687		$	11,687
Total assets	40,820		1,548			11,687		(330		)	575		1,651		15,526		4,999		76,476
Borrowings	—		50,956			—		—			—		—		—		—		50,956		N/A
Total liabilities	—		50,956			—		—			—		—		—		—		50,956		N/A
Net asset  (liability)	$	40,820	$	(49,408	)	$	11,687	$	(330	)	$	575	$	1,651	$	15,526	$	4,999	$	25,520	N/A

(1) RSO's maximum exposure to loss at September 30, 2013 does not exceed the carrying amount of its investment.

Other than the contingent obligation arrangement described above in connection with LEAF and the commitments RSO has to fund its real estate joint ventures, there were no explicit arrangements or implicit variable interests that could require RSO to provide financial support to any of its unconsolidated VIEs.

C. Supplemental Cash Flow Information - RSO

Supplemental disclosure of cash flow information (in thousands):

	Nine Months Ended
	September 30,
	2013		2012
Non-cash investing activities include the following:
Acquisition of real estate investments	$	—	$	(21,661	)
Conversion of loans to investment in real estate	$	—	$	21,661
Non-cash financing activities include the following:
Distributions on common stock declared but not paid	$	25,447	$	19,897
Distribution on preferred stock declared but not paid	$	2,023	$	308
Income taxes paid in cash	$	8,997	$	19,771
Issuance of restricted stock	$	242	$	480
Subscription receivable	$	257	$	24,213

D. Investment securities - Trading - RSO

The following table summarizes RSO's structured notes and residential mortgage-backed securities (“RMBS”) which are classified as investment securities, trading and carried at fair value (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2013:
Structured notes	$	8,554	$	4,026	$	(1,000	)	$	11,580
RMBS	1,934		—		(1,415		)	519
Total	$	10,488	$	4,026	$	(2,415	)	$	12,099
December 31, 2012:
Structured notes	$	9,413	$	10,894	$	(1,028	)	$	19,279
RMBS	6,047		858		(1,341		)	5,564
Total	$	15,460	$	11,752	$	(2,369	)	$	24,843

RSO purchased four securities and sold six securities during the nine months endedSeptember 30, 2013, for a net gain of $6.9 million.  RSO held 11 and 13 investment securities, trading as of September 30, 2013 and December 31, 2012, respectively.

E. Investment Securities available-for-sale - RSO

RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. If RSO finances the purchase of securities with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria and RSO will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on RSO's consolidated balance sheet in RSO's line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain (loss) and net interest income on linked transactions, net on RSO's consolidated statement of income. CMBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.

The following table summarizes RSO's investment securities, including those pledged as collateral and classified as available-for-sale, which are carried at fair value (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2013:
CMBS	$	194,268	$	7,297	$	(13,792	)	$	187,773
ABS	26,317		1,776		(495		)	27,598
Corporate bonds	5,375		29		(91		)	5,313
Other asset-backed	—		—		—			—
Total	$	225,960	$	9,102	$	(14,378	)	$	220,684
December 31, 2012:
CMBS	$	182,828	$	4,626	$	(16,639	)	$	170,815
ABS	25,885		1,700		(1,115		)	26,470
Corporate Bonds	34,361		111		(190		)	34,282
Other asset-backed	—		23		—			23
Total	$	243,074	$	6,460	$	(17,944	)	$	231,590

(1) As of September 30, 2013 and December 31, 2012, $174.0 million and $195.2 million, respectively, of securities were pledged as collateral security under related financings.    

The following table summarizes the estimated maturities of RSO’s CMBS, ABS, and corporate bonds according to their estimated weighted average life classifications (in thousands, except percentages):

Weighted Average Life	Fair Value			Amortized Cost		Weighted Average Coupon
September 30, 2013:
Less than one year	$	42,561	(1)	$	45,731	4.97%
Greater than one year and less than five years	136,672			138,629		4.67%
Greater than five years and less than ten years	37,088			36,905		2.71%
Greater than ten years	4,363			4,695		4.03%
Total	$	220,684		$	225,960	4.39%
December 31, 2012:
Less than one year	$	42,618	(1)	$	46,522	4.09%
Greater than one year and less than five years	122,509			131,076		4.55%
Greater than five years and less than ten years	61,780			60,801		3.31%
Greater than ten years	4,683			4,675		4.03%
Total	$	231,590		$	243,074	4.12%

(1)    RSO expects that the maturity date of these CMBS will either be extended or the CMBS will be paid in full.

The contractual maturities of the CMBS investment securities available-for-sale range from October 2013 to April 2025.  The contractual maturities of the ABS investment securities available-for-sale range from November 2015 to August 2022. The contractual maturities of the corporate bond investment securities available-for-sale range from December 2015 to April 2021.

The following table shows the fair value and gross unrealized losses, aggregated by investment category and length of time, of those individual investment securities available-for-sale that have been in a continuous unrealized loss position during the periods specified (in thousands):

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2013:
CMBS	$	62,839	$	(8,333	)	$	12,124	$	(5,459	)	$	74,963	$	(13,792	)
ABS	201		(2		)	6,589		(493		)	6,790		(495		)
Corporate bonds	2,976		(91		)	—		—			2,976		(91		)
Total temporarily impaired securities	$	66,016	$	(8,426	)	$	18,713	$	(5,952	)	$	84,729	$	(14,378	)
December 31, 2012:
CMBS	$	25,803	$	(442	)	$	38,734	$	(16,197	)	$	64,537	$	(16,639	)
ABS	—		—			5,961		(1,115		)	5,961		(1,115		)
Corporate bonds	19,445		(190		)	—		—			19,445		(190		)
Total temporarily impaired securities	$	45,248	$	(632	)	$	44,695	$	(17,312	)	$	89,943	$	(17,944	)

RSO held nine and 19 CMBS investment securities available-for-sale that have been in a loss position for more than 12 months as of September 30, 2013 and December 31, 2012, respectively.  RSO held nine ABS investment securities available-for-sale that have been in a loss position for more than 12 months as of September 30, 2013 and December 31, 2012, respectively.  RSO had no corporate bonds that have been in a loss position for more than 12 months as of September 30, 2013 and December 31, 2012. The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.

The determination of other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.  RSO reviews its portfolios and makes other-than-temporary impairment determinations at least quarterly.  RSO considers the following factors when determining if there is an other-than-temporary impairment on a security:    

• the length of time the market value has been less than amortized cost;

• the severity of the impairment;

• the expected loss of the security as generated by a third-party valuation model;

• original and current credit ratings from the rating agencies;

• underlying credit fundamentals of the collateral backing the securities;

• whether, based upon RSO’s intent, it is more likely than not that RSO will sell the security before the recovery of the amortized cost basis; and

• third-party support for default, for recovery, prepayment speed and reinvestment price assumptions.

At September 30, 2013 and December 31, 2012, RSO held $187.8 million and $170.8 million, respectively, (net of unrealized losses of $6.5 million and $12.0 million, respectively), of CMBS recorded at fair value.  To determine fair value, RSO uses a third party valuation firm.

At September 30, 2013 and December 31, 2012, RSO held $27.6 million and $26.5 million, respectively, (net of unrealized gains of $1.3 million and 585,000, respectively), of ABS recorded at fair value.  To determine their fair value, RSO uses dealer quotes.

At September 30, 2013 and December 31, 2012, RSO held $5.3 million and $34.3 million, respectively, (net of unrealized losses of $62,000 and losses of $78,000, respectively), of corporate bonds recorded at fair value. To determine their fair value, RSO uses dealer quotes.

 RSO’s securities classified as available-for-sale have increased in fair value on a net basis as of September 30, 2013 as compared to December 31, 2012, primarily due to improving dealer marks and new purchases in 2013. RSO performs an on-going review of third-party reports and updated financial data on the underlying properties in order to analyze current and projected security performance.  Rating agency downgrades are considered with respect to RSO’s income approach when determining other-than-temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment. During the three and nine months endedSeptember 30, 2013, RSO recognized other-than-temporary impairment losses of $255,000 and $276,000, respectively, on positions that supported RSO's CMBS investment. During the three and nine months endedSeptember 30, 2012, RSO recognized other-than-temporary impairment losses of $9,000 and $42,000, respectively, on positions that supported RSO's CMBS investment.

During the three and nine months endedSeptember 30, 2013, there were no ABS sales. During the three and nine months endedSeptember 30, 2012, RSO sold two and five ABS positions with a total par of $1.4 million and $4.3 million, respectively, and recognized gains of $89,000 and $111,000, respectively.

During the three and nine months endedSeptember 30, 2013, RSO sold 17 and 32 corporate bond positions with a total par value of $30.0 million and $33.0 million, respectively, and recognized a net loss of $441,000 and $432,000, respectively. During the nine months endedSeptember 30, 2013, RSO had two corporate bond positions redeemed with a total par value of $3.5 million, and recognized a loss of $11,000. During the nine months endedSeptember 30, 2012, RSO had one corporate bond position redeemed with a total par value of $182,000, and recognized a gain of $39,000.

Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on CMBS in RSO’s investment portfolio.  At September 30, 2013 and December 31, 2012, the aggregate discount due to interest rate changes exceeded the aggregate premium on RSO’s CMBS by approximately $4.8 million and $8.0 million, respectively.  At September 30, 2013 and December 31, 2012, the aggregate discount on RSO’s ABS portfolio was $2.6 million and $3.1 million, respectively.  There were no premiums on RSO’s ABS investment portfolio at September 30, 2013 and December 31, 2012. At September 30, 2013 the aggregate discount on RSO’s corporate bond portfolio was $154,000. At December 31, 2012, the aggregate premium on RSO’s corporate bond portfolio was $608,000.

F. Investments in real estate - RSO

The table below summarizes RSO’s investments in real estate (in thousands):

	As of September 30, 2013				As of December 31, 2012
	Book Value			Number of Properties	Book Value			Number of Properties
Multi-family property	$	22,102		1	$	42,179		2
Office property	10,244			1	10,149			1
Hotel property	25,718			1	25,608			1
Subtotal	58,064				77,936
Less:  Accumulated depreciation	(2,920		)		(2,550		)
Investments in real estate	$	55,144			$	75,386

During the three and nine months endedSeptember 30, 2013, RSO made no acquisitions. On September 30, 2013, RSO sold one of its multi-family properties. The gain from the sale of this property is recorded on RSO's consolidated income statement in gain on sale of real estate. During the year ended December 31, 2012, RSO foreclosed on one self-originated loan and converted the loan to equity with a fair value of $25.5 million at acquisition. The loan was collateralized by a 179 unit hotel property in Coconut Grove, Florida. The property had an occupancy rate of 75% at acquisition.

The following table is a summary of the aggregate estimated fair value of the assets and liabilities acquired on the respective date of acquisition during the year ended December 31, 2012 (in thousands). There were no such acquisitions during the nine months ended September 30, 2013.

Description	December 31, 2012
Assets acquired:
Investments in real estate	$	25,500
Other assets	(89		)
Total assets acquired	25,411
Liabilities assumed:
Accounts payable and other liabilities	3,750
Total liabilities assumed	3,750
Estimated fair value of net assets acquired	$	21,661

G. Loans held for investment - RSO

The following is a summary of RSO’s loans (in thousands):

Loan Description	Principal			Unamortized (Discount) Premium (1)			Carrying Value (2)
September 30, 2013:
Bank loans (3)	$	914,676		$	(5,648	)	$	909,028
Commercial real estate loans:
Whole loans	671,118			(3,003		)	668,115
B notes	16,328			(90		)	16,238
Mezzanine loans	57,667			(93		)	57,574
Total commercial real estate loans	745,113			(3,186		)	741,927
Subtotal loans before allowances	1,659,789			(8,834		)	1,650,955
Allowance for loan loss	(12,865		)	—			(12,865		)
Total	$	1,646,924		$	(8,834	)	$	1,638,090
December 31, 2012:
Bank loans (3)	$	1,218,563		$	(25,249	)	$	1,193,314
Commercial real estate loans:
Whole loans (4)	569,829			(1,891		)	567,938
B notes	16,441			(114		)	16,327
Mezzanine loans	82,992			(206		)	82,786
Total commercial real estate loans	669,262			(2,211		)	667,051
Subtotal loans before allowances	1,887,825			(27,460		)	1,860,365
Allowance for loan loss	(17,691		)	—			(17,691		)
Total	$	1,870,134		$	(27,460	)	$	1,842,674

(1) Amounts include deferred amendment fees of $288,000 and $450,000 and deferred upfront fees of $260,000 and $334,000 being amortized over the life of the bank loans as of September 30, 2013 and December 31, 2012, respectively.  Amounts include loan origination fees of $2.9 million and $1.9 million and loan extension fees of $189,000 and $214,000 being amortized over the life of the commercial real estate loans as of September 30, 2013 and December 31, 2012, respectively.

(2) Substantially all loans are pledged as collateral under various borrowings at September 30, 2013 and December 31, 2012, respectively.

(3) Amounts include $332.4 million and $14.9 million of bank loans held for sale at September 30, 2013 and December 31, 2012, respectively.

(4) Amount includes $34.0 million from two whole loans which are classified as loans held for sale at December 31, 2012.

At September 30, 2013 and December 31, 2012, approximately 39.2% and 47.7%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in commercial real estate loans located in California; approximately 7.1% and 7.9%, respectively, in Arizona; and approximately 14.8% and 11.1%, respectively, in Texas.  At September 30, 2013 and December 31, 2012, approximately 15.2% and 13.2%, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare.

At September 30, 2013, RSO’s bank loan portfolio consisted of $906.1 million (net of allowance of $3.0 million) of floating rate loans, which bear interest ranging between the three month London Interbank Offered Rate (“LIBOR”) plus 1.5% and three month LIBOR plus 10.0% with maturity dates ranging from December 2013 to April 2021.

At December 31, 2012, RSO’s bank loan portfolio consisted of $1.2 billion (net of allowance of $9.7 million) of floating rate loans, which bear interest ranging between the three month LIBOR plus 1.5% and three month LIBOR plus 8.8% with maturity dates ranging from August 2013 to January 2021.

The following is a summary of the weighted average life of RSO’s bank loans, at amortized cost (in thousands):

	September 30, 2013 (1)		December 31, 2012
Less than one year	$	29,008	$	10,028
Greater than one year and less than five years	574,042		821,568
Five years or greater	305,978		361,718
	$	909,028	$	1,193,314

(1) Bank loans include $4.6 million with maturity dates less than one year, $157.4 million with maturity dates greater than one year and less than five years and $170.3 million with maturity dates five years or greater that are held for sale as of September 30, 2013.

The following is a summary of RSO’s commercial real estate loans held for investment (dollars in thousands):

Description	Quantity	Amortized Cost		Contracted Interest Rates	Maturity Dates (3)
September 30, 2013:
Whole loans, floating rate (1)	47	$	668,115	LIBOR plus 2.50% to LIBOR plus 8.0%	December 2013 to August 2019
B notes, fixed rate	1	16,238		8.68%	April 2016
Mezzanine loans, fixed rate (6)	4	57,574		0.50% to 20.00%	December 2014 to September 2019
Total (2)	52	$	741,927
December 31, 2012:
Whole loans, floating rate (1) (4) (5)	37	$	567,938	LIBOR plus 2.50% to LIBOR plus 5.50%	June 2013 to February 2019
B notes, fixed rate	1	16,327		8.68%	April 2016
Mezzanine loans, floating rate	2	15,845		LIBOR plus 2.50% to LIBOR plus 7.45%	August 2013 to December 2013
Mezzanine loans, fixed rate (6)	3	66,941		0.50% to 20.00%	September 2014 to September 2019
Total (2)	43	$	667,051

(1) Whole loans had $6.6 million and $8.9 million in unfunded loan commitments as of September 30, 2013 and December 31, 2012, respectively.  These commitments are funded as the borrowers request additional funding and have satisfied the requirements to obtain this additional funding.

(2) The total does not include an allowance for loan loss of $9.9 million and $8.0 million as of September 30, 2013 and December 31, 2012, respectively.

(3) Maturity dates do not include possible extension options that may be available to the borrowers.

(4) Floating rate whole loans include a $2.0 million portion of a whole loan that has a fixed rate of 15.0% as of December 31, 2012.

(5) Amount includes $34.0 million from two whole loans that were classified as loans held for sale at December 31, 2012.

(6) Fixed rate mezzanine loans include a mezzanine loan that was modified into two tranches which both currently pay interest at 0.50%. In addition, the subordinate tranche accrues interest at LIBOR plus 18.50% which is deferred until maturity.

The following is a summary of the weighted average life of RSO’s commercial real estate loans, at amortized cost (in thousands):

Description	2013		2014		2015 and Thereafter		Total
September 30, 2013:
B notes	$	—	$	—	$	16,238	$	16,238
Mezzanine loans	—		11,398		46,176		57,574
Whole loans	4,067		—		664,048		668,115
Total (1)	$	4,067	$	11,398	$	726,462	$	741,927
December 31, 2012:
B notes	$	—	$	—	$	16,327	$	16,327
Mezzanine loans	5,328		20,694		56,764		82,786
Whole loans	71,799		—		496,139		567,938
Total (1)	$	77,127	$	20,694	$	569,230	$	667,051

(1) Weighted average life of commercial real estate loans assumes full exercise of extension options available to borrowers.

The following is a summary of the allocation of the allowance for loan loss with respect to RSO’s commercial real estate and bank loans (in thousands, except percentages) by asset class:

Description	Allowance for Loan Loss		Percentage of Total Allowance
September 30, 2013:
B notes	$	166	1.29%
Mezzanine loans	531		4.12%
Whole loans	9,214		71.63%
Bank loans	2,954		22.96%
Total	$	12,865
December 31, 2012:
B notes	$	206	1.16%
Mezzanine loans	860		4.86%
Whole loans	6,920		39.12%
Bank loans	9,705		54.86%
Total	$	17,691

As of September 30, 2013, RSO had recorded an allowance for loan losses of $12.9 million consisting of a $3.0 million allowance on RSO’s bank loan portfolio and a $9.9 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on three bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios. The bank loan allowance decreased $6.8 million from $9.7 million as of December 31, 2012 to $3.0 million as of September 30, 2013 as a result of improved credit conditions.  The whole loan allowance increased $2.3 million from $6.9 million as of December 31, 2012 to $9.2 million as of September 30, 2013 as a result of specific provisions taken on one commercial real estate loan.

As of December 31, 2012, RSO had recorded an allowance for loan losses of $17.7 million consisting of a $9.7 million allowance on RSO’s bank loan portfolio and a $8.0 million allowance on RSO’s commercial real estate portfolio as a result of the impairment of one bank loan and four commercial real estate loans as well as the maintenance of a general reserve with respect to these portfolios.

H. Investments in unconsolidated entities - RSO

In May 2013, RSO entered into a limited partnership agreement with CVC Global Credit Opportunities Fund, L.P. ("the Partnership"), a Delaware limited partnership which generally invests in assets through a master-feeder fund structure ("the Master Fund"). RSO invested $15.0 million as of September 30, 2013. The General Partner of the Partnership and the Master Fund is CVC Global Credit Opportunities Fund GP, LLC, a Delaware limited liability company. The investment manager of the partnership and the Master Fund is CVC Credit Partners, LLC. The fund will pay the investment manager a quarterly management fee in advance calculated at the rate of 1.5% annually based on the balance of each limited partner's capital account. RSO's management fee was waived upon entering the agreement given that RSO is a related party of CVC Credit Partners, LLC. For the three and nine months endedSeptember 30, 2013, RSO recorded earnings of $433,000 and $526,000, respectively, which were recorded in equity in net losses of unconsolidated subsidiaries on the RSO statement of income. The investment balance of $15.5 million at September 30, 2013 is recorded as an investment in unconsolidated entities on RSO's balance sheet using the equity method.

In January 2013, LTCC invested $2.0 million into LCF for the purpose of originating and acquiring life settlement contracts. Although the Investment Committee and Board are controlled by the joint venture partner, the joint venture partner must obtain LTCC's unanimous approval to make any investments and the joint venture partner must obtain LTCC approval for all material business operations. As a result, RSO determined that there was joint control and, therefore, neither RSO nor its joint venture partner will consolidate LCF. Using the equity method, RSO recognized net losses of $107,000 and $349,000 during the three and nine months ended September 30, 2013, as equity in net losses of unconsolidated subsidiaries. RSO's investment in LCF was $1.7 million at September 30, 2013 and is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet.

On June 19, 2012, RSO entered into a joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments.  RSO purchased a 7.5% equity interest in the venture. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. For the three and nine months ended September 30, 2013, RSO recorded earnings of $6,000 and $49,000, which were recorded in equity in net losses of unconsolidated subsidiaries on RSO's consolidated statement of income.  RSO recorded a loss of $100,000 for both the three and nine months ended September 30, 2012. The investment balance of $575,000 and $526,000 at September 30, 2013 and December 31, 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.

On November 16, 2011, RSO and the Company, entered into a SPA with Eos Partners, L.P.  In exchange for RSO's prior interest in LEAF, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF.  RSO’s investment in LEAF was valued at $36.3 million based on a third-party valuation.  Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction.  These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions. RSO recorded a loss of $2.2 million in conjunction with the transaction.  On January 18, 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,682 shares of newly issued Series A-1 Preferred Stock for $3.7 million. During the second quarter of 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,323 shares of newly issued Series E Preferred Stock for $3.3 million. The Series E Preferred Stock has priority over all other classes of preferred stock. RSO accrued $207,000 on the Series E Preferred Stock shares to date. RSO's fully-diluted basis assuming conversion is 27.5%. RSO’s interest in the investment is accounted for under the equity method.  For the three and nine months ended September 30, 2013, RSO recorded losses of $346,000 and $378,000, respectively, which was recorded in equity in net losses of unconsolidated subsidiaries on the RSO consolidated statements of income. For the three and nine months ended September 30, 2012, RSO recorded a loss of $1.0 million and $2.3 million, respectively, which was recorded in equity in net losses on the RSO consolidated statements of income. RSO’s investment in LEAF was carried at $40.8 million and $33.1 million as of September 30, 2013 and December 31, 2012, respectively.

On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds RSO's interests in a real estate joint venture) from the Company at book value.  This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value.  RSO acquired the membership interests for $2.1 million. The agreement requires RSO to contribute 3% to 5% (depending on the asset agreement) of the total funding required for each asset acquisition on a monthly basis.  RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1% of the combined investment calculated as of the last calendar day of the month. For the three and nine months ended September 30, 2013, RSO paid RREM management fees of $6,500 and $23,000, respectively. For the three and nine months ended September 30, 2012, RSO paid RREM management fees of $11,000 and $35,000, respectively. For the three and nine months ended September 30, 2013, RSO recorded losses of $521,000 and $735,000, respectively, which was recorded in equity in net losses of unconsolidated subsidiaries on the RSO consolidated statement of income.  For the three and nine months ended September 30, 2012, RSO recorded earnings of $346,000 and $931,000, respectively, which was recorded in equity in net losses of unconsolidated subsidiaries on the RSO consolidated statement of income. The investment balance of $(330,000) and $2.3 million at September 30, 2013 and December 31, 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.

RSO has a 100% interest valued at $1.5 million in the common shares (3% of the total equity) in two trusts, RCT I and RCT II and determined it was not the primary beneficiary of either trust. RSO records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated trusts using the cost method and records dividend income upon declaration by RCT I and RCT II.  For the three and nine months ended September 30, 2013, RSO recognized $604,000 and $1.8 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $48,000 and $143,000, respectively, of amortization of deferred debt issuance costs.  For the three and nine months ended September 30, 2012, RSO recognized $626,000 and $1.9 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $46,000 and $136,000, respectively, of amortization of deferred debt issuance costs.  RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.

I. Financing receivables - RSO

The following tables show the allowance for loan losses and recorded investments in loans for the years indicated (in thousands):

	Commercial Real Estate Loans			Bank Loans			Loans Receivable-Related Party		Total
September 30, 2013:
Allowance for Loan Losses:
Allowance for losses at January 1, 2013	$	7,986		$	9,705		$	—	$	17,691
Provision (benefit) for loan loss	2,017			(1,476		)	—		541
Loans charged-off	(92		)	(5,275		)	—		(5,367		)
Allowance for losses at September 30, 2013	$	9,911		$	2,954		$	—	$	12,865
Ending balance:
Individually evaluated for impairment	$	4,067		$	1,882		$	—	$	5,949
Collectively evaluated for impairment	$	5,844		$	1,072		$	—	$	6,916
Loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—
Loans:
Ending balance:
Individually evaluated for impairment	$	191,100		$	3,553		$	8,067	$	202,720
Collectively evaluated for impairment	$	550,827		$	905,475		$	—	$	1,456,302
Loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—
December 31, 2012:
Allowance for Loan Losses:
Allowance for losses at January 1, 2012	$	24,221		$	3,297		$	—	$	27,518
Provision for loan loss	5,225			11,593			—		16,818
Loans charged-off	(21,460		)	(5,185		)	—		(26,645		)
Allowance for losses at December 31, 2012	$	7,986		$	9,705		$	—	$	17,691
Ending balance:
Individually evaluated for impairment	$	2,142		$	3,236		$	—	$	5,378
Collectively evaluated for impairment	$	5,844		$	6,469		$	—	$	12,313
Loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—
Loans:
Ending balance:
Individually evaluated for impairment	$	177,055		$	4,689		$	8,324	$	190,068
Collectively evaluated for impairment	$	489,996		$	1,187,874		$	—	$	1,677,870
Loans acquired with deteriorated credit quality	$	—		$	751		$	—	$	751

Credit quality indicators

Bank Loans

RSO uses a risk grading matrix to assign grades to bank loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-5 with 1 representing RSO’s highest rating and 5 representing its lowest rating.  RSO also designates loans that are sold after the period end as held for sale at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  RSO considers metrics such as performance of the underlying company, liquidity, collectability of interest, enterprise valuation, default probability, ratings from rating agencies, and industry dynamics in grading its bank loans.

Credit risk profiles of bank loans were as follows (in thousands):

	Rating 1		Rating 2		Rating 3		Rating 4		Rating 5		Held for Sale		Total
As of September 30, 2013
Bank loans	$	514,277	$	39,123	$	16,206	$	3,518	$	3,553	$	332,351	$	909,028
As of December 31, 2012
Bank loans	$	1,095,148	$	33,677	$	27,837	$	16,318	$	5,440	$	14,894	$	1,193,314

All of RSO’s bank loans are performing with the exception of three loans with an amortized cost of $3.6 million as of September 30, 2013, none of which defaulted during the three months ended September 30, 2013. As of December 31, 2012, all of RSO's bank loans were performing with the exception of five loans with an amortized cost of $5.4 million, one of which defaulted as of December 31, 2012, three of which defaulted as of March 31, 2012 (including a loan acquired with deteriorated credit quality as a result of the acquisition of Whitney CLO I), and one of which defaulted on December 31, 2011.

Commercial Real Estate Loans

RSO uses a risk grading matrix to assign grades to commercial real estate loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-4 with 1 representing RSO’s highest rating and 4 representing its lowest rating.  RSO also designates loans that are sold after the period end at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  In addition to the underlying performance of the loan collateral, RSO considers metrics such as the strength of underlying sponsorship, payment history, collectability of interest, structural credit enhancements, market trends and loan terms in grading its commercial real estate loans.

Credit risk profiles of commercial real estate loans were as follows (in thousands):

	Rating 1		Rating 2		Rating 3		Rating 4		Held for Sale		Total
As of September 30, 2013
Whole loans	$	591,105	$	44,943	$	32,067	$	—	$	—	$	668,115
B notes	16,238		—		—		—		—		16,238
Mezzanine loans	57,574		—		—		—		—		57,574
	$	664,917	$	44,943	$	32,067	$	—	$	—	$	741,927
As of December 31, 2012
Whole loans	$	427,456	$	—	$	106,482	$	—	$	34,000	$	567,938
B notes	16,327		—		—		—		—		16,327
Mezzanine loans	38,296		—		44,490		—		—		82,786
	$	482,079	$	—	$	150,972	$	—	$	34,000	$	667,051

All of RSO’s commercial real estate loans were performing as of September 30, 2013 and December 31, 2012.

Loan Portfolios Aging Analysis

The following table shows the loan portfolio aging analysis as of the dates indicated at cost basis (in thousands):

	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
September 30, 2013:
Whole loans	$	—	$	—	$	—	$	—	$	668,115	$	668,115	$	—
B notes	—		—		—		—		16,238		16,238		—
Mezzanine loans	—		—		—		—		57,574		57,574		—
Bank loans	—		—		3,553		3,553		905,475		909,028		—
Loans receivable- related party	—		—		—		—		8,067		8,067		—
Total loans	$	—	$	—	$	3,553	$	3,553	$	1,655,469	$	1,659,022	$	—
December 31, 2012:
Whole loans	$	—	$	—	$	—	$	—	$	567,938	$	567,938	$	—
B notes	—		—		—		—		16,327		16,327		—
Mezzanine loans	—		—		—		—		82,786		82,786		—
Bank loans	1,549		—		3,891		5,440		1,187,874		1,193,314		—
Loans receivable- related party	—		—		—		—		8,324		8,324		—
Total loans	$	1,549	$	—	$	3,891	$	5,440	$	1,863,249	$	1,868,689	$	—

Impaired Loans

The following tables show impaired loans in the categories indicated (in thousands):

	Recorded Balance		Unpaid Principal Balance		Specific Allowance			Average Investment in Impaired Loans		Interest Income Recognized
September 30, 2013:
Loans without a specific valuation allowance:
Whole loans	$	127,961	$	127,961	$	—		$	121,371	$	6,951
B notes	—		—		—			—		—
Mezzanine loans	38,072		38,072		—			38,072		1,300
Bank loans	—		—		—			—		—
Loans receivable - related party	5,924		5,924		—			—		—
Loans with a specific valuation allowance:
Whole loans	25,067		25,067		(4,067		)	24,562		1,824
B notes	—		—		—			—		—
Mezzanine loans	—		—		—			—		—
Bank loans	3,553		3,553		(1,882		)	—		—
Loans receivable - related party	—		—		—			—		—
Total:
Whole loans	$	153,028	$	153,028	$	(4,067	)	$	145,933	$	8,775
B notes	—		—		—			—		—
Mezzanine loans	38,072		38,072		—			38,072		1,300
Bank loans	3,553		3,553		(1,882		)	—		—
Loans receivable - related party	5,924		5,924		—			—		—
	$	200,577	$	200,577	$	(5,949	)	$	184,005	$	10,075
December 31, 2012:
Loans without a specific valuation allowance:
Whole loans	$	115,841	$	115,841	$	—		$	114,682	$	3,436
B notes	—		—		—			—		—
Mezzanine loans	38,072		38,072		—			38,072		367
Bank loans	—		—		—			—		—
Loans receivable - related party	6,754		6,754		—			—		851
Loans with a specific valuation allowance:
Whole loans	23,142		23,142		(2,142		)	22,576		801
B notes	—		—		—			—		—
Mezzanine loans	—		—		—			—		—
Bank loans	5,440		5,440		(3,236		)	—		—
Loans receivable - related party	—		—		—			—		—
Total:
Whole loans	$	138,983	$	138,983	$	(2,142	)	$	137,258	$	4,237
B notes	—		—		—			—		—
Mezzanine loans	38,072		38,072		—			38,072		367
Bank loans	5,440		5,440		(3,236		)	—		—
Loans receivable - related party	6,754		6,754		—			—		851
	$	189,249	$	189,249	$	(5,378	)	$	175,330	$	5,455

Troubled- Debt Restructurings

The following tables show troubled-debt restructurings in RSO's loan portfolio (in thousands):

	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Three Months Ended September 30, 2013:
Whole loans	2	$	48,374	$	52,716
B notes	—	—		—
Mezzanine loans	—	—		—
Bank loans	—	—		—
Loans receivable - related party	—	—		—
Total loans	2	$	48,374	$	52,716
Three Months Ended September 30, 2012:
Whole loans	2	$	42,550	$	42,550
B notes	—	—		—
Mezzanine loans	1	38,072		38,072
Bank loans	—	—		—
Loans receivable	—	—		—
Loans receivable - related party	—	—		—
Total loans	3	$	80,622	$	80,622

Nine Months Ended September 30, 2013:
Whole loans	4	$	104,702	$	109,044
B notes	—	—		—
Mezzanine loans	—	—		—
Bank loans	—	—		—
Loans receivable - related party	1	6,592		6,592
Total loans	5	$	111,294	$	115,636
Nine Months Ended September 30, 2012:
Whole loans	5	$	168,708	$	151,422
B notes	—	—		—
Mezzanine loans	1	38,072		38,072
Bank loans	—	—		—
Loans receivable	—	—		—
Loans receivable - related party	1	7,797		7,797
Total loans	7	$	214,577	$	197,291

As of September 30, 2013 and December 31, 2012, there were no troubled-debt restructurings that subsequently defaulted.

J. Intangible assets - RSO

Intangible assets represent identifiable intangible assets acquired as a result of RSO’s acquisition of RCAM in February 2011, its conversion of loans to investments in real estate in June 2011, and the acquisition of real estate in August 2011.  RSO amortizes identified intangible assets to expense over their estimated lives or period of benefit using the straight-line method.  RSO evaluates intangible assets for impairment as events and circumstances change.  In October 2012, RSO purchased 66.6% of preferred equity and began consolidating Whitney CLO I, one of the RCAM CLOs. As a result of this transaction and the consolidation of Whitney CLO I, RSO wrote-off the unamortized balance of $2.6 million, the intangible asset associated with this CLO, which was recorded in gain/(loss) on consolidation in the RSO consolidated statement of income during the year ended December 31, 2012. In May 2013, RSO purchased additional equity, increasing its ownership percentage to 68.3%. Due to an event whereby a second CLO liquidated in early 2013, RSO accelerated the amortization of the remaining balance of its intangible asset and recorded a $657,000 charge to depreciation and amortization on the consolidated statement of income during the year ended December 31, 2012. RSO expects to record amortization expense on intangible assets of approximately $1.9 million for the year ending December 31, 2013, and $1.8 million for the years ending December 31, 2014, 2015, 2016 and 2017.  The weighted average amortization period was 8.0 years and 8.7 years at September 30, 2013 and December 31, 2012, respectively and the accumulated amortization was $12.0 million and $10.5 million at September 30, 2013 and December 31, 2012, respectively.

The following table summarizes intangible assets at September 30, 2013 and December 31, 2012 (in thousands).

	Beginning Balance		Accumulated Amortization			Net Assets
September 30, 2013:
Investment in RCAM	$	21,213	$	(9,526	)	$	11,687
Investments in real estate:
In-place leases	2,461		(2,421		)	40
Above (below) market leases	29		(28		)	1
	2,490		(2,449		)	41
Total intangible assets	$	23,703	$	(11,975	)	$	11,728
December 31, 2012:
Investment in RCAM	$	21,213	$	(8,108	)	$	13,105
Investments in real estate:
In-place leases	2,461		(2,379		)	82
Above (below) market leases	29		(24		)	5
	2,490		(2,403		)	87
Total intangible assets	$	23,703	$	(10,511	)	$	13,192

For the three and nine months ended September 30, 2013, RSO recognized $1.2 million and $4.2 million, respectively of fee income related to the investment in RCAM. For the three and nine months ended September 30, 2012, RSO recognized $1.8 million and $5.4 million, respectively of fee income related to the investment in RCAM.

K. Borrowings - RSO

RSO historically has financed the acquisition of its investments, including investment securities, loans and lease receivables, through the use of secured and unsecured borrowings in the form of CDOs, securitized notes, repurchase agreements, secured term facilities, warehouse facilities and trust preferred securities issuances.  Certain information with respect to RSO’s borrowings at September 30, 2013 and December 31, 2012 is summarized in the following table (in thousands, except percentages):

	Outstanding Borrowings		Weighted Average Borrowing Rate	Weighted Average Remaining Maturity	Value of Collateral
September 30, 2013:
RREF CDO 2006-1 Senior Notes (1)	$	95,151	1.86%	32.9 years	$	170,255
RREF CDO 2007-1 Senior Notes (2)	178,575		0.85%	33.0 years	325,551
Apidos CDO I Senior Notes (3)	101,827		1.53%	3.8 years	117,827
Apidos CDO III Senior Notes (4)	145,875		0.86%	6.7 years	157,009
Apidos Cinco CDO Senior Notes (5)	320,997		0.77%	6.6 years	339,154
Apidos CLO VIII Senior Notes (6)	302,916		2.09%	17 days	351,434
Apidos CLO VIII Securitized Borrowings (10)	18,444		14.13%	17 days	—
Whitney CLO I Senior Notes(9)	—		—%	N/A	8,573
Whitney CLO I Securitized Borrowings (9)	2,424		5.78%	N/A	—
Unsecured Junior Subordinated Debentures (7)	50,956		4.22%	22.9 years	—
Repurchase Agreements (8)	205,265		2.29%	18 days	284,290
Total	$	1,422,430	1.73%	9.6 years	$	1,754,093
December 31, 2012:
RREF CDO 2006-1 Senior Notes (1)	$	145,664	1.42%	33.6 years	$	295,759
RREF CDO 2007-1 Senior Notes (2)	225,983		0.81%	33.8 years	292,980
Apidos CDO I Senior Notes (3)	202,969		1.07%	4.6 years	217,745
Apidos CDO III Senior Notes (4)	221,304		0.80%	7.5 years	232,655
Apidos Cinco CDO Senior Notes (5)	320,550		0.82%	7.4 years	344,105
Apidos CLO VIII Senior Notes (6)	300,951		2.16%	8.8 years	351,014
Apidos CLO VIII Securitized Borrowings (10)	20,047		15.27%	8.8 years	—
Whitney CLO I Senior Notes(9)	171,555		1.82%	4.2 years	191,704
Whitney CLO I Securitized Borrowings (9)	5,860		9.50%	4.2 years	—
Unsecured Junior Subordinated Debentures (7)	50,814		4.26%	23.7 years	—
Repurchase Agreements (8)	106,303		2.28%	18 days	145,234
Mortgage Payable	13,600		4.17%	5.6 years	18,100
Total	$	1,785,600	1.62%	12.5 years	$	2,089,296

(1) Amount represents principal outstanding of $95.4 million and $146.4 million less unamortized issuance costs of $268,000 and $728,000 as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in August 2006.

(2) Amount represents principal outstanding of $179.4 million and $227.4 million less unamortized issuance costs of $786,000 and $1.4 million as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in June 2007.

(3) Amount represents principal outstanding of $101.8 million and $203.2 million less unamortized issuance costs of $0 and $274,000 as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in August 2005.

(4) Amount represents principal outstanding of $146.1 million and $222 million less unamortized issuance costs of $205,000 and $659,000 as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in May 2006.

(5) Amount represents principal outstanding of $322.0 million and $322.0 million less unamortized issuance costs of $1.0 million and $1.5 million as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in May 2007.

(6) Amount represents principal outstanding of $317.6 million and $317.6 million, less unamortized issuance costs of $4.1 million and $4.7 million, and less unamortized discounts of $10.6 million and $11.9 million as of September 30, 2013 and December 31, 2012, respectively.  This CDO transaction closed in October 2011. Apidos CLO VIII was called and the notes were paid in full in October 2013.

(7) Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.

(8) Amount represents principal outstanding of $52.7 million and $47.5 million less unamortized deferred debt costs of $47,000 and $23,000 plus accrued interest costs of $25,000 and $27,000 related to CMBS repurchase facilities as of September 30, 2013 and December 31, 2012, respectively, and principal outstanding of $153.8 million and $59.1 million less unamortized deferred debt costs of $1.3 million and $348,000 plus accrued interest costs of $161,000 and $79,000 related to CRE repurchase facilities as of September 30, 2013 and December 31, 2012. Amount does not reflect CMBS repurchase agreement borrowings that are components of Linked Transactions. At September 30, 2013 and December 31, 2012, RSO had repurchase agreements of $63.7 million and $20.4 million and accrued interest costs of $41,000 and $10,000, respectively, that were linked to CMBS purchases and accounted for as Linked Transactions, and, as such, the linked repurchase agreements are not included in the above table.

(9) Amount represents principal outstanding of $174.1 million less unamortized discounts of $2.5 million as of December 31, 2012. In September 2013, the Company called and liquidated Whitney CLO I. As a result, substantially all of the remaining assets were sold and the balance on the outstanding notes totaling $103.7 million was paid down.

(10) The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Senior Notes, respectively.

Collateralized Debt Obligations

Resource Real Estate Funding CDO 2007-1

In June 2007, RSO closed RREF CDO 2007-1, a $500 million CDO transaction that provided financing for commercial real estate loans and commercial mortgage-backed securities.  The investments held by RREF CDO 2007-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2007-1 issued a total of $265.6 million of senior notes at par to unrelated investors.  RCC Real Estate, Inc. ("RCC Real Estate"), a wholly owned subsidiary of RSO, purchased 100% of the class H senior notes (rated  BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for $68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2007-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2007-1. The reinvestment period for RREF 2007-1 ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of September 30, 2013, $62.6 million of Class A-1 notes have been paid down and $50.0 million of the class A-1R notes have been paid down.

At closing, the senior notes issued to investors by RREF CDO 2007-1 consisted of the following classes: (i) $180.0 million of class A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of unissued class A-1R notes, which allowed the CDO to fund future funding obligations under the existing whole loan participations that had future funding commitments; the undrawn balance of the class A-1R notes accrued a commitment fee at a rate per annum equal to 0.18%, the drawn balance bore interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of class A-2 notes bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million of class B notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million of class C notes bearing interest at a fixed rate of 6.423%; (vi) $26.8 million of class D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of class E notes bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9 million of class F notes bearing interest at one-month LIBOR plus 1.30%; (ix) $11.3 million of class G notes bearing interest at one-month LIBOR plus 1.55%; (x) $11.3 million of class H notes bearing interest at one-month LIBOR plus 2.30%; (xi) $11.3 million of class J notes bearing interest at one-month LIBOR plus 2.95%; (xii) $10.0 million of class K notes bearing interest at one-month LIBOR plus 3.25%; (xiii) $18.8 million of class L notes bearing interest at a fixed rate of 7.50% and (xiv) $28.8 million of class M notes bearing interest at a fixed rate of 8.50%.  All of the notes issued mature in September 2046, although RSO has the right to call the notes anytime after July 2017 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 0.85% and 0.81% at September 30, 2013 and December 31, 2012, respectively.

During the nine months ended September 30, 2012, RSO repurchased $50.0 million of the Class A-1R notes in RREF CDO 2007-1 at a weighted average price of 90.00% to par which, after fees paid to an investment bank to finance the transaction and related expenses, resulting in a $3.6 million gain reported as a gain on the extinguishment of debt in RSO's consolidated statements of income. During the three and nine months ended September 30, 2013, RSO did not repurchase any notes.

As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.

Resource Real Estate Funding CDO 2006-1

In August 2006, RSO closed RREF CDO 2006-1, a $345.0 million CDO transaction that provided financing for commercial real estate loans.  The investments held by RREF CDO 2006-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2006-1 issued a total of $308.7 million of senior notes at par to investors of which RCC Real Estate purchased 100% of the class J senior notes (rated BB: Fitch) and 100% of the class K senior notes (rated B:Fitch) for $43.1 million.  In addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $36.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2006-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2006-1.  The reinvestment period for RREF 2006-1 ended in September 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of September 30, 2013, $108.1 million, respectively, of Class A-1 notes have been paid down.

At closing, the senior notes issued to investors by RREF CDO 2006-1 consisted of the following classes:  (i) $129.4 million of class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4 million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii) $5.0 million of class A-2 notes bearing interest at a fixed rate of 5.842%; (iv) $6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%; (v) $20.7 million of class C notes bearing interest at one-month LIBOR plus 0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of class J notes bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of class K notes bearing interest at a fixed rate of 6.00%.  All of the notes issued mature in August 2046, although RSO has the right to call the notes anytime after August 2016 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 1.86% and 1.42% at September 30, 2013 and December 31, 2012, respectively.

During the nine months ended September 30, 2012, RSO repurchased $4.3 million of the Class A-1 notes and $4.0 million of the Class C notes in RREF CDO 2006-1 at a weighted average price of 81.63% to par which resulted in a $1.5 million gain reported as a gain on the extinguishment of debt in RSO's consolidated statements of income. During the three and nine months ended September 30, 2013, RSO did not repurchase any notes.

As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.

Whitney CLO I

In February 2011, RSO acquired the rights to manage the assets held by Whitney CLO I. In October 2012, RSO purchased a $20.9 million preferred equity interest at a discount of 42.5% which represents 66.6% of the outstanding preference shares in Whitney CLO I. In May 2013, RSO purchased an additional $550,000 equity interest in Whitney CLO I and as of September 30, 2013 holds 68.3% of the outstanding preference shares. Based upon those purchases, RSO determined that it had a controlling interest and consolidated Whitney CLO I. The preferred equity interest is subordinated in right of payment to all other securities issued by Whitney CLO I. In September 2013, RSO liquidated Whitney CLO I, and as a result substantially all of the assets were sold. Total proceeds from the sale of these assets, plus proceeds from previous sales and paydowns in the CLO were used to pay down the remaining balance on the outstanding notes of $103.7 million.

The balance of senior notes issued to investors when RSO acquired a controlling interest in October 2012 were as follows: (i) $48.8 million of class A-1L notes bearing interest at LIBOR plus 0.32%; (ii) $26.5 million of class A-1LA notes bearing interest at LIBOR plus 0.29%; (iii) $36.5 million of class A-1LB notes bearing interest at LIBOR plus 0.45%; (iv) $19.8 million of class A-2F notes bearing interest at LIBOR plus 5.19%; (v) $15.0 million of class A-2L notes bearing interest at LIBOR plus 0.57%; (vi) $25.0 million of class A-3L notes bearing interest at LIBOR plus 1.05%; (vii) $23.5 million of class B-1LA notes bearing interest at LIBOR plus 2.10%; (viii) $14.4 million of class B-1LB notes bearing interest at LIBOR plus 1.00%. All of the notes issued mature on March 1, 2017. RSO has the right to call the notes anytime after March 1, 2009 until maturity in March 2017. The weighted average interest rate on all notes was 0% and 1.82% at September 30, 2013 and December 31, 2012, respectively.

Apidos CLO VIII

In October 2011, RSO closed Apidos CLO VIII, a $350.0 million CLO transaction that provides financing for bank loans.  The investments held by Apidos CLO VIII collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CLO VIII issued a total of $317.6 million of senior notes at a discount of 4.4% to investors and RCC Commercial purchased a $15.0 million interest representing 43.0% of the outstanding subordinated debt.  The remaining 57.0% of subordinated debt is owned by unrelated third parties.  The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII.

The senior notes issued to investors by Apidos CLO VIII consist of the following classes: (i) $231.2 million of class A-1 notes bearing interest at LIBOR plus 1.5%; (ii) $35.0 million of class A-2 notes bearing interest at LIBOR plus 2.0%; (iii) $17.3 million of class B-1 notes bearing interest at LIBOR plus 2.5%; (iv) $6.8 million of class B-2 notes bearing interest at LIBOR plus 2.5%; (v) $14.1 million of class C notes bearing interest at LIBOR plus 3.1% and (vi) $13.2 million of class D notes bearing interest at LIBOR plus 4.5%. All of the notes issued mature on October 17, 2021, although RSO has the right to call the notes anytime from October 17, 2013 until maturity.  The weighted average interest rate on all notes was 2.09% and 2.16% at September 30, 2013 and December 31, 2012, respectively. In October 2013, Apidos CLO VIII was called and liquidated. Proceeds from the liquidation were used to pay the notes down in full.

Apidos Cinco CDO

In May 2007, RSO closed Apidos Cinco CDO, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos Cinco CDO collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos Cinco CDO issued a total of $322.0 million of senior notes at par to investors and RCC Commercial purchased a $28.0 million equity interest representing 100% of the outstanding preference shares.  The reinvestment period for Apidos Cinco CDO will end in May 2014.  The equity interest is subordinated in right of payment to all other securities issued by Apidos Cinco CDO.

The senior notes issued to investors by Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of class A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3 notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14, 2020, although RSO has the right to call the notes anytime after May 14, 2011 until maturity.  The weighted average interest rate on all notes was 0.77% and 0.82% at September 30, 2013 and December 31, 2012, respectively.

Apidos CDO III

In May 2006, RSO closed Apidos CDO III, a $285.5 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO III collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO III issued a total of $262.5 million of senior notes at par to investors and RCC Commercial purchased a $23.0 million equity interest representing 100% of the outstanding preference shares. The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO III.

At closing, the senior notes issued to investors by Apidos CDO III consisted of the following classes:  (i) $212.0 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes issued mature on September 12, 2020, although RSO has the right to call the notes anytime after September 12, 2011 until maturity.  The weighted average interest rate on all notes was 0.86% and 0.80% at September 30, 2013 and December 31, 2012, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of September 30, 2013, $116.4 million of Class A-1 notes have been paid down.

Apidos CDO I

In August 2005, RSO closed Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO I collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO I issued a total of $321.5 million of senior notes at par to investors and RCC Commercial purchased a $28.5 million equity interest representing 100% of the outstanding preference shares.  The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO I.

At closing, the senior notes issued to investors by Apidos CDO I consisted of the following classes:  (i) $259.5 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and (v) $8.0 million of class D notes bearing interest at a fixed rate of 9.25%.  All of the notes issued mature on July 27, 2017, although RSO has the right to call the notes anytime after July 27, 2010 until maturity.  The weighted average interest rate on all notes was 1.52% and 1.07% at September 30, 2013 and December 31, 2012, respectively. The reinvestment period for Apidos CDO I ended in July 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of September 30, 2013, $217.7 million of Class A-1 Notes have been paid down.

During the nine months ended September 30, 2012, RSO repurchased $2.0 million of the Class B notes in Apidos CDO I at a weighted average price of 85.11% of par which resulted in a $298,000 gain reported as a gain on the extinguishment of debt in RSO's consolidated statements of income. During the three and nine months ended September 30, 2013, RSO did not repurchase any notes.

Unsecured Junior Subordinated Debentures

In May 2006 and September 2006, RSO formed RCT I and RCT II, respectively, for the sole purpose of issuing and selling capital securities representing preferred beneficial interests.  Although RSO owns 100% of the common securities of RCT I and RCT II, RCT I and RCT II are not consolidated into RSO’s consolidated financial statements because RSO is not deemed to be the primary beneficiary of these entities.  In connection with the issuance and sale of the capital securities, RSO issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing RSO’s maximum exposure to loss.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II are included in RSO's borrowings and are being amortized into interest expense in RSO's consolidated statements of income using the effective yield method over a ten year period.

The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at September 30, 2013 were $285,000 and $306,000, respectively.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2012 were $358,000 and $377,000, respectively.  The rates for RCT I and RCT II, at September 30, 2013, were 4.22% and 4.22%, respectively.  The rates for RCT I and RCT II, at December 31, 2012, were 4.26% and 4.26%, respectively. 

The rights of holders of common securities of RCT I and RCT II are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities.  The capital and common securities of RCT I and RCT II are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each.  Unless earlier dissolved, RCT I will dissolve on May 25, 2041 and RCT II will dissolve on September 29, 2041.  The junior subordinated debentures are the sole assets of RCT I and RCT II, mature on September 30, 2036 and October 30, 2036, respectively, and may be called at par by RSO any time after September 30, 2011 and October 30, 2011, respectively.  RSO records its investments in RCT I and RCT II’s common securities of $774,000 each as investments in unconsolidated trusts and records dividend income upon declaration by RCT I and RCT II.

Repurchase and Credit Facilities

CMBS – Term Repurchase Facility

In February 2011, the registrant's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc.(collectively, the "RSO Subsidiaries"), entered into a master repurchase and securities contract (the “2011 Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  Under the 2011 Facility, from time to time, the parties may enter into transactions in which the RSO Subsidiaries and Wells Fargo agree to transfer from the RSO Subsidiaries to Wells Fargo all of their right, title and interest to certain commercial mortgage backed securities and other assets (the “Assets”) against the transfer of funds by Wells Fargo to the RSO Subsidiaries, with a simultaneous agreement by Wells Fargo to transfer back to the RSO Subsidiaries such Assets at a date certain or on demand, against the transfer of funds from the RSO Subsidiaries to Wells Fargo.  The maximum amount of the Facility is $100.0 million which has a two year term with a one year option to extend, and an interest rate equal to the one-month LIBOR plus 1.00% plus a .25% initial structuring fee and a .25% extension fee upon exercise. On February 1, 2013, RSO exercised the option to extend the 2011 Facility to January 31, 2014 and negotiated another one year option to extend to January 31, 2015. The RSO Subsidiaries may enter into interest rate swaps and cap agreements for securities whose average life exceeds two years to mitigate interest rate risk under the 2011 Facility.

The 2011 Facility contains customaryevents of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the RSO Subsidiaries to repay the purchase price for purchased assets.

 The 2011 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the RSO Subsidiaries to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.

 Under the terms of the 2011 Facility and pursuant to a guarantee agreement dated February 1, 2011 (the “ 2011 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Subsidiaries to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of the RSO Subsidiaries with respect to Wells Fargo under each of the governing documents.  The 2011 Guaranty includes covenants that, among other things, limit RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate and RCC Commercial were in compliance with all debt covenants as of September 30, 2013.

At September 30, 2013, RCC Real Estate and RCC Commercial had borrowed $51.0 million (net of $47,000 of deferred debt issuance costs), all of which the RSO Subsidiaries had guaranteed.  At September 30, 2013, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $60.1 million and a weighted average interest rate of one-month LIBOR plus 1.22%, or 1.30%.  At December 31, 2012, RCC Real Estate had borrowed $42.5 million (net of $23,000 of deferred debt issuance costs), all of which the RSO subsidiaries had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $51.4 million and a weighted average interest rate of one-month LIBOR plus 1.30%, or 1.53%. At September 30, 2013, RSO also had repurchase agreements of $9.3 million, with a weighted average interest rate of one-month LIBOR plus 1.42% or 1.60% that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table. The borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $11.3 million as of September 30, 2013. At December 31, 2012, RSO also had repurchase agreements of $12.2 million, with a weighted average interest rate of one-month LIBOR plus 1.42% or 1.60%, respectively. The borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $14.6 million as of December 31, 2012.

The following table shows information about the amount at risk under this facility (dollars in thousands):

	Amount at Risk (1)		Weighted Average Maturity in Days	Weighted Average Interest Rate
September 30, 2013:
Wells Fargo Bank, National Association.(2)	$	11,195	18	1.30	%
December 31, 2012:
Wells Fargo Bank, National Association.(2)	$	10,722	18	1.53	%

(1) Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.

(2) $9.3 million and $12.2 million of linked repurchase agreement borrowings are being included as derivative instruments as of September 30, 2013 and December 31, 2012, respectively.

CRE – Term Repurchase Facilities

On February 27, 2012, RCC Real Estate entered into a master repurchase and securities agreement (the "2012 Facility") with Wells Fargo to finance the origination of commercial real estate loans.  The 2012 facility had a maximum amount of $150.0 million and an initial 18 month term with twoone year options to extend.  RSO paid an origination fee of 37.5 basis points (0.375)%.  RSO guaranteed RCC Real Estate’s performance of its obligations under the 2012 Facility.  On April 2, 2013, RCC Real Estate entered into an amendment which increased the size to $250.0 million and extended the current term of the 2012 Facility to February of 2015 and provides two additional one year extension options at RSO's discretion. RCC Real Estate paid an additional structuring fee of $101,000 and an extension fee of $938,000 in connection with the amendment and will amortize the additional fees over the term of the extension. At September 30, 2013, RCC Real Estate had borrowed $152.5 million (net of $1.3 million of deferred debt issuance costs), all of which RSO had guaranteed.  At September 30, 2013, borrowings under the 2012 Facility were secured by 20 commercial real estate loans with an estimated fair value of $220.2 million and a weighted average interest rate of one-month LIBOR plus 2.43%, or 2.61%. At December 31, 2012, RCC Real Estate had borrowed $58.8 million (net of $348,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At December 31, 2012, borrowings under the 2012 Facility were secured by eight commercial real estate loans with an estimated fair value of $85.4 million and a weighted average interest rate of one-month LIBOR plus 2.67%, or 2.88%.

This 2012 Facility contains customaryevents of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of RSO to repay the purchase price for purchased assets.

 The 2012 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require RSO to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.

 Under the terms of the 2012 Facility and pursuant to a guarantee agreement dated February 27, 2012 (the “2012 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Companies to Wells Fargo under or in connection with the 2012 Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of RSO with respect to Wells Fargo under each of the governing documents.  The 2012 Guaranty includes covenants that, among other things, limit the registrant's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of September 30, 2013.

The following table shows information about the amount at risk under the facility (dollars in thousands);

	Amount at Risk (1)		Weighted Average Maturity in Days	Weighted Average Interest Rate
September 30, 2013:
Wells Fargo	$	66,619	18	2.61	%
December 31, 2012
Wells Fargo	$	26,332	18	2.88	%

(1) Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.

On July 19, 2013, RCC Real Estate's wholly owned subsidiary, RCC Real Estate SPE 5 ("SPE 5") entered into a master repurchase and securities agreement (the "DB Facility") with Deutsche Bank AG, Cayman Islands Branch ("DB") to finance the origination of commercial real estate loans.  The DB Facility had a maximum amount of $200 million and an initial 12 month term with twoone-year extensions at the option of SPE 5 and subject further to the right of SPE 5 to repurchase the assets held in the facility earlier. RSO paid a structuring fee of 0.25% of the maximum facility amount, as well as other reasonable closing costs. RSO guaranteed SPE 5's performance of its obligations under the DB Facility. There were no outstanding borrowings under this facility as of September 30, 2013 or December 31, 2012.

The DB Facility contains provisions that provide DB with certain rights if certain credit events have occurred with respect to one or more assets financed on the DB Facility to either repay a portion of the advance on such asset(s) or repay such advance in full (by repurchase of such asset(s). Depending on the nature of the credit event, such repayment may be required notwithstanding the availability of interest and principal payments from assets financed on the DB Facility, or may only be required to the extent of the availability of such payments.

The DB Facility contains events of default (subject to certain materiality thresholds and grace periods) customary for this type of financing arrangement, including but not limited to: payment defaults; bankruptcy or insolvency proceedings; a change of control of SPE 5 or RSO; breaches of covenants and/or certain representations and warranties; performance defaults by RSO; a judgment in an amount greater than $100,000 against SPE 5 or $5,000,000 in the aggregate against RSO; or a default involving the failure to pay or acceleration of a monetary obligation in excess of $100,000 of SPE 5 or $5.0 million of RSO. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the DB Facility and the liquidation by DB of assets then subject to the DB Facility. RSO was in compliance with all debt covenants as of September 30, 2013.

Short-Term Repurchase Agreements

On November 6, 2012, RSO entered into a master repurchase and securities agreement with JP Morgan Securities LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity with monthly resets of interest rates.  At September 30, 2013, RCC Real Estate had borrowed $17.8 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At September 30, 2013, borrowings under the repurchase agreement were secured by four CMBS bonds with an estimated fair value of $26.8 million and a weighted average interest rate of one-month LIBOR plus 0.79%, or 0.98%.  At December 31, 2012, RCC Real Estate had borrowed $4.7 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $7.2 million and a weighted average interest rate of one-month LIBOR plus 0.80%, or 1.01%. 

The following table shows information about the amount at risk under this facility (dollars in thousands);

	Amount at Risk (1)		Weighted Average Maturity in Days	Weighted Average Interest Rate
September 30, 2013:
JP Morgan Securities, LLC (2)	$	9,696	30	0.98	%
December 31, 2012:
JP Morgan Securities, LLC (2)	$	2,544	11	1.01	%

(1) Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.

(2) $17.8 million and$4.7 million linked repurchase agreement borrowings are being included as derivative instruments as of September 30, 2013 and December 31, 2012.

On February 14, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity date with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.  At September 30, 2013, RCC Real Estate had borrowed $1.7 million, all of which RSO had guaranteed.  At September 30, 2013, borrowings under the repurchase agreement were secured by one CMBS bond with an estimated fair value of $2.8 million and a weighted average interest rate of one-month LIBOR plus 1.01%, or 1.19%. At December 31, 2012, RCC Real Estate had borrowed $1.9 million, all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by one CMBS bond with an estimated fair value of $3.1 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%. At September 30, 2013, RSO also had repurchase agreements of $21.5 million, with a weighted average interest rate of one-month LIBOR plus 1.02% or 1.20%, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table. At September 30, 2013, borrowings under the repurchase agreement accounted for as Linked Transactions were secured by seven CMBS bonds with an estimated fair value of $31.1 million. At December 31, 2012, RSO also had repurchase agreements of $3.5 million, with a weighted average interest rate of one-month LIBOR plus 1.25% or 1.46% , respectively, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table. At December 31, 2012, borrowings under the repurchase agreement accounted for as Linked Transactions were secured by a CMBS bond with an estimated fair value of $5.7 million.

The following table shows information about the amount at risk under this facility (dollars in thousands);

	Amount at Risk (1)		Weighted Average Maturity in Days	Weighted Average Interest Rate
September 30, 2013:
Wells Fargo Securities, LLC (2)	$	10,854	30	1.19	%
December 31, 2012:
Wells Fargo Securities, LLC (2)	$	1,956	28	1.46	%

(1) Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.

(2) $21.5 million and $3.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of September 30, 2013 and December 31, 2012.

On March 8, 2005, RCC Real Estate entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of CMBS and commercial real estate loans.  There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.   At September 30, 2013, RCC Real Estate had borrowed $15.1 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At September 30, 2013, borrowings under the repurchase agreement were secured by five CMBS bonds with an estimated fair value of $24.3 million and a weighted average interest rate of one-month LIBOR plus 1.27%, or 1.45%.  At December 31, 2012, RCC Real Estate had borrowed $3.1 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $5.1 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%. 

The following table shows information about the amount at risk under this facility (dollars in thousands);

	Amount at Risk (1)		Weighted Average Maturity in Days	Weighted Average Interest Rate
September 30, 2013:
Deutsche Bank Securities, Inc.	$	9,276	19	1.45	%
December 31, 2012
Deutsche Bank Securities, Inc.	$	2,069	7	1.46	%

(1) Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.

Mortgage Payable

On August 1, 2011, RSO, through RCC Real Estate, purchased Whispertree Apartments, a 504 unit multi-family property located in Houston, Texas, for $18.1 million.  The property was 95% occupied at acquisition.  In conjunction with the purchase of the property, RSO entered into a seven year mortgage of $13.6 million with a lender.  The mortgage bears interest at a rate of one-month LIBOR plus 3.95%.  As of September 30, 2013, there were no outstanding borrowings under this agreement as the property was sold during the three months ended September 30, 2013 and the underlying mortgage was repaid. At December 31, 2012 there was $13.6 million outstanding and the borrowing rate was 4.17%.

. Related party transactions - RSO

Relationship with LEAF.LEAF originates and manages equipment leases and notes on behalf of RSO.

On March 5, 2010, RSO entered into agreements with Lease Equity Appreciation Fund II, L.P. (“LEAF II”) (an equipment leasing partnership sponsored by LEAF Financial and of which a LEAF Financial subsidiary is the general partner), pursuant to which RSO provided and funded an $8.0 million credit facility to LEAF II.  The credit facility initially had a one year term at 12% per year, payable quarterly, and was secured by all the assets of LEAF II including its entire ownership interest in LEAF II Receivables Funding.  RSO received a 1% origination fee in connection with establishing the facility.  The facility originally matured on March 3, 2011 and was extended until September 3, 2011 with a 1% extension fee paid on the outstanding loan balance.  On June 3, 2011, RSO entered into an amendment to extend the maturity to February 15, 2012 and decrease the interest rate from 12% to 10% per annum resulting in a troubled-debt restructuring under current accounting guidance.  On February 15, 2012, the credit facility was further amended to extend the maturity to February 15, 2013 with a 1% extension fee accrued and added to the amount outstanding.  On January 11, 2013, RSO entered into another amendment to extend the maturity to February 15, 2014 with an additional 1% extension fee accrued and added to the amount outstanding. The loan is current and performing with balances outstanding at September 30, 2013 and December 31, 2012 of $5.9 million and $6.8 million, respectively.

Relationship with CVC Credit Partners.On February 24, 2011, a subsidiary of RSO purchased 100% of the ownership interests in Churchill Pacific Asset Management LLC ("CPAM") from Churchill Financial Holdings LLC for $22.5 million.  CPAM subsequently changed its name to RCAM. Through RCAM, RSO is entitled to collect senior, subordinated and incentive fees related to five CLO holdings of approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing the five CLOs.   CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM.  For the three and nine months endedSeptember 30, 2013, CVC Credit Partners earned subordinated fees of $160,000 and $515,000, respectively. For the three and nine months endedSeptember 30, 2012, CVC Credit Partners earned subordinated fees of $197,000 and $604,000, respectively. In October 2012, RSO purchased 66.6% of the preferred equity in one of the RCAM CLOs. In May 2013, RSO purchased additional equity in this CLO, increasing its ownership percentage to 68.3%. In September 2013, this CLO was called and the notes were paid down in full. Another RCAM-managed CLO also elected to redeem its outstanding notes in whole earlier this year in February 2013.

Relationship with Resource Real Estate. On June 21, 2011, RSO entered into a joint venture with an unaffiliated third party to form CR SLH Partners, L.P. (“SLH Partners”) to purchase a defaulted promissory note secured by a mortgage on a multi-family apartment building.  RSO purchased a 10% equity interest in the venture and also loaned SLH Partners $7.0 million to finance the project secured by a first mortgage lien on the property. On May 23, 2012, SLH Partners repaid the $7.0 million loan in its entirety.  The loan had a maturity date of September 21, 2012 and bore interest at a fixed rate of 10.0% per annum on the unpaid principal balance, payable monthly.   RSO received a commitment fee equal to 1.0% of the loan amount at the origination of the loan and received a $70,000 exit fee upon repayment.  RREM was appointed as the asset manager of the venture.  RREM performs lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements.  RREM receives an annual asset management fee equal to 2.0% of the gross receipts generated from the property.  RSO held a $1.1 million and $1.2 million preferred equity investment in SLH Partners as of September 30, 2013 and December 31, 2012, respectively.

Relationship with TBBK.  Walter Beach, a director of TBBK since 1999, has also served as a director of RSO since March 2005. On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility with Bancorp.  The note matured on June 30, 2012 and was not renewed.  

Relationship with Ledgewood.  Until 1996, Edward E. Cohen, a director who was RSO’s Chairman from its inception until November 2009, was of counsel to Ledgewood, P.C., a law firm.  In addition, one of RSO’s executive officers, Jeffrey F. Brotman, was employed by Ledgewood until 2007.  Mr. E. Cohen receives certain debt service payments from Ledgewood related to the termination of his affiliation with Ledgewood and its redemption of his interest in the firm.  Mr. Brotman also receives certain debt service payments from Ledgewood related to the termination of his affiliation with the firm.  For the three and nine months endedSeptember 30, 2013, RSO paid Ledgewood $70,000 and $155,000, respectively, in connection with legal services rendered to RSO as compared to $160,000 and $277,000 for the three and nine months endedSeptember 30, 2012, respectively.

M. Fair value of financial instruments - RSO

In analyzing the fair value of its investments accounted for on a fair value basis, RSO follows the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  RSO determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as using third party valuation firms or discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment.  RSO evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, RSO expects that changes in classifications between levels will be rare.

Certain assets and liabilities are measured at fair value on a recurring basis.  The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.

RSO reports its investment securities available-for-sale at fair value.  To determine fair value, RSO uses an independent third-party valuation firm utilizing market color as well as appropriate prepayment, default, and recovery rates.  These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Based on the market color available for each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.

RSO reports its investment securities, trading at fair value, based on an independent third-party valuation.  RSO evaluates the reasonableness of the valuation it receives by using a dealer quote.  If there is a material difference between the value indicated by the third party and a quote RSO receives, RSO will evaluate the difference.  Any changes in fair value are recorded on RSO’s results of operations as net unrealized (loss) gain on investment securities, trading.

The CMBS underlying RSO’s Linked Transactions are valued using the same techniques as those used for RSO’s other CMBS. The value of the underlying CMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the CMBS and accrued interest payable on the underlying repurchase agreement borrowings. RSO’s Linked Transactions are classified as Level 2 or Level 3 in the fair value hierarchy.

Derivatives (interest rate swaps and interest rate caps), both assets and liabilities, are reported at fair value, and are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters.  This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors.  Although RSO has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by RSO and its counterparties.  RSO assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and, if material, categorizes those derivatives within Level 3 of the fair value hierarchy.

The following table presents information about RSO’s assets (including derivatives that are presented net) measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):

	Level 1		Level 2		Level 3		Total
September 30, 2013:
Assets:
Investment securities, trading	$	—	$	—	$	12,099	$	12,099
Investment securities available-for-sale	4,972		85,826		129,886		220,684
CMBS - linked transactions	—		9,410		20,568		29,978
Total assets at fair value	$	4,972	$	95,236	$	162,553	$	262,761
Liabilities:
Derivatives (net)	$	—	$	442	$	11,766	$	12,208
Total liabilities at fair value	$	—	$	442	$	11,766	$	12,208
December 31, 2012:
Assets:
Investment securities, trading	$	—	$	—	$	24,843	$	24,843
Investment securities available-for-sale	9,757		132,561		89,272		231,590
CMBS - linked transactions	—		4,802		2,033		6,835
Total assets at fair value	$	9,757	$	137,363	$	116,148	$	263,268
Liabilities:
Derivatives (net)	$	—	$	610	$	14,077	$	14,687
Total liabilities at fair value	$	—	$	610	$	14,077	$	14,687

The following table presents additional information about assets which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):

	Level 3
Beginning balance, January 1, 2013	$	116,148
Total gains or losses (realized/unrealized):
Included in earnings	8,530
Purchases	89,514
Sales	(30,196		)
Paydowns	(20,186		)
Unrealized gains (losses) – included in Accumulated other comprehensive income	(1,257		)
Transfers from level 2	—
Ending balance, September 30, 2013	$	162,553

The following table presents additional information about liabilities which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):

	Level 3
Beginning balance, January 1, 2013	$	14,077
Unrealized gains – included in Accumulated other comprehensive income	(2,311		)
Ending balance, September 30, 2013	$	11,766

RSO had $255,000 and $811,000 of impairment losses included in earnings due to the other-than-temporary impairment charges on one and four securities during each of the three and nine months endedSeptember 30, 2013, respectively. RSO had $9,000 and $180,000 of impairment losses included in earnings due to other-than-temporary impairment charges on two and four securities during the three and nine months endedSeptember 30, 2012, respectively. These losses are included in the RSO consolidated statements of income as net impairment losses recognized in earnings.

Loans held for sale consist of bank loans and commercial real estate loans (“CRE loans”) identified for sale due to credit concerns.  Interest on loans held for sale is recognized according to the contractual terms of the loan and included in RSO's interest income on loans.  The fair value of bank loans held for sale and impaired bank loans is based on what secondary markets are currently offering for these loans.  As such, RSO classifies these loans as nonrecurring Level 2.  For RSO’s CRE loans where there is no primary market, fair value is measured using discounted cash flow analysis and other valuation techniques and these loans are classified as nonrecurring Level 3. The amount of nonrecurring fair value losses for impaired loans for the three and nine months endedSeptember 30, 2013 was $69 and $3.1 million, respectively, as compared to $3.4 million and $5.6 million for the three and nine months endedSeptember 30, 2012, respectively, and is included in RSO's consolidated statements of income as provision for loan losses.

The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):

	Level 1		Level 2		Level 3		Total
September 30, 2013:
Assets:
Loans held for sale	$	—	$	332,351	$	—	$	332,351
Impaired loans	—		1,046		—		1,046
Total assets at fair value	$	—	$	333,397	$	—	$	333,397
December 31, 2012:
Assets:
Loans held for sale	$	—	$	14,894	$	34,000	$	48,894
Impaired loans	—		4,366		21,000		25,366
Total assets at fair value	$	—	$	19,260	$	55,000	$	74,260

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):

	Fair Value at September 30, 2013		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Interest rate swap agreements	$	12,208	Discounted cash flow	Weighted average credit spreads	5.00%

RSO is required to disclose the fair value of financial instruments for which it is practicable to estimate that value.  The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, principal paydown receivable, interest receivable, distribution payable and accrued interest expense approximates their carrying value on RSO's consolidated balance sheet.  

The fair value of RSO's Level 2 loans held-for-investment was primarily measured using a third-party pricing service.  The fair value of RSO’s Level 3 loans held-for-investment was measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Loans receivable-related party are estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

CDO notes are valued using the dealer quotes, typically the dealer who underwrote the CDO in which the notes are held.

Junior subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.

The fair values of RSO’s remaining financial instruments that are not reported at fair value on the RSO consolidated balance sheets are reported below (in thousands):

			Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets of Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013:
Loans held-for-investment	$	1,305,739	$	1,299,103	$	—	$	568,545	$	730,558
Loans receivable-related party	$	8,067	$	8,067	$	—	$	—	$	8,067
CDO notes	$	1,166,209	$	1,020,919	$	—	$	1,020,919	$	—
Junior subordinated notes	$	50,956	$	17,450	$	—	$	—	$	17,450
Repurchase agreement	$	205,265	$	205,265	$	—	$	—	$	205,265
December 31, 2012:
Loans held-for-investment	$	1,793,780	$	1,848,617	$	—	$	1,186,642	$	661,975
Loans receivable-related party	$	8,324	$	8,324	$	—	$	—	$	8,324
CDO notes	$	1,614,883	$	1,405,124	$	—	$	1,405,124	$	—
Junior subordinated notes	$	50,814	$	17,308	$	—	$	—	$	17,308
Repurchase agreement	$	106,303	$	106,303	$	—	$	—	$	106,303