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VARIABLE INTEREST ENTITIES
 12 Months Ended
Dec. 31, 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.
Consolidated VIE - RSO
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 and determined that its benefits could be significant to RSO. Accordingly, management concluded that the Company is the primary beneficiary and should consolidate RSO. However, 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 assets and liabilities and operations of RSO which was consolidated by the Company:
RSO Balance Sheets Detail (in thousands):
 
 
 
 
December 31,
 
2013
 
2012
ASSETS (1)
 
 
 
Cash and cash equivalents
$
262,270

 
$
85,278

Restricted cash
63,309

 
94,112

Subtotal- Cash and cash equivalents
325,579

 
179,390

Investment securities, trading
11,558

 
24,843

Investment securities available-for-sale, pledged as collateral, at fair value
162,608

 
195,200

Investment securities available-for-sale, at fair value
47,229

 
36,390

Subtotal - Investments, at fair value
221,395

 
256,433

Loans, pledged as collateral and net of allowances of $13.8 million and $17.7 million
1,369,526

 
1,793,780

Loans receivable–related party
6,966

 
8,324

Loans held for sale
21,916

 
48,894

Subtotal - Loans, before eliminations
1,398,408

 
1,850,998

Eliminations
(950
)
 
(1,570
)
Subtotal - Loans
1,397,458

 
1,849,428

Property available-for-sale
25,346

 
—

Investment in real estate
29,778

 
75,386

Investments in unconsolidated entities
74,438

 
45,413

Subtotal, Investments in real estate and unconsolidated entities, before eliminations
129,562

 
120,799

Eliminations
—

 
(93
)
Subtotal, Investments in real estate and unconsolidated entities
129,562

 
120,706

Line items included in "other assets":
 
 
 
Linked transactions, net at fair value
30,066

 
6,835

Interest receivable
8,965

 
7,763

Deferred tax asset
5,212

 
2,766

Principal paydown receivable
6,821

 
25,570

Intangible assets
11,822

 
13,192

Prepaid expenses
2,871

 
10,396

Other assets
10,726

 
4,109

Subtotal - Other assets, before eliminations
76,483

 
70,631

Eliminations
(16
)
 
(31
)
Subtotal - Other assets
76,467

 
70,600

Total assets (excluding eliminations)
$
2,151,427

 
$
2,478,251

Total assets (including eliminations)
$
2,150,461

 
$
2,476,557

LIABILITIES (2)
 

 
 

Borrowings
$
1,319,810

 
$
1,785,600

Eliminations
205

 
—

Subtotal Borrowings
1,320,015

 
1,785,600

Distribution payable
27,023

 
21,655

Accrued interest expense
1,693

 
2,918

Derivatives, at fair value
10,586

 
14,687

Accrued tax liability
1,629

 
13,641

Deferred tax liability
4,112

 
8,376

Accounts payable and other liabilities
12,650

 
18,029

Subtotal - Other liabilities, before eliminations
57,693

 
79,306

Eliminations
(2,446
)
 
(8,067
)
Subtotal - Other liabilities
55,247

 
71,239

Total liabilities (before eliminations)
$
1,377,503

 
$
1,864,906

Total liabilities (after eliminations)
$
1,375,262

 
$
1,856,839


RSO Balance Sheets Detail (in thousands):
 
 
 
 
December 31,
 
2013
 
2012
(1) Assets of consolidated RSO's VIEs included in the total assets above:
 
 
 
        Restricted cash
$
61,372

 
$
90,108

        Investments securities available-for-sale, pledged as collateral, at fair value
105,846

 
135,566

        Loans held for sale
2,376

 
14,894

        Loans, pledged as collateral and net of allowances of $8.8 million and $15.2 million
1,219,569

 
1,678,719

        Interest receivable
5,627

 
5,986

        Prepaid expenses
247

 
328

        Principal receivable
6,821

 
25,570

        Other assets
—

 
333

        Total assets of consolidated VIEs
$
1,401,858

 
$
1,951,504

 
 
 
 
(2) Liabilities of consolidated RSO's VIEs included in the total liabilities above:
 
 
 
        Borrowings
$
1,070,339

 
$
1,614,882

        Accrued interest expense
918

 
2,666

        Derivatives, at fair value
10,191

 
14,078

        Accounts payable and other liabilities
1,604

 
698

        Total liabilities of consolidated VIEs
$
1,083,052

 
$
1,632,324

The following table presents detail of noncontrolling interests attributable to RSO:
 
December 31,
 
2013
 
2012
Total stockholders' equity per RSO balance sheet
$
773,924

 
$
613,345

Eliminations
(30,560
)
 
(31,022
)
Noncontrolling interests attributable to RSO
$
743,364

 
$
582,323

RSO Income Statement Detail (in thousands):
 
 
 
 
 
 
Years Ended December 31,
 
2013
 
2012
 
2011
REVENUES
 
 
 
 
 
Interest income:
 
 
 
 
 
Loans
$
99,455

 
$
109,030

 
$
86,739

Securities
14,309

 
14,296

 
12,424

Interest income − other
4,212

 
10,004

 
10,711

Total interest income
117,976

 
133,330

 
109,874

Interest expense
61,010

 
42,792

 
32,186

Net interest income
56,966

 
90,538

 
77,688

Rental income
19,923

 
11,463

 
3,656

Dividend income
273

 
69

 
3,045

Equity in net earnings (losses) of unconsolidated subsidiaries
949

 
(2,709
)
 
112

Fee income
6,075

 
7,068

 
7,789

Net realized gain on sales of investment securities available-for-sale and loans
10,986

 
4,106

 
2,643

Net realized and unrealized (loss) gain on investment securities, trading
(324
)
 
12,435

 
837

Unrealized (loss) gain and net interest income on linked transactions, net
(3,841
)
 
728

 
216

Revenues from consolidated VIE - RSO
91,007

 
123,698

 
95,986

OPERATING EXPENSES
 

 
 

 
 
Management fees − related party
14,220

 
18,512

 
11,022

Equity compensation − related party
10,472

 
4,636

 
2,526

Rental operating expense
14,062

 
8,046

 
2,743

General and administrative
16,110

 
9,773

 
8,399

Depreciation and amortization
3,855

 
5,885

 
4,619

Income tax (benefit) expense
(1,041
)
 
14,602

 
12,036

Net impairment losses recognized in earnings
863

 
180

 
6,898

Provision for loan losses
3,020

 
16,818

 
13,896

Total operating expenses
61,561

 
78,452

 
62,139

Reclassification of income tax expense
1,041

 
(14,602
)
 
(12,036
)
Expenses of consolidated VIE - RSO
62,602

 
63,850

 
50,103

Adjusted operating income
28,405

 
59,848

 
45,883

OTHER REVENUE (EXPENSE)
 

 
 

 
 
Gain on consolidation
—

 
2,498

 
—

Gains on the extinguishment of debt
—

 
16,699

 
3,875

Gains on the sale of real estate
16,616

 
—

 
—

Other expenses
391

 
—

 
(6
)
Other income, net, from consolidated VIE - RSO
17,007

 
19,197

 
3,869

Income from continuing operations
45,412

 
79,045

 
49,752

Income tax provision - RSO
(1,041
)
 
14,602

 
12,036

NET INCOME
46,453

 
64,443

 
37,716

Net income allocated to preferred shares
(7,221
)
 
(1,244
)
 
—

NET INCOME ALLOCABLE TO RSO COMMON SHAREHOLDERS
$
39,232

 
$
63,199

 
$
37,716

RSO Cash Flow Detail (in thousands)
 
 
 
 
 
 
Years Ended December 31,
 
2013
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
46,453

 
$
64,443

 
$
37,716

Items included in "Change in cash attributable to consolidated VIE - RSO":
 
 
 
 
 
Provision for loan losses
3,020

 
16,818

 
13,896

Depreciation of investments in real estate and other
1,946

 
1,838

 
729

Amortization of intangible assets
1,970

 
4,047

 
3,890

Amortization of term facilities
1,395

 
957

 
570

Accretion of net discounts on loans held for investment
(9,521
)
 
(17,817
)
 
(15,588
)
Accretion of net discounts on securities available-for-sale
(2,712
)
 
(3,177
)
 
(3,698
)
Amortization of discount on notes of securitizations
14,524

 
2,470

 
274

Amortization of debt issuance costs on notes of securitizations
7,426

 
4,700

 
3,341

Amortization of stock-based compensation
10,472

 
4,636

 
2,526

Amortization of terminated derivative instruments
339

 
227

 
227

Accretion of interest-only available-for-sales securities
(1,005
)
 
(719
)
 
—

Distribution accrued to preferred stockholders
(7,221
)
 
(1,244
)
 
—

Deferred income tax benefits
(6,710
)
 
2,329

 
(399
)
Purchase of mortgage loans held for sale
(60,514
)
 
—

 
—

Payments on mortgage loans held for sale
3

 
—

 
—

Proceeds from sale of mortgage loans held for sale
60,365

 
—

 
—

Purchase of securities, trading
(11,044
)
 
(8,348
)
 
(38,904
)
Principal payments on securities, trading
4,309

 
1,027

 
643

Proceeds from sales of securities, trading
19,696

 
33,579

 
18,131

Net realized and unrealized loss (gain) on investment securities, trading
324

 
(12,435
)
 
(837
)
Net realized gains on sales of investment securities available-for-sale and loans
(10,986
)
 
(4,106
)
 
(2,643
)
Gain on early extinguishment of debt
—

 
(16,699
)
 
(3,875
)
Gain on sale of real estate
(16,616
)
 
—

 
—

Net impairment losses recognized in earnings
855

 
180

 
6,898

      Gain on consolidation
—

 
(2,498
)
 
—

      Linked Transactions fair value adjustments
6,018

 
(168
)
 
—

      Equity in net (earnings) losses of unconsolidated subsidiaries
(949
)
 
2,709

 
(112
)
      Adjust for impact of imputed interest on VIE accounting
—

 
1,879

 
—

Changes in operating assets and liabilities, net of acquisitions
 
 
 
 
 
   Decrease (increase) in restricted cash
8,445

 
(2,062
)
 
(5,628
)
   (Increase) decrease in interest receivable, net of purchased interest
(1,108
)
 
987

 
(2,513
)
   Decrease (increase) in principal paydowns receivable
18,749

 
(25,465
)
 
363

   (Decrease) increase in management fee payable
(6,357
)
 
3,929

 
974

   (Decrease) increase in security deposits
(337
)
 
25

 
80

   (Decrease) increase in accounts payable and accrued liabilities
(9,106
)
 
7,573

 
15,370

   (Decrease) increase in accrued interest expense
(1,445
)
 
(193
)
 
1,696

   Decrease (increase) in other assets
7,259

 
(20,007
)
 
(520
)
Subtotal - consolidated VIE - RSO operating activity
21,484

 
(25,028
)
 
(5,109
)
Change in consolidated VIE - RSO cash for the period
(176,992
)
 
(42,162
)
 
(13,628
)
Subtotal - Change in cash attributable to consolidated VIE - RSO before eliminations
(155,508
)
 
(67,190
)
 
(18,737
)
Elimination of intercompany activity
(712
)
 
932

 
2,179

Subtotal - Change in cash attributable to consolidated VIE - RSO
(156,220
)
 
(66,258
)
 
(16,558
)
Non-cash incentive compensation to RAI
484

 
1,468

 
430

Elimination of intercompany activity
(484
)
 
(1,468
)
 
(430
)
Non-cash incentive compensation to RAI, after eliminations
—

 
—

 
—

Net cash provided by operating activities (excluding eliminations)
68,421

 
40,883

 
33,037

 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2013
 
2012
 
2011
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 
Purchase of loans
(725,657
)
 
(649,983
)
 
(970,309
)
Purchase of securities available-for-sale
(136,282
)
 
(119,779
)
 
(117,044
)
Subtotal - Purchase of loans and securities by consolidated VIE - RSO, before eliminations
(861,939
)
 
(769,762
)
 
(1,087,353
)
Eliminations
—

 
—

 
15,221

Subtotal - Purchase of loans and securities by consolidated VIE - RSO
(861,939
)
 
(769,762
)
 
(1,072,132
)
Principal payments received on loans
571,914

 
570,276

 
424,600

Proceeds from sale of loans
674,977

 
173,378

 
212,042

Principal payments on securities available-for-sale
52,812

 
47,284

 
11,810

Proceeds from sale of securities available-for-sale
11,893

 
28,652

 
13,747

Proceeds from sale of real estate held-for-sale
37,001

 
2,886

 
1,464

Subtotal - principal payments and proceeds from sales received by consolidated VIE - RSO, before eliminations
1,348,597

 
822,476

 
663,663

Decrease in restricted cash
22,248

 
50,756

 
31,014

Items included in "Other -VIE, investing activity":
 
 
 
 
 
Acquisition of Primary Capital Advisors, LC
(7,613
)
 
—

 
—

Investment in unconsolidated entity
(28,034
)
 
474

 
(4,762
)
Equity contribution to VIE
—

 
(710
)
 
—

      Minority interest equity
5,531

 
114

 
—

Improvement of real estate held-for-sale
(404
)
 
(138
)
 
—

Purchase of investments in real estate
—

 
—

 
(19,299
)
Distributions from investments in real estate
1,094

 
1,152

 
—

Improvements in investments in real estate
(365
)
 
(3,878
)
 
—

Purchase of intangible asset
—

 
—

 
(21,213
)
Investment in loans - related parties
(1,241
)
 
—

 
(10,000
)
Principal payments received on loans – related parties
1,685

 
1,251

 
10,430

Purchase of furniture and fixtures
(133
)
 
—

 
—

Acquisition of property and equipment
(373
)
 
—

 
—

Investments in real estate assets
—

 
—

 
(689
)
Subtotal - Other consolidated VIE - investing activity, before eliminations
(29,853
)
 
(1,735
)
 
(45,533
)
Eliminations
(593
)
 
(47
)
 
(262
)
Subtotal - Other consolidated VIE - investing activity
(30,446
)
 
(1,782
)
 
(45,795
)
Net cash provided by (used in) investing activities (excluding eliminations)
479,053

 
101,735

 
(438,209
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2013
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Items included in "Net borrowings (repayments) of debt by consolidated VIE - RSO"
 
 
 
 
 
Proceeds from borrowings:
 
 
 

 
 
Repurchase agreements
15,226

 
71,121

 
55,852

Collateralized debt obligations
—

 
—

 
323,244

CRE Securitization
260,840

 
—

 
—

6.0% Convertible senior notes
115,000

 
—

 
—

Mortgage payable
—

 
—

 
13,600

Payments on borrowings:
 
 
 
 
 
Collateralized debt obligations
(797,573
)
 
(243,539
)
 
(21,428
)
Mortgage payable
(13,600
)
 
—

 
—

  Repurchase of issued bonds
—

 
—

 
(6,125
)
  Retirement of debt
—

 
(20,365
)
 
—

Subtotal - net (repayments) borrowings of debt by consolidated VIE - RSO
(420,107
)
 
(192,783
)
 
365,143

Distributions paid on common stock
(93,458
)
 
(74,050
)
 
(69,869
)
Elimination of dividends paid to RAI
2,203

 
2,174

 
2,454

Distribution paid on common stock, after elimination
(91,255
)
 
(71,876
)
 
(67,415
)
Net proceeds from issuances of common stock (net of offering costs of $3,837, $2,165 and $1,263)
114,454

 
55,502

 
46,347

Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0, $19 and $11)
19,211

 
73,044

 
83,564

Proceeds from issuance of 8.5% Series A redeemable
preferred shares (net of offering costs of $3, $781 and $0)
112

 
16,411

 
—

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $1,670, $1,201 and $0)
56,214

 
26,099

 
—

Subtotal - net proceeds from issuance of stock by consolidated VIE
189,991

 
171,056

 
129,911

Payment of debt issuance costs
(9,786
)
 
(586
)
 
(6,385
)
Payment of equity to third party sub-note holders
(30,709
)
 
(3,480
)
 
—

Distributions paid on preferred stock
(6,413
)
 
(613
)
 
—

Subtotal - Other consolidated VIE -RSO financing activity, before elimination
(46,908
)
 
(4,679
)
 
(6,385
)
Elimination
205

 
—

 
—

Subtotal - Other consolidated VIE -RSO financing activity after elimination
(46,703
)
 
$
(4,679
)
 
$
(6,385
)
Net cash (used in) provided by financing activities (excluding eliminations)
$
(370,482
)
 
$
(100,456
)
 
$
418,800

NET INCREASE IN CASH AND CASH EQUIVALENTS
176,992

 
42,162

 
13,628

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
85,278

 
43,116

 
29,488

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
262,270

 
$
85,278

 
$
43,116

SUPPLEMENTAL DISCLOSURE:
 

 
 

 
 
Interest expense paid in cash
$
41,453

 
$
41,369

 
$
32,596

Income taxes paid in cash
$
10,710

 
$
22,758

 
$
—

Summary of Significant Accounting Policies - RSO
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates affecting RSO's consolidated financial statements include the net realizable and fair values of RSO's investments and derivatives, the estimated life used to calculate depreciation, amortization, and accretion of premiums and discounts, respectively, provisions for loan losses, valuation of servicing asset and the disclosure of contingent liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities of three months or less at the time of purchase. At December 31, 2013 and 2012, this included $22.5 million and $19.9 million, respectively, held in a prime brokerage account, $156.6 million and $20.6 million, respectively, held in a money market account, $81.1 million and $43.3 million, respectively, held in checking accounts, and $2.1 million and $1.5 million, respectively, held in accounts at RSO's investment properties.
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 and investment securities available-for-sale are reported at fair value. To determine fair value, RSO uses an independent third-party valuation firm utilizing data available in the market 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 a prioritization of inputs used in valuation of each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. Any changes in fair value to RSO's investment securities, trading are recorded in RSO's consolidated statements of income as net realized and unrealized (loss) gain on investment securities, trading. Any changes in fair value to RSO's investment securities available-for-sale are recorded in RSO's consolidated balance sheets as a component of accumulated other comprehensive income (loss) in stockholders' equity.
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 RSO's consolidated statements of income.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
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.
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.
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.
Loans
RSO acquires loans through direct origination, through the acquisition of participations in commercial real estate loans and corporate leveraged loans in the secondary market and through syndications of newly originated loans. Loans are held for investment; therefore, RSO initially records them at their acquisition price, and subsequently, accounts for them based on their outstanding principal plus or minus unamortized premiums or discounts. RSO may sell a loan held for investment where the credit fundamentals underlying a particular loan have changed in such a manner that RSO's expected return on investment may decrease. Once the determination has been made by RSO that it no longer will hold the loan for investment, RSO identifies these loans as “Loans held for sale” and will account for them at the lower of amortized cost or fair value.
Loan Interest Income Recognition
Interest income on loans includes interest at stated rates adjusted for amortization or accretion of premiums and discounts. Premiums and discounts are amortized or accreted into income using the effective yield method. If a loan with a premium or discount is prepaid, RSO immediately recognizes the unamortized portion as a decrease or increase to interest income. In addition, RSO defers loan origination fees and loan origination costs and recognizes them over the life of the related loan against interest income using the effective yield method.
Residential Loan Origination
RSO originates residential loans to be funded by permanent investors. Origination fees and direct origination costs are initially deferred and are recognized as income at the time the loan is sold to a permanent investor. RSO originates loans primarily in six states with a focus on the Southeast. RSO may sell or retain the right to service the loans. Servicing fees are recognized as income when the related mortgage payments are collected based on the outstanding balance of the related mortgage loans or on an agreed upon rate. Servicing fee income is reduced by amortization of capitalized servicing rights.
Mortgage loans held for sale are valued at the lower of cost or market, determined on an aggregate basis for each type of loan after the net effect of any hedging activities. Market value is determined using sales commitments to permanent investors or on current market rates for loans of similar quality and type (Level 2). Mortgage loans are included as loans held for sale in the consolidated balance sheets.
Residential real estate properties acquired through foreclosure to be sold are initially recorded at fair value less selling costs at the date of foreclosure, establishing a new cost basis. Any write down to fair value at the time of foreclosure is charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of the carrying amount or fair value less costs to sell. Costs related to holding foreclosed real estate and subsequent adjustments to value are expensed. The fair value of real estate owned is determined using unobservable inputs including estimates of selling costs and marketability of the property (Level 3).
The unpaid principal balances of loans serviced by RSO for others are not included in the RSO's consolidated balance sheets. The fair value of residential servicing rights included on RSO's consolidated balance sheets was determined using an estimated current market value at the date of loan origination and other assumptions. Capitalized servicing rights are amortized over the life of the loan, assuming certain prepayment and other assumptions.
Allowance for Loan Loss
RSO maintains an allowance for loan loss. For RSO's bank and CRE loan portfolios, loans held for investment are first individually evaluated for impairment to determine whether a specific reserve is required. Loans that are not determined to be impaired individually 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) RSO's management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) RSO's 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. When a loan is placed on non-accrual, previously accrued interest is reversed from interest income.
For RSO's residential mortgage loans, the allowance is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and amount of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. A general component is maintained to cover uncertainties that could affect RSO management's estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. RSO's management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans are carried at fair value and are measured on a nonrecurring basis. The fair value is determined using unobservable inputs including estimates of selling costs (Level 3).
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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 with respect to RSO's investment in real estate or intangible assets during the years ended December 31, 2013 and 2012.
Comprehensive Income (Loss)
Comprehensive income (loss) for RSO includes net income and the change in net unrealized gains (losses) on available-for-sale securities, derivative instruments used to hedge exposure to interest rate fluctuations and protect against declines in the market value of assets resulting from general market trends as well as translation of currency as a result of RSO's investment in the equity of foreign CDOs.
Income Taxes
RSO operates in such a manner as to qualify as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"); therefore, applicable REIT taxable income is included in the taxable income of its shareholders, to the extent distributed by RSO.  To maintain REIT status for federal income tax purposes, RSO is generally required to distribute at least 90% of its REIT taxable income to its shareholders as well as comply with certain other qualification requirements as defined under the Code.  As a REIT, RSO is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. 
Taxable income, from non-REIT activities managed through RSO's taxable REIT subsidiaries ("TRSs"), is subject to federal, state and local income taxes.  Income taxes for the TRSs are accounted for under the asset and liability method.  Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and tax basis of assets and liabilities. 
Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, Whitney CLO I, and Harvest CLO VII, RSO's foreign TRSs, are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands and, with respect to Harvest CLO VII, Ireland, and are generally exempt from federal and state income at the corporate level because their activities in the United States are limited to trading in stock and securities for their own account.  Therefore, despite their status as TRSs, they generally will not be subject to corporate tax on their earnings and no provision for income taxes is required; however, because they are “controlled foreign corporations,” RSO will generally be required to include Apidos CDO I's, Apidos CDO III's, Apidos Cinco CDO's, Apidos CLO VIII's, Whitney CLO I's, and Harvest CLO VII's current taxable income in its calculation of REIT taxable income.
On October 27, 2011 RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. On January 24, 2012, RSO again reorganized the ownership structure of Apidos CDO I and Apidos CDO III.  As a result, for the period January 1, 2012 through January 23, 2012, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. For the period January 24, 2012 through December 31, 2012 the earnings from Apidos CDO I are included in RSO's calculation of REIT taxable income.
On December 11, 2012, RSO further reorganized the ownership structure of Apidos CDO III.  As a result, for the period from January 24, 2012 through December 10, 2012 the earnings from Apidos CDO III are included in RSO's calculation of REIT taxable income.  Also as a result of the reorganization on December 11, 2012, for the period December 11, 2012 through December 31, 2012, the earnings from Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. 
On November 12, 2012, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I.  As a result, for the period November 12, 2012 through December 31, 2012, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from November 12, 2012 through December 31, 2012 was recorded.
On February 13, 2013, RSO further reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I. As a result, for the period January 1, 2013 through February 12, 2013, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO’s calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from January 1, 2013 through February 12, 2013 has been recorded. Also, as a result of the reorganization on February 13, 2013, for the period February 13, 2013 and ending December 31, 2013 the earnings from Apidos Cinco CDO and Whitney CLO I are included in RSO’s calculation of REIT taxable income.
On March 8, 2013, RSO reorganized the ownership structure of Apidos CDO III. As a result, the earnings from Apidos CDO III for the period January 1, 2013 through March 7, 2013 are excluded from RSO’s calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from January 1, 2013 through March 7, 2013 has been recorded. Also, as a result of the reorganization on March 8, 2013, for the period March 8, 2013 and ending December 31, 2013 the earnings from Apidos CDO III are included in RSO’s calculation of REIT taxable income.
On September 10, 2013, RSO acquired approximately 9.5% of the equity of Harvest CLO VII, which is a foreign TRS, organized as an exempt company incorporated with limited liability under the laws of Ireland. This equity is directly owned by a domestic QRS (Qualified REIT Subsidiary) of RSO; therefore, its earnings are included in RSO’s calculation of REIT taxable income.
RSO accounts for taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction (e.g., sales, use, value added) on a net (excluded from revenue) basis.
Linked Transactions
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 sheets in the 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 (loss) gain and net interest income on linked transactions, net on RSO's consolidated statements of income.
Reclassifications
Certain reclassifications have been made to RSO's 2011 and 2012 consolidated financial statements to conform to the 2013 presentation.
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 such VIE should be consolidated. This analysis require 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 RSO management’s analysis, RSO is the primary beneficiary of eight VIEs at December 31, 2013: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1, Whitney CLO I and RCC CRE Notes 2013. In performing the primary beneficiary analysis for seven of these VIEs (other than Whitney CLO I, which is discussed below), it was determined that the parties 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 securitizations 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, and were financed by the issuance of debt securities. The manager manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of 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 eighth 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, see “- Unconsolidated VIEs - Resource Capital Asset Management,” below. For a discussion of RSO’s securitizations, see “Borrowings” 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 consolidated statements of income.
RSO has exposure to losses on its securitizations 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 securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these securitizations have been eliminated, and RSO’s consolidated balance sheets reflects both the assets held and debt issued by the securitizations to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to the securitizations' assets and liabilities as opposed to RSO's net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on RSO's consolidated balance sheets.
The creditors of RSO’s eight 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 years ended December 31, 2013, 2012 and 2011, RSO has provided financial support of $166,000, $156,000 and $710,000, respectively. RSO has provided no other financial support to any other of its 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 VIEs as of December 31, 2013 (in thousands):
 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney CLO I
 
RREF
2006
 
RREF
2007
 
CRE Notes 2013
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
12,432

 
$
9,477

 
$
30,009

 
$
849

 
$
1,009

 
$
20

 
$
430

 
$
7,146

 
$
61,372

Investment securities
available-for-sale, pledged
   as collateral, at fair value
8,187

 
5,394

 
15,537

 
—

 
—

 
10,178

 
66,550

 
—

 
105,846

Loans, pledged as collateral
82,573

 
129,435

 
299,923

 
—

 
71

 
158,938

 
250,155

 
298,474

 
1,219,569

Loans held for sale
536

 
651

 
1,189

 
—

 
—

 
—

 
—

 
—

 
2,376

Interest receivable
(153
)
 
639

 
1,034

 
—

 
7

 
1,628

 
2,068

 
404

 
5,627

Prepaid assets
35

 
26

 
43

 
—

 
—

 
83

 
60

 
—

 
247

Principal paydown receivable
—

 
—

 
1

 
—

 
—

 
—

 
6,820

 
—

 
6,821

Total assets (2)
$
103,610

 
$
145,622

 
$
347,736

 
$
849

 
$
1,087

 
$
170,847

 
$
326,083

 
$
306,024

 
$
1,401,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
87,131

 
$
133,209

 
$
321,147

 
$
—

 
$
440

 
$
94,004

 
$
177,837

 
$
256,571

 
$
1,070,339

Accrued interest expense
269

 
62

 
313

 
—

 
—

 
44

 
113

 
117

 
918

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,186

 
9,005

 
—

 
10,191

Accounts payable and
   other liabilities
162

 
19

 
25

 
973

 
394

 
30

 
1

 
—

 
1,604

Total liabilities
$
87,562

 
$
133,290

 
$
321,485

 
$
973

 
$
834

 
$
95,264

 
$
186,956

 
$
256,688

 
$
1,083,052

 
(1)
Includes $35.1 million available for reinvestment in certain of the securitizations.
(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 RSO management’s analysis, 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 financial statements as of December 31, 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 Commercial Capital, Inc.
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, 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. 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. RSO's resulting interest is accounted for under the equity method. During 2013, RSO entered into a third stock purchase agreement with LEAF to purchase 3,682 shares of newly issues Series A-1 Preferred Stock for $3.7 million and 4,445 shares of newly issued Series E Preferred Stock for $4.4 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 recorded at $41.0 million and $33.1 million as of December 31, 2013 and 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, a third-party investor 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 consolidated 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 became 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 amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $11.2 million and $13.1 million at December 31, 2013 and 2012, respectively. RSO recognized fee income of $5.3 million, $7.0 million and $7.8 million for the years ended December 31, 2013, 2012 and 2011, 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 February 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 did 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 had the power to direct the activities that are most significant to the VIE. As a result, together with the related party, RSO had 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 was 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 the Company. 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 $160,000 and $591,000 for these investments for the years ended December 31, 2013 and 2012, respectively. 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. RSO’s investment in RRE VIP Borrower, LLC at December 31, 2013 and 2012 was zero 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. 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. RREM receives an annual asset management fee equal to 1.0% of outstanding contributions. For the years ended December 31, 2013 and 2012, RSO paid RREM management fees of $38,000 and $39,000, respectively. The investment balance of $674,000 and $526,000 at December 31, 2013 and 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
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, L.P., ("the Partnership"), a Delaware limited partnership which generally invests in corporate credit assets through a master-feeder fund structure ("the Master Fund"). 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. Because the Partnership is not a VIE and RSO owns only 34.4% of the partnership interest, RSO does not consolidate it. RSO records its investment in the fund using the equity method. For the year ended December 31, 2013, RSO recognized $1.2 million of income in equity in net earnings (losses) of unconsolidated entities on RSO's consolidated statements of income. The investment balance of $16.2 million at December 31, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets.
Life Care funding
In January 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 of LCF 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 determined that there was joint control and does not consolidated LCF. RSO's investment in LCF of $1.5 million at December 31, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets.
Harvest CLO VII Limited
In September 2013, RSO invested $5.3 million in the subordinated notes of a European CLO, which represented 9.5% 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 consolidated 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 interest income - other on the consolidated statements of income.
The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of December 31, 2013 (in thousands):
 
Unconsolidated Variable Interest Entities
 
 
 
LEAF Commercial Capital, Inc.
 
Unsecured Junior Subordinated Debentures
 
Resource Capital Asset Management CDOs
 
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
$
41,016

 
$
1,548

 
$
—

 
$
—

 
$
674

 
$
1,530

 
$
16,177

 
$
5,369

 
$
66,314

 
66,314

Intangible assets
—

 
—

 
11,233

 
—

 
—

 
—

 
—

 
—

 
11,233

 
11,233

Total assets
41,016

 
1,548

 
11,233

 
—

 
674

 
1,530

 
16,177

 
5,369

 
77,547

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
51,005

 
—

 
—

 
—

 
—

 
—

 
—

 
51,005

 
N/A

Total liabilities
—

 
51,005

 
—

 
—

 
—

 
—

 
—

 
—

 
51,005

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net asset (liability)
$
41,016

 
$
(49,457
)
 
11,233

 
—

 
674

 
$
1,530

 
$
16,177

 
$
5,369

 
$
26,542

 
N/A

 
(1)
RSO's maximum exposure to loss at December 31, 2013 does not exceed the carrying amount of its investment, subject to the LRF 3's contingent obligation as described above.
Other than the contingent liability arrangement described above in connection with LEAF and the commitments 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.
Supplemental cash flow information - RSO
Supplemental disclosure of cash flow information (in thousands):
 
Years Ended
 
December 31,
 
2013
 
2012
 
2011
Non-cash investing activities include the following:
 
 
 
 
 
Contribution of lease receivables and other assets
$
—

 
$
—

 
$
117,840

Conversion of equity in LRF 3 to preferred stock and warrants
$
—

 
$
—

 
$
(21,000
)
Acquisition of real estate investments
$
—

 
$
(21,661
)
 
$
(33,073
)
Conversion of loans to investment in real estate
$
—

 
$
21,661

 
$
34,550

Conversion of PIK interest in securities available-for-sale
$
—

 
$
—

 
$
2,364

Net purchase of loans on warehouse line
$
—

 
$
—

 
$
(52,735
)
Acquisition of loans, pledged as collateral
$
—

 
$
(230,152
)
 
$
—

 
 
 
 
 
 
Non-cash financing activities include the following:
 
 
 

 
 

Distributions on common stock declared but not paid
$
25,536

 
$
21,024

 
$
19,979

Distribution on preferred stock declared but not paid
$
2,159

 
$
1,244

 
$
—

Issuance of restricted stock
$
823

 
$
2,189

 
$
1,203

Contribution of equipment-backed securitized notes and other liability
$
—

 
$
—

 
$
(96,840
)
Subscription receivable
$
—

 
$
1,248

 
$
—

Assumption of collateralized debt obligations
$
—

 
$
206,408

 
$
—

Acquisition of loans on warehouse line
$
—

 
$
—

 
$
52,735

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
December 31, 2013
 
 
 
 
 
 
 
Structured notes
$
8,057

 
$
4,050

 
$
(1,000
)
 
$
11,107

RMBS
1,919

 
—

 
(1,468
)
 
451

Total
$
9,976

 
$
4,050

 
$
(2,468
)
 
$
11,558

 
 
 
 
 
 
 
 
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 nine securities during the year ended December 31, 2013, for a net realized gain of $7.5 million. RSO held eight and 13 investment securities, trading as of December 31, 2013 and 2012, respectively. RSO purchased two securities and sold 15 securities during the year ended December 31, 2012, for a net realized gain of $5.5 million. RSO also had one position liquidate during the year ended December 31, 2012 which resulted in a gain of $224,000.
Investment securities available-for-sale - RSO
RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. 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
December 31, 2013:
 
 
 
 
 
 
 
CMBS
$
185,178

 
$
7,570

 
$
(12,030
)
 
180,718

ABS
25,406

 
1,644

 
(394
)
 
26,656

Corporate Bonds
2,517

 
16

 
(70
)
 
2,463

Total
$
213,101

 
$
9,230

 
$
(12,494
)
 
$
209,837

 
 
 
 
 
 
 
 
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 December 31, 2013 and 2012, $162.6 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
December 31, 2013:
 
 
 
 
 
Less than one year
$
39,256

(1) 
$
40,931

 
5.25
%
Greater than one year and less than five years
139,700

 
141,760

 
4.69
%
Greater than five years and less than ten years
26,526

 
25,707

 
1.10
%
Greater than ten years
4,355

 
4,703

 
4.03
%
Total
$
209,837

 
$
213,101

 
4.32
%
 
 
 
 
 
 
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 January 2014 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 December 2019.
The following table shows the fair value, gross unrealized losses and number of securities 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, except number of securities):
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
52,012

 
$
(7,496
)
 
34

 
$
14,159

 
$
(4,534
)
 
10

 
$
66,171

 
$
(12,030
)
 
44

ABS
143

 
(1
)
 
1

 
6,692

 
(393
)
 
9

 
6,835

 
(394
)
 
10

Corporate Bonds
865

 
(70
)
 
1

 
—

 
—

 
—

 
865

 
(70
)
 
1

Total
temporarily
impaired
securities
$
53,020

 
$
(7,567
)
 
36

 
$
20,851

 
$
(4,927
)
 
19

 
$
73,871

 
$
(12,494
)
 
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 
CMBS
$
25,803

 
$
(442
)
 
22

 
$
38,734

 
$
(16,197
)
 
19

 
$
64,537

 
$
(16,639
)
 
41

ABS
—

 
—

 
—

 
5,961

 
(1,115
)
 
9

 
5,961

 
(1,115
)
 
9

Corporate Bonds
19,445

 
(190
)
 
12

 
—

 
—

 
—

 
19,445

 
(190
)
 
12

Total
temporarily
impaired
securities
$
45,248

 
$
(632
)
 
34

 
$
44,695

 
$
(17,312
)
 
28

 
$
89,943

 
$
(17,944
)
 
62


The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
 RSO’s securities classified as available-for-sale have decreased on a net basis as of December 31, 2013 as compared to December 31, 2012 primarily due to the call and liquidation of Apidos VIII and Whitney CLO I which resulted in the sale of most of RSO's corporate bonds during 2013. RSO performs an on-going review of third-party reports and updated financial data on the properties underlying these securities 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-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 years ended December 31, 2013 and 2012, RSO recognized other-than-temporary impairment losses of $328,000 and $42,000, respectively, on positions that supported RSO's CMBS investments.
The following table summarizes RSO's sales of investment securities available-for-sale during the period indicated, (in thousands, except number of securities):
 
Positions
Sold
 
Par Amount Sold
 
Realized Gain (Loss)
December 31, 2013:
 
 
 
 
 
CMBS position
4
 
$
14,500

 
$
466

Corporate bond position
35
 
$
34,253

 
$
(474
)
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
CMBS position
7
 
$
31,000

 
$
1,372

ABS position
5
 
$
4,255

 
$
147

Corporate bond position
1
 
$
2,250

 
$
27



The amounts above do not include redemptions. During the year ended December 31, 2013, RSO had three corporate bond positions redeemed with a total par of $4.3 million, and recognized a loss of $11,000. During the year ended December 31, 2012, RSO had two corporate bond positions redeemed with a total par of $2.1 million, and recognized a gain of $27,000.
Changes in interest rates may also have an effect on the rate of principal prepayments and, as a result, prepayments on RSO’s investment portfolio. The aggregate discount (premium) due to interest rate changes were as follows (in thousands):
 
December 31,
 
2013
 
2012
CMBS
$
6,583

 
$
8,011

ABS
$
2,394

 
$
3,145

Corporate bond
$
(68
)
 
$
(479
)
Investments real estate - RSO
The table below summarizes RSO's investments in real estate (in thousands, except number of properties):
 
 
As of December 31, 2013
 
As of December 31, 2012
 
 
Book Value
 
Number of Properties
 
Book Value
 
Number of Properties
Multi-family property
 
$
22,107

 
1
 
$
42,179

 
2
Office property
 
10,273

 
1
 
10,149

 
1
Hotel property
 
—

 
—
 
25,608

 
1
Subtotal
 
32,380

 
 
 
77,936

 
 
Less:  Accumulated depreciation
 
(2,602
)
 
 
 
(2,550
)
 
 
Investments in real estate
 
$
29,778

 
 
 
$
75,386

 
 

During the year ended December 31, 2013, RSO made no acquisitions and sold one of its multi-family properties. The gain from the sale of this property of $16.6 million is recorded on RSO's consolidated statements of income in gain on sale of real estate. RSO also confirmed the intent and ability to sell one of its other investments in real estate. This asset has been reclassified to property available-for-sale on RSO's consolidated balance sheets at December 31, 2013.
During the year ended December 31, 2012, RSO foreclosed on one self-originated loan and converted the loan to an owned property 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 a hotel 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):
 
 
December 31,
Description
 
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

Loans held for investments - RSO
The following is a summary of RSO’s loans (in thousands):
Loan Description
 
Principal
 
Unamortized (Discount) Premium (1)
 
Carrying
Value (2)
December 31, 2013:
 
 
 
 
 
 
Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
$
749,083

 
$
(3,294
)
 
$
745,789

B notes
 
16,288

 
(83
)
 
16,205

Mezzanine loans
 
64,417

 
(100
)
 
64,317

Total commercial real estate loans
 
829,788

 
(3,477
)
 
826,311

Bank loans (3) 
 
555,806

 
(4,033
)
 
551,773

Middle-market loans
 
10,250

 
—

 
10,250

Residential mortgage loans (4)
 
16,915

 
—

 
16,915

Subtotal loans before allowances
 
1,412,759

 
(7,510
)
 
1,405,249

Allowance for loan loss
 
(13,807
)
 
—

 
(13,807
)
Total
 
$
1,398,952

 
$
(7,510
)
 
$
1,391,442

 
 
 
 
 
 
 
December 31, 2012:
 
 

 
 

 
 

Commercial real estate loans:
 
 

 
 

 
 

Whole loans (5)
 
$
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

Bank loans (3) 
 
1,218,563

 
(25,249
)
 
1,193,314

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 $216,000 and $450,000 and deferred upfront fees of $141,000 and $334,000 being amortized over the life of the bank loans as of December 31, 2013 and 2012, respectively.  Amounts include loan origination fees of $3.3 million and $1.9 million and loan extension fees of $73,000 and $214,000 being amortized over the life of the commercial real estate loans as of December 31, 2013 and 2012, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at December 31, 2013 and 2012, respectively.
(3)
Amounts include $6.9 million and $14.9 million of bank loans held for sale at December 31, 2013 and 2012, respectively.
(4)
Amount includes $15.0 million of residential mortgage loans held for sale at December 31, 2013.
(5)
Amount includes $34.0 million from two whole loans which are classified as loans held for sale at December 31, 2012.
At December 31, 2013 and 2012, approximately 39.0% and 47.7%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in commercial real estate loans located in California; approximately 6.4% and 7.9%, respectively, in Arizona; approximately 14.6% and 11.1%, respectively, in Texas. At December 31, 2013 and 2012, approximately 15.8% and 13.9%, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare. During the year ended December 31, 2013, approximately 66% of RSO's residential mortgage loans were originated in Georgia, 9% in North Carolina, 7% in Tennessee and Virginia and 6% in Alabama.
At December 31, 2013, RSO’s bank loan portfolio consisted of $548.4 million (net of allowance of $3.4 million) of floating rate loans, which bear interest ranging between the three month LIBOR plus 1.5%, and the three month LIBOR plus 10.5% with maturity dates ranging from January 2014 to December 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 the 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):
 
December 31,
 
2013
 
2012
Less than one year
$
36,985

 
$
10,028

Greater than one year and less than five years
369,624

 
821,568

Five years or greater
145,164

 
361,718

 
$
551,773

 
$
1,193,314


The following is a summary of RSO’s commercial real estate loans held for investment (in thousands):
Description
 
Quantity
 
Amortized
Cost
 
Contracted
Interest Rates
 
Maturity
Dates (3)
December 31, 2013:
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (4) (5)
 
52
 
$
745,789

 
LIBOR plus 2.68% to
LIBOR plus 12.14%
 
March 2014 to
February 2019
B notes, fixed rate
 
1
 
16,205

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
1
 
12,455

 
LIBOR plus 13.53%
 
April 2016
Mezzanine loans, fixed rate (7)
 
3
 
51,862

 
0.50% to 18.72%
 
September 2014 to
September 2019
Total (2) 
 
57
 
$
826,311

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 

 
 
 
 
Whole loans, floating rate (1) (4) (6)
 
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 (7)
 
3
 
66,941

 
0.50% to 20.00%
 
September 2014 to
September 2019
Total (2) 
 
43
 
$
667,051

 
 
 
 
 
(1)
Whole loans had $13.7 million and $8.9 million in unfunded loan commitments as of December 31, 2013 and 2012, respectively.  These unfunded commitments are advanced as the borrowers formally request additional funding as permitted under the loan agreement and any necessary approvals have been obtained.
(2)
The total does not include an allowance for loan loss of $10.4 million and $8.0 million as of December 31, 2013 and 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 combined $11.4 million mezzanine component of two whole loans which have a fixed rate of 12.0% as of December 31, 2013, and includes a $2.0 million mezzanine component of a whole loan that has a fixed rate of 15.0% at December 31, 2012.
(5)
Floating rate whole loans include a $799,000 junior mezzanine tranche of a whole loan that has a fixed rate of 10.0% as of December 31, 2013.
(6)
Amount includes $34.0 million from two whole loans that are classified as loans held for sale at December 31, 2012.
(7)
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
 
2014
 
2015
 
2016 and Thereafter
 
Total
December 31, 2013:
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,205

 
$
16,205

Mezzanine loans
 
5,711

 
—

 
58,606

 
64,317

Whole loans
 
—

 
17,949

 
727,840

 
745,789

Total (1) 
 
$
5,711

 
$
17,949

 
$
802,651

 
$
826,311

 
(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
December 31, 2013:
 
 
 
 
B notes
 
$
174

 
1.26%
Mezzanine loans
 
559

 
4.05%
Whole loans
 
9,683

 
70.13%
Bank loans
 
3,391

 
24.56%
Total
 
$
13,807

 
 
 
 
 
 
 
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 December 31, 2013, RSO had recorded an allowance for loan losses of $13.8 million consisting of a $3.4 million allowance on RSO’s bank loan portfolio and a $10.4 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 $6.3 million from $9.7 million as of December 31, 2012 to $3.4 million as of December 31, 2013 as a result of improved credit conditions. The whole loan allowance increased $2.8 million from $6.9 million as of December 31, 2012 to $9.7 million as of December 31, 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 provisions taken on five bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios.
Investments in unconsolidated entities - RSO
In May, June and July 2013, RSO invested $15.0 million 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"). 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 ("CVC Credit Partners"). CVC Capital Partners SICAV-FIS, S.A. ("CVC"), together with its affiliates, and the Company, own a majority and a significant minority, respectively, of the investment manager. 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. For the year ended December 31, 2013, RSO recorded earnings of $1.2 million, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. RSO's investment balance of $16.2 million at December 31, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
In January 2013, LTCC invested $2.0 million into LCF for the purpose of originating and acquiring life settlement contracts. Using the equity method, RSO recognized a loss of $470,000 during the year ended December 31, 2013, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. RSO's investment in LCF was $1.5 million at December 31, 2013 and is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
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.  RREM receives an annual asset management fee equal to 1% of outstanding contributions. For the years ended December 31, 2013 and 2012, RSO paid RREM management fees of $38,000 and $39,000, respectively. For the years ended December 31, 2013 and 2012, RSO recorded income of $148,000 and losses of $135,000, respectively, which were recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statement of income. The investment balance of $674,000 and $526,000 at December 31, 2013 and 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
RSO's resulting interest from the November 16, 2011 formation of LEAF is accounted for under the equity method. RSO recorded losses of $183,000 and $3.3 million for the years ended December 31, 2013 and 2012, respectively, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. No such loss was recorded for the year ended December 31, 2011. RSO's investment in LEAF was valued at $41.0 million and $33.1 million as of December 31, 2013 and 2012, respectively, and is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds an interest in a real estate joint venture) from the Company at book value. 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 years ended December 31, 2013, 2012 and 2011, RSO paid RREM management fees of $28,000, $45,000 and $55,000, respectively. For the years ended December 31, 2013, 2012 and 2011, RSO recorded income of $278,000, $683,000 and $112,000, respectively, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on the consolidated statements of income. The investment balance of zero and $2.3 million at December 31, 2013 and 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets 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. 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 years ended December 31, 2013, 2012 and 2011, RSO recognized $2.4 million, $2.5 million and $3.3 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $191,000, $183,000 and $277,000, respectively, of amortization of deferred debt issuance costs.
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
 
Residential Mortgage Loans
 
Loans Receivable-Related Party
 
Total
December 31, 2013:
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2013
$
7,986

 
$
9,705

 
$
—

 
$
—

 
$
17,691

Provision for loan loss
2,686

 
334

 
—

 
—

 
3,020

Loans charged-off
(256
)
 
(6,648
)
 
—

 
—

 
(6,904
)
Allowance for losses at December 31, 2013
$
10,416

 
$
3,391

 
$
—

 
$
—

 
$
13,807

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
4,572

 
$
2,621

 
$
—

 
$
—

 
$
7,193

Collectively evaluated for impairment
$
5,844

 
$
770

 
$
—

 
$
—

 
$
6,614

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
194,403

 
$
3,554

 
$
—

 
$
6,966

 
$
204,923

Collectively evaluated for impairment
$
631,908

 
$
548,219

 
$
16,915

 
$
—

 
$
1,197,042

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 December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
477,754

 
$
42,476

 
$
18,806

 
$
2,333

 
$
3,554

 
$
6,850

 
$
551,773

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 were performing with the exception of three loans with an amortized cost of $3.6 million as of December 31, 2013, one of which defaulted in 2012, one of which defaulted as of March 31, 2013 and one of which defaulted as of June 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 as of 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 designates loans that are sold after the period ends 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 December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Whole loans
$
680,718

 
$
32,500

 
$
32,571

 
$
—

 
$
—

 
$
745,789

B notes
16,205

 
—

 
—

 
—

 
—

 
16,205

Mezzanine loans
51,862

 
12,455

 
—

 
—

 
—

 
64,317

 
$
748,785

 
$
44,955

 
$
32,571

 
$
—

 
$
—

 
$
826,311

 
 
 
 
 
 
 
 
 
 
 
 
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 December 31, 2013 and 2012.
Residential Mortgage Loans
Residential mortgage loans are reviewed periodically for collectability in light of historical experience, the nature and amount of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing underlying conditions. RSO also designates loans that are sold after the period ends as held for sale at the lower of their fair market value or cost.
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
December 31, 2013:
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
745,789

 
$
745,789

 
$
—

B notes
—

 
—

 
—

 
—

 
16,205

 
16,205

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
64,317

 
64,317

 
—

Bank loans
—

 
—

 
3,554

 
3,554

 
548,219

 
551,773

 
—

Residential mortgage loans
234

 
91

 
268

 
593

 
16,322

 
16,915

 
—

Loans receivable-related party
—

 
—

 
—

 
—

 
6,966

 
6,966

 
—

Total loans
$
234

 
$
91

 
$
3,822

 
$
4,147

 
$
1,397,818

 
$
1,401,965

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 indicated (in thousands):
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
December 31, 2013:
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
130,759

 
$
137,959

 
$
—

 
$
123,495

 
$
8,439

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
1,615

Bank loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Residential mortgage loans
$
315

 
$
268

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
5,733

 
$
5,733

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
25,572

 
$
25,572

 
$
(4,572
)
 
$
24,748

 
$
1,622

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
3,554

 
$
3,554

 
$
(2,621
)
 
$
—

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
156,331

 
$
163,531

 
$
(4,572
)
 
$
148,243

 
$
10,061

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
1,615

Bank loans
3,554

 
3,554

 
(2,621
)
 
—

 
—

Residential mortgage loans
315

 
268

 
—

 
—

 
—

Loans receivable - related party
5,733

 
5,733

 
—

 
—

 
—

 
$
204,005

 
$
211,158

 
$
(7,193
)
 
$
186,315

 
$
11,676

 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
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
Year Ended December 31, 2013:
 
 
 
 
 
Whole loans
5
 
$
143,484

 
$
147,826

B notes
—
 
—

 
—

Mezzanine loans
—
 
—

 
—

Bank loans
—
 
—

 
—

Residential mortgage loans
—
 
—

 
—

Loans receivable - related party
1
 
6,592

 
6,592

Total loans
6
 
$
150,076

 
$
154,418

 
 
 
 
 
 
Year Ended December 31, 2012:
 
 
 

 
 

Whole loans
6
 
$
143,261

 
$
126,946

B notes
—
 
—

 
—

Mezzanine loans
1
 
38,072

 
38,072

Bank loans
—
 
—

 
—

Loans receivable
1
 
7,797

 
7,797

Total loans
8
 
$
189,130

 
$
172,815

As of December 31, 2013 and 2012, there were no troubled-debt restructurings that subsequently defaulted.
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 the preferred equity of, 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 RSO's 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 RSO's consolidated statement of income during the year ended December 31, 2012. Upon acquisition of PCA, RSO recognized an intangible asset of $600,000 related to its wholesale-correspondent relationships, which have a finite life of approximately two years.
RSO recorded amortization expense on intangible assets of $2.0 million for the year ended December 31, 2013, and expects to record amortization expense on intangible assets of approximately $2.1 million for the year ended December 31, 2014, $2.0 million for the year ended December 31, 2015, $1.8 million for the years ended December 31, 2016 and 2017 and $1.6 million for the year ended December 31, 2018.  The weighted average amortization period was 7.7 years and 8.7 years at December 31, 2013 and 2012, respectively and the accumulated amortization was $12.5 million and $10.5 million at December 31, 2013 and 2012, respectively.
The following table summarizes intangible assets at December 31, 2013 and 2012 (in thousands).
 
Beginning Balance
 
Accumulated Amortization
 
Net Asset
December 31, 2013:
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(9,980
)
 
$
11,233

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,430
)
 
31

Above (below) market leases
29

 
(29
)
 
—

Investment in PCA:
 
 
 
 


Wholesale or correspondent relationships
600

 
(42
)
 
558

Total intangible assets
$
24,303

 
$
(12,481
)
 
$
11,822

 
 
 
 
 
 
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

Total intangible assets
$
23,703

 
$
(10,511
)
 
$
13,192



For the years ended December 31, 2013, 2012 and 2011, RSO recognized $5.3 million, $7.0 million and $7.8 million, respectively, of fee income related to the investment in RCAM.
On October 31, 2013, RSO through its taxable REIT subsidiary, RCC Residential, Inc. acquired PCA, an Atlanta based company that originates and services residential mortgage loans, for approximately $7.6 million in cash. The total cost of the acquisition including legal and other professional fees was $333,000. All legal and professional fees were expensed as incurred. RSO’s acquisition of PCA represents a return to the residential mortgage investment market by providing a residential mortgage origination platform.
    
As part of this transaction, a key employee of PCA was granted approximately $800,000 of RSO’s restricted stock. The grant is accounted for as compensation and is being amortized to equity compensation expense over three years, the vesting period. Dividends declared on the stock while unvested are recorded as compensation expense. Dividends declared after the stock vests will be recorded as a distribution. For the year ended December 31, 2013, $48,000 of amortization of this stock grant was recorded to equity compensation expense on RSO's consolidated statement of income and $27,000 of compensation expense related to dividends on unvested shares was recorded to general and administrative expense on RSO’s consolidated statement of income.
The purchase price has been allocated to the assets acquired and liabilities assumed based upon RSO’s best estimate of fair value, with any shortage under the net tangible and intangible assets acquired allocated to gain on bargain purchase. The gain on bargain purchase resulted from the stock grant described above being accounted for as compensation under GAAP and was recorded as other income (expense) on RSO's consolidate statement of income.
The valuation of the identified intangibles, including wholesale and correspondent relationship assets, totaling $600,000, which relates to PCA’s operations, was determined based upon estimated net profits, after taxes, to be received as a result of those relationships. The wholesale correspondent relationships are being amortized over their estimated useful life of two years.
The following table sets forth the allocation of the purchase price (in thousands):
Assets acquired:
 
Cash and cash equivalents
$
1,233

Loans held for sale
15,021

Loans held for investment
2,071

Wholesale and correspondent relationships
600

Other assets
5,828

Total assets
24,753

 
 
Less: Liabilities assumed:
 
Borrowings
14,584

Other liabilities
2,165

Total liabilities
16,749

 
 
Gain on bargain purchase
391

Total cash purchase price
$
7,613


Although no further purchase price adjustments for PCA are anticipated, RSO has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed on this investment. Accordingly, RSO's preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as RSO completes the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in RSO's consolidated financial statements, retrospectively.
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 December 31, 2013 and 2012 is summarized in the following table (in thousands, except percentages):
 
Outstanding Borrowings
 
Unamortized Issuance Costs and Discounts
 
Principal Outstanding
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
 
Date Securitization Closed
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
94,004

 
$
205

 
$
94,209

 
1.87%
 
32.6 years
 
$
169,115

 
August 2006
RREF CDO 2007-1 Senior Notes
177,837

 
719

 
178,556

 
0.84%
 
32.8 years
 
318,933

 
June 2007
RCC CRE Notes 2013
256,571

 
4,269

 
260,840

 
2.03%
 
15.0 years
 
305,586

 
December 2013
Apidos CDO I Senior Notes 
87,131

 
—

 
87,131

 
1.68%
 
3.6 years
 
103,736

 
August 2005
Apidos CDO III Senior Notes  
133,209

 
117

 
133,326

 
0.88%
 
6.7 years
 
145,930

 
May 2006
Apidos Cinco CDO Senior Notes
321,147

 
853

 
322,000

 
0.74%
 
6.4 years
 
342,796

 
May 2007
Whitney CLO I Securitized Borrowings(1)
440

 
—

 
440

 
—%
 
N/A
 
885

 
N/A
Unsecured Junior Subordinated Debentures (2)
51,005

 
543

 
51,548

 
4.19%
 
22.8 years
 
—

 
May/Sept 2006
6.0% Convertible Senior Notes
106,535

 
8,465

 
115,000

 
6.00%
 
4.9 years
 
—

 
October 2013
CRE - Term Repurchase Facilities (3) 
29,703

 
1,033

 
30,736

 
2.67%
 
21 days
 
48,186

 
N/A
CMBS - Term Repurchase Facility (4)
47,601

 
12

 
47,613

 
1.38%
 
21 days
 
56,949

 
N/A
Residential Mortgage Financing Agreements
14,627

 
—

 
14,627

 
4.24%
 
56 days
 
16,487

 
N/A
Total
$
1,319,810

 
16,216

 
1,336,026

 
1.87%
 
13.1 years
 
$
1,508,603

 
 



 
Outstanding Borrowings
 
Unamortized Issuance Costs and Discounts
 
Principal Outstanding
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
 
Date Securitization Closed
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
145,664

 
$
755

 
$
146,419

 
1.42
%
 
33.6 years
 
$
295,759

 
August 2006
RREF CDO 2007-1 Senior Notes
225,983

 
1,485

 
227,468

 
0.81
%
 
33.8 years
 
292,980

 
June 2007
Apidos CDO I Senior Notes
202,969

 
273

 
203,242

 
1.07
%
 
4.6 years
 
217,745

 
August 2005
Apidos CDO III Senior Notes
221,304

 
659

 
221,963

 
0.80
%
 
7.5 years
 
232,655

 
May 2006
Apidos Cinco CDO Senior Notes
320,550

 
1,450

 
322,000

 
0.82
%
 
7.4 years
 
344,105

 
May 2007
Apidos CLO VIII Senior Notes
300,951

 
16,649

 
317,600

 
2.16
%
 
8.8 years
 
351,014

 
Paid in full October 2013
Apidos CLO VIII Securitized Borrowings (3)
20,047

 
—

 
20,047

 
15.27
%
 
8.8 years
 
—

 
Paid in full October 2013
Whitney CLO I Senior Notes
171,555

 
2,548

 
174,103

 
1.82
%
 
4.2 years
 
191,704

 
Paid in full September 2013
Whitney Securitized Borrowings (1)
5,860

 
—

 
5,860

 
9.50
%
 
4.2 years
 
—

 
Paid in full September 2013
Unsecured Junior Subordinated Debentures (2)
50,814

 
734

 
51,548

 
4.26
%
 
23.7 years
 
—

 
May/Sept 2006
CRE - Term Repurchase Facilities (3)
58,834

 
348

 
59,182

 
2.89
%
 
18 days
 
85,390

 
N/A
CMBS - Term Repurchase Facility (4)
47,469

 
23

 
47,492

 
1.52
%
 
18 days
 
59,845

 
N/A
Mortgage Payable
13,600

 
—

 
13,600

 
4.17
%
 
5.6 years
 
18,100

 
Paid in full September 2013
Total
$
1,785,600

 
$
24,924

 
$
1,810,524

 
1.62
%
 
12.5 years
 
$
2,089,297

 
 
 
(1)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Senior Notes, respectively.
(2)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(3)
Amount also includes accrued interest costs of $26,000 and $79,000 related to CRE repurchase facilities as of December 31, 2013 and 2012, respectively.
(4)
Amount also includes accrued interest costs of $22,000 and $23,000 related to CMBS repurchase facilities as of December 31, 2013 and 2012, respectively.

Securitizations
RCC CRE Notes 2013
In December 2013, RSO closed CRE Notes 2013, a $307.8 million CRE securitization transaction that provided financing for transitional commercial real estate loans. The investments held by CRE Notes 2013 securitized the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. CRE Notes 2013 issued a total of $260.8 million of senior notes at par to unrelated investors. RCC Real Estate purchased 100% of the Class D senior notes (rated BBB:DBRS), class E senior notes (rated BB:DBRS) and class F senior notes (rated B:DBRS) for $30.0 million. In addition, RCC CRE Notes 2013 Investor, LLC, a subsidiary of RCC Real Estate, purchased a $16.9 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 CRE Notes 2013 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 CRE Notes 2013. There is no reinvestment period for CRE Notes 2013, which will result in the sequential pay down of notes as underlying collateral matures and pays down. As of December 31, 2013, none of the notes have been paid down.

At closing, the senior notes issued to investors by CRE Notes 2013 consisted of the following classes: (i) $136.9 million of Class A notes bearing interest at one-month LIBOR plus 1.30%; (ii) $78.5 million of Class A-S notes bearing interest at one-month LIBOR plus 2.15%; (iii) $30.8 million of Class B notes bearing interest at one-month LIBOR plus 2.85%; (iv) $14.6 million of Class C notes bearing interest at one-month LIBOR plus 3.50%; (v) $13.8 million of Class D notes bearing interest at one-month LIBOR plus 4.50%; (vi) $9.2 million of Class E notes bearing interest at one-month LIBOR plus 5.50%; (vii) and $6.9 million of Class F notes bearing interest at one-month LIBOR plus 6.50%. All of the notes issued mature in December 2028, although RSO has the right to call the notes anytime after January 2016 until maturity. The weighted average interest rate on all notes issued to outside investors was 2.03% at December 31, 2013.

As a result of RSO’s ownership of senior notes, the notes retained at the CRE securitization's closing eliminate in consolidation.
Resource Real Estate Funding CDO 2007-1
In June 2007, RSO closed RREF CDO 2007-1, a $500.0 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 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 December 31, 2013, $63.4 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 consist 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 allow the CDO to fund future funding obligations under the existing whole loan participations that have 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 0.84% and 0.81% at December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013 RSO did not repurchase any notes. During the year ended December 31, 2012, RSO repurchased and redeemed $50.0 million of Class A-1R notes and $26.8 million of the Class D notes in RREF CDO 2007-1 at a weighted average price of 78.85% to par which, after fees paid to an investment bank to finance the transaction and related expenses, resulted in a $14.9 million gain reported as a gain on the extinguishment of debt in RSO's consolidated statements of income. During the year ended 2011, RSO repurchased $10.0 million of Class A-2 notes at a weighted average price of 61.25% to par which resulted in a $3.9 million gain.
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 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 December 31, 2013, $110.0 million of Class A-1 notes have been paid down.
The senior notes issued to investors by RREF CDO 2006-1 consist 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%.  As a result of RSO’s ownership of the Class J and K senior notes, these notes eliminate in consolidation.  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 1.87% and 1.42% at December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013 RSO did not repurchase any notes.  During the year ended December 31, 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 year ended December 31, 2011, 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 represented 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 December 31, 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 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 outstanding notes by $103.7 million. The weighted average interest rate on all notes was 1.82% at December 31, 2012.
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 Resource TRS III purchased a $15.0 million interest representing 43% of the outstanding subordinated debt.  The remaining 57% of subordinated debt is owned by unrelated third parties.  The reinvestment period for Apidos CLO VIII will end in October 2014.  The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII. In 2013, Apidos CLO VIII was called and liquidated and, as a result, 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 notes in full. The weighted average interest rate on all notes was 2.16% at December 31, 2012.
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 ends 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 0.74% and 0.82% at December 31, 2013 and 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 consist 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 0.88% and 0.80% at December 31, 2013 and 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 December 31, 2013, $129.2 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 consist 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 1.68% and 1.07% and at December 31, 2013 and 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 December 31, 2013, $232.4 million of Class A-1 Notes have been paid down.
During the year ended December 31, 2012 RSO repurchased $2.0 million of the Class B notes in Apidos CDO I at a weighted average price of 85.11% to 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 years ended December 31, 2013 and 2011, RSO did not repurchase any notes.
6.0% Convertible Senior Notes
On October 21, 2013, RSO issued and sold in a public offering $115.0 million aggregate principal amount of its 6.0% Convertible Senior Notes due in 2018, ("6.0% Convertible Senior Notes"). After deducting the underwriting discount and the estimated offering costs, RSO received approximately $111.1 million of net proceeds. The discount of $4.9 million on the 6.0% Convertible Senior Notes reflects the difference between the stated value of the debt and the fair value of the notes as if they were issued without a conversion feature and at a higher rate of interest that RSO estimated would have been applicable without the conversion feature. The discount will be amortized on a straight-line basis as additional interest expense through maturity on December 1, 2018. Interest on the 6.0% convertible senior notes is paid semi-annually and the 6.0% Convertible Senior Notes mature on December 1, 2018. Prior to December 1, 2018, the 6.0% Convertible Senior Notes are not redeemable at RSO's option, except to preserve RSO's status as a REIT. On or after December 1, 2018, RSO may redeem all or a portion of the 6.0% Convertible Senior Notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 6.0% Convertible Senior Notes may require RSO to repurchase all or a portion of the 6.0% Convertible Senior Notes at a purchase price equal to the principal amount plus accrued and unpaid interest on December 1, 2018, or upon the occurrence of certain defined fundamental changes. The 6.0% Convertible Senior Notes are convertible at the option of the holder at a current conversion rate of 150.1502 common shares per $1,000 principal amount of 6.0% Convertible Senior Notes (equivalent to a current conversion price of $6.66 per common share). Upon conversion of 6.0% Convertible Senior Notes by a holder, the holder will receive cash, RSO common shares or a combination of cash and RSO common shares, at RSO's election.
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 $774,000 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 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 December 31, 2013 were $261,000 and $282,000, 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 December 31, 2013, were 4.20% and 4.19%, 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 entities and records dividend income upon declaration by RCT I and RCT II.
Repurchase and Credit Facilities
Borrowings under the repurchase agreements were guaranteed by RSO or one of its subsidiaries. The following table sets forth certain information with respect to RSO's borrowings at December 31, 2013 and 2012 (dollars in thousands):
 
December 31, 2013
 
December 31, 2012
 
Outstanding Borrowings
 
Value of Collateral
 
Number of Positions as Collateral
 
Weighted Average Interest Rate
 
Outstanding Borrowings
 
Value of Collateral
 
Number of Positions as Collateral
 
Weighted Average Interest Rate
CMBS Term Repurchase Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (1)
$
47,601

 
$
56,949

 
44
 
1.38%
 
$
42,530

 
$
51,636

 
33
 
1.52%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (2)
30,003

 
48,186

 
3
 
2.67%
 
58,834

 
85,390

 
8
 
2.89%
Deutsche Bank AG (3)
(300
)
 
—

 
—
 
—%
 
N/A

 
N/A

 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Securities, LLC
—

 
—

 
—
 
—%
 
1,862

 
3,098

 
1
 
1.46%
Deutsche Bank Securities, LLC
—

 
—

 
—
 
—%
 
3,077

 
5,111

 
1
 
1.46%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Century Bank
11,916

 
13,089

 
74
 
4.17%
 
N/A

 
N/A

 
N/A
 
N/A
ViewPoint Bank, NA
2,711

 
3,398

 
17
 
4.58%
 
N/A

 
N/A

 
N/A
 
N/A
Totals
$
91,931

 
$
121,622

 
 
 
 
 
$
106,303

 
$
145,235

 
 
 
 
 
(1)
The Wells Fargo CMBS term facility borrowing includes $12,000 and $23,000, of deferred debt issuance costs as of December 31, 2013 and 2012, respectively.
(2)
The Wells Fargo CRE term repurchase facility borrowing includes $732,000 and $348,000 of deferred debt issuance costs as of December 31, 2013 and 2012, respectively.
(3)
The Deutsche Bank term repurchase facility has not been utilized through December 31, 2013 and the borrowing includes $300,000 of deferred debt issuance costs as of December 31, 2013.
    
The assets in the following table are accounted for as linked transactions. These linked repurchase agreements are not included in borrowings on RSO's consolidated balance sheets.
 
December 31, 2013
 
December 31, 2012
 
Borrowings
Under
Linked
Transactions (1)
 
Value of Collateral Under Linked Transactions
 
Number of Positions as Collateral Under Linked Transactions
 
Weighted Average Interest Rate
of Linked
Transactions
 
Borrowings
Under
Linked
Transactions (1)
 
Value of Collateral Under Linked Transactions
 
Number of Positions as Collateral Under Linked Transactions
 
Weighted Average Interest Rate
of Linked
Transactions
CMBS Term
   Repurchase
   Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank
$
6,506

 
$
8,345

 
7
 
1.65%
 
$
12,180

 
$
14,586

 
6
 
1.40%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term
   Repurchase
   Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank
—

 
—

 
—
 
—%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term
   Repurchase
   Agreements -
   CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JP Morgan Securities, LLC
17,020

 
24,814

 
4
 
0.99%
 
4,703

 
7,221

 
1
 
1.01%
Wells Fargo Securities, LLC
21,969

 
30,803

 
9
 
1.19%
 
3,533

 
5,444

 
1
 
1.46%
Deutsche Bank Securities, LLC
18,599

 
29,861

 
9
 
1.43%
 
—

 
—

 
—
 
—%
Totals
$
64,094

 
$
93,823

 
 
 
 
 
$
20,416

 
$
27,251

 
 
 
 

The following table shows information about the amount at risk under the repurchase facilities (dollars in thousands):
 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
December 31, 2013:
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
10,796

 
21
 
1.38%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
20,718

 
21
 
2.67%
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
JP Morgan Securities, LLC (3)
$
7,882

 
11
 
0.99%
Wells Fargo Securities, LLC (4)
$
8,925

 
2
 
1.19%
Deutsche Bank Securities, LLC
$
11,418

 
22
 
1.43%
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
10,722

 
18
 
1.53%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
26,332

 
18
 
2.88%
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
JP Morgan Securities, LLC (3)
$
2,544

 
11
 
1.01%
Wells Fargo Securities, LLC (4)
$
1,956

 
28
 
1.46%
Deutsche Bank Securities, LLC
$
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.
(2)
$6.5 million and $12.2 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2013 and 2012, respectively.
(3)
$17.0 million of linked repurchase agreement borrowings are being included as derivative instruments as of December 31, 2013.
(4)
As of December 31, 2012, $3.5 million of linked repurchase agreement borrowings are being included as derivative instruments.
CMBS - Term Repurchase Facility
In February 2011, the RSO's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc. (collectively, the "RCC 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 RCC Subsidiaries and Wells Fargo agree to transfer from the RCC 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 RCC Subsidiaries, with a simultaneous agreement by Wells Fargo to transfer back to the RCC Subsidiaries such Assets at a date certain or on demand, against the transfer of funds from the RCC Subsidiaries to Wells Fargo.  The maximum amount of the 2011 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 0.25% initial structuring fee and a 0.25% extension fee upon exercise. The 2011 Facility has a current maturity date of January 31, 2015. The RCC 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 customary events 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 RCC 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 such circumstances, Wells Fargo may require the RCC 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 RCC 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 RCC 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 December 31, 2013.
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 facility had a maximum amount of $150.0 million and an initial 18 month term.  RSO paid an origination fee of 37.5 basis points (0.375%). On April 12, 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 27, 2015. The amendment also provides two additional one year extension option at RCC Real Estate'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.
This 2012 Facility contains customary events 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 RSO 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 RSO; 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 RSO'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 December 31, 2013.
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 has a maximum amount of $200.0 million and an initial 12 month term, ending on July 19, 2014, with two one-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 December 31, 2013 or 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 require SPE 5 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 $5.0 million 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 financial debt covenants as of December 31, 2013.
Short-Term Repurchase Agreements - CMBS
On November 6, 2012, RCC Real Estate 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. Interest rates reset monthly.
On February 14, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the purchase 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.
On March 8, 2005, RCC Real Estate entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the purchase of CMBS and the origination of 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.

Residential Mortgage Financing Agreements
PCA has a master repurchase agreement with New Century Bank d/b/a Customer's Bank ("New Century") to finance the acquisition of residential mortgage loans. The facility has a maximum amount of $30.0 million and a termination date of July 2, 2014, which was amended from the original terms over the course of four amendments. At December 31, 2013, PCA had borrowed $11.9 million under this facility. The facility bears interest at one-month LIBOR plus 3.50%. RSO did not own PCA nor was it party to the agreement with New Century at December 31, 2012.
The New Century facility contains provisions that provide New Century with certain rights if certain credit events have occurred with respect to one or more assets financed on the New Century facility to require PCA 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 New Century facility, or may only be required to the extent of the availability of such payments.
The New Century 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 in the nature of PCA's business as a mortgage banker as presently conducted or a change in senior management, including the employment of two senior members of PCA's management staff; breaches of covenants and/or certain representations and warranties; performance defaults by PCA; a judgment in an amount greater than $10,000 against PCA or $50,000 in the aggregate against PCA. 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 New Century facility and the liquidation by New Century of assets then subject to the New Century facility. The agreement requires PCA to maintain a minimum maintenance balance account at all times of $1.5 million. PCA was in compliance with all financial debt covenants as of December 31, 2013.
PCA has a loan participation agreement with ViewPoint Bank, NA ("ViewPoint") to finance the acquisition of residential mortgage loans. The facility has a maximum amount of $15.0 million and a termination date of December 30, 2014, which was amended from the original terms over the course of five amendments. At December 31, 2013, PCA had borrowed $2.7 million. The facility bears interest at one-month LIBOR with a 4.00% floor. RSO did not own PCA nor was it party to the agreement with ViewPoint at December 31, 2012.
    
The ViewPoint facility contains provisions that provide ViewPoint with certain rights if certain credit events have occurred with respect to one or more assets financed on the ViewPoint facility to require either PCA to 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 ViewPoint facility, or may only be required to the extent of the availability of such payments. The agreement requires PCA to maintain a minimum balance in a deposit account at all times of $1.0 million.
PCA received a waiver on a covenant due to an event of default that requires PCA to maintain consolidated net income of at least one dollar for the preceding twelve month period and not allow PCA's consolidated net income to be a negative number for three consecutive months. The waiver removed all existing defaults and waived the net income covenant requirement until September 30, 2014. PCA was in compliance with all other financial covenant requirements under the agreement as of December 31, 2013.
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 bore interest at a rate of one-month LIBOR plus 3.95%.  As of December 31, 2012 the borrowing rate was 4.17%. At December 31, 2013, there were no outstanding borrowings under this agreement as the property was sold and the underlying mortgage was repaid in 2013.
Related party transactions - RSO
Relationship with LEAF. LEAF Financial originated and managed 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 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. On December 17, 2013, RSO entered into another amendment to extend the maturity to February 15, 2015. The loan amount outstanding at December 31, 2013 and 2012 was $5.7 million and $6.8 million, respectively.
RSO's resulting interest from the formation of LEAF is accounted for under the equity method. For the years ended December 31, 2013 and 2012, RSO recorded a loss of $183,000 and $3.3 million, respectively, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statement of income.  No such income or loss was incurred for the year ended December 31, 2011. RSO’s investment in LEAF was valued at $41.0 million and $33.1 million as of December 31, 2013 and 2012, respectively.
Relationship with CVC Credit Partners. On April 17, 2012, ACM, a former subsidiary of the Company, was sold to CVC Credit Partners, a joint venture entity in which the Company owns a 33% interest.  CVC Credit Partners manages internally and externally originated bank loan assets on RSO’s behalf.  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 Resource Capital Asset Management ("RCAM"). Through RCAM, RSO is entitled to collect senior, subordinated and incentive fees related to five CLOs holding approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing these CLOs.  CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM.  For the years ended December 31, 2013, 2012 and 2011, CVC Credit Partners incurred subordinated fees of $643,000 and $800,000 and $1.0 million, 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 interest in this CLO, increasing its ownership 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 in February 2013.
In May, June and July 2013, RSO invested a total of $15.0 million 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"). 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. CVC Capital Partners SICAV-FIS, S.A. ("CVC"), together with its affiliates, and the Company, own a majority and a significant minority, respectively, of the investment manager. 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. For the year ended December 31, 2013, RSO recorded earnings of $1.2 million, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. The fund's investment balance of $16.2 million at December 31, 2013 is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
Relationship with TBBK. Mr. Daniel G. Cohen, or Mr. D. Cohen, is the Chairman of the Board and Mrs. Betsy Z. Cohen, or Mrs. B. Cohen, is the Chief Executive Officer of TBBK and its subsidiary bank. Mrs. B. Cohen is the wife of Mr. E. Cohen, and Mr. E. Cohen and Mrs. B. Cohen are the parents of Messrs. J. Cohen, RSO's President and Chief Executive Officer, and D. Cohen. 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 TBBK. 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 years ended December 31, 2013, 2012 and 2011, RSO paid Ledgewood $360,000 and $438,000 and $238,000, respectively, in connection with legal services rendered to RSO.
Fair value of financial instruments
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 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 data available in the market 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 a prioritization of inputs used in the valuation of 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's management 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
December 31, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
11,558

 
$
11,558

Investment securities available-for-sale
2,370

 
92

 
207,375

 
209,837

CMBS - Linked Transactions
—

 
—

 
30,066

 
30,066

Total assets at fair value
$
2,370

 
$
92

 
$
248,999

 
$
251,461

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
395

 
10,191

 
10,586

Total liabilities at fair value
$
—

 
$
395

 
$
10,191

 
$
10,586

 
 
 
 
 
 
 
 
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, 2012
$
58,508

Total gains or losses (realized or unrealized):
 

Included in earnings
14,105

Purchases
8,341

Sales
(37,632
)
Paydowns
(2,012
)
Transfers into Level 3
66,381

Unrealized (losses) – included in accumulated other comprehensive income
8,457

Beginning balance, January 1, 2013
116,148

Total gains or losses (realized or unrealized):
 

Included in earnings
10,094

Purchases
106,570

Sales
(37,499
)
Paydowns
(41,571
)
Unrealized gains (losses) – included in accumulated other comprehensive income
362

Transfers into level 3
94,895

Ending balance, December 31, 2013
$
248,999


RSO is not able to obtain significant observable inputs and market data points due to a change in methodology whereby RSO began using a third party valuation firm to determine fair value. As a result, $94.9 million of CMBS (including certain CMBS accounted for as linked transactions, were reclassified to Level 3 during the year ended December 31, 2013.
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, 2012                                                                                               
$
12,000

Unrealized losses – included in accumulated other comprehensive income
2,077

Beginning balance, January 1, 2013                                                                                      
14,077

Unrealized losses – included in accumulated other comprehensive income
(3,886
)
Ending balance, December 31, 2013                                                                                            
$
10,191


RSO had $328,000, $42,000 and $4.6 million of losses included in earnings due to the other-than-temporary impairment charges of during the years ended December 31, 2013, 2012 and 2011, respectively. With respect to December 31, 2013 and 2012 RSO recorded final charge-off adjustments on assets that had previous principal losses and in 2011 there was an other-than-temporary impairment taken on one asset. These losses are included in the consolidated statements of operations as net impairment losses recognized in earnings.
Loans held for sale consist of bank loans and 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 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 years ended December 31, 2013, 2012 and 2011 was $3.1 million, $7.8 million and $11.4 million, respectively, and is included in the consolidated statements of operations as provision for loan and lease 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
December 31, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
6,850

 
$
15,066

 
$
21,916

Impaired loans
—

 
225

 
—

 
225

Total assets at fair value
$
—

 
$
7,075

 
$
15,066

 
$
22,141

 
 
 
 
 
 
 
 
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 December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
December 31, 2013
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Significant
Unobservable
Input Value
Interest rate swap agreements
$
10,191

 
Discounted cash flow
 
Weighted average credit spreads
 
5.03
%

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 the consolidated balance sheets.  The fair value of RSO’s investment securities-trading is reported in section D. Investment securities - trading section above. The fair value of RSO’s investment securities available-for-sale is reported in section E. Investment securities available-for-sale above. 
Loans held-for-investment:  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 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)
December 31, 2013:
 
 
 
 
 
 
 
 
 
Loans held-for-investment
$
1,369,526

 
$
1,358,434

 
$
—

 
$
545,352

 
$
813,082

Loans receivable-related party
$
6,966

 
$
6,966

 
$
—

 
$
—

 
$
6,966

CDO notes
$
1,070,339

 
$
653,617

 
$
—

 
$
653,617

 
$
—

Junior subordinated notes
$
51,005

 
$
17,499

 
$
—

 
$
—

 
$
17,499

Repurchase agreements
$
77,304

 
$
77,304

 
$
—

 
$
—

 
$
77,304

 
 
 
 
 
 
 
 
 
 
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 agreements
$
106,303

 
$
106,303

 
$
—

 
$
—

 
$
106,303


RAI - Other VIEs
VIEs not consolidated
The Company’s investments in RRE Opportunity REIT I and its investments in the structured finance entities that hold investments in trust preferred assets (“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.  With respect to RRE Opportunity REIT I, the Company has advanced offering costs that are being reimbursed as the REIT raises additional equity which is included in Receivables from managed entities and related parties, net on the Consolidated Balance Sheets.  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 December 31, 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 nonconsolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at December 31, 2013 (in thousands):
 
Receivables from
Managed Entities and Related
Parties, Net (1)
 
Investments
 
Maximum Exposure
to Loss in
Non-consolidated VIEs
RRE Opportunity REIT I
$
—

 
$
2,549

 
$
2,549

Ischus entities
204

 
—

 
204

Trapeza entities
—

 
777

 
777

 
$
204

 
$
3,326

 
$
3,530

 
(1)
Exclusive of expense reimbursements due to the Company.
Income Taxes
RSO operates in such a manner as to quality as a REIT, under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"); therefore, applicable REIT taxable income is included in the taxable income of RSO shareholders, to the extent distributed RSO. To maintain REIT status for federal income tax purposes, RSO is generally required to distribute at least 90% of its REIT taxable income to its shareholders as well as comply with certain other qualification requirements as defined under the Code. As a REIT, RSO is not subject to federal corporate income tax to extent that it distributes 100% of its REIT taxable income each year.
Taxable income from non-REIT activities managed through RSO's taxable REIT subsidiaries is subject to federal, state and local income taxes. RSO's taxable REIT subsidiaries' income taxes are accounted for under the asset and liability method.  Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and tax basis of assets and liabilities. 
The following table details the components of income taxes (in thousands):
 
Years Ended December 31,
 
2013
 
2012
 
2011
Provision (benefit) for income taxes:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
4,601

 
$
11,497

 
$
7,839

State
1,068

 
776

 
4,596

Total current
5,669

 
12,273

 
12,435

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
(5,116
)
 
1,769

 
(305
)
State
(1,594
)
 
560

 
(94
)
Total deferred
(6,710
)
 
2,329

 
(399
)
Income tax provision (benefit)
$
(1,041
)
 
$
14,602

 
$
12,036


A reconciliation of the income tax benefit (provision) based upon the statutory tax rate to the effective income tax rate is as follows (in thousands):
 
Years Ended December 31,
 
2013
 
2012
 
2011
Statutory tax rate
$
(588
)
 
$
9,518

 
$
6,324

State and local taxes, net of federal benefit
(728
)
 
225

 
2,641

Permanent Adjustments
2

 
32

 
—

Subpart F income
—

 
3,458

 
1,991

Basis difference in LEAF investment
—

 
—

 
1,080

Prior period tax expense
253

 
—

 
—

Other items
20

 
1,369

 
—

 
$
(1,041
)
 
$
14,602

 
$
12,036



The components of deferred tax assets and liabilities are as follows (in thousands):
 
December 31,
 
2013
 
2012
Deferred tax assets related to:
 
 
 
Investment in securities
$
118

 
$
118

Intangible assets basis difference
2,725

 
2,557

Federal, state and local loss carryforwards
941

 
45

Subpart F income
1,359

 
12

Partnership investment
2

 
34

Deferred revenue
23

 
—

Accrued expenses
44

 
—

Total deferred tax assets
5,212

 
2,766

Valuation allowance
—

 
—

Total deferred tax assets
$
5,212

 
$
2,766

Deferred tax liabilities related to:
 
 
 
Unrealized loss on investments
$
(3,764
)
 
$
(4,286
)
Equity investments
(153
)
 
(838
)
Basis difference in LEAF investment
(195
)
 
(185
)
Subpart F income
—

 
(3,067
)
Total deferred tax liabilities
$
(4,112
)
 
$
(8,376
)

Apidos CDO I, Apidos CDO III and Apidos Cinco CDO, Apidos CLO VIII, and Whitney CLO I, and Harvest CLO VII, RSO's foreign TRSs, are organized as exempted companies incorporated with limited liability under the laws of the Cayman Islands and, with respect to Harvest CLO VII, Ireland, and are generally exempt from federal and state income at the corporate level because their activities in the United States are limited to trading in stock and securities for their own account.  Therefore, despite their status as TRSs, they generally will not be subject to corporate tax on their earnings and no provision for income taxes is required; however, because they are “controlled foreign corporations,” RSO will generally be required to include Apidos CDO I's, Apidos CDO III's, Apidos Cinco CDO's, Apidos CLO VIII's, and Whitney CLO I's and Harvest CLO VII's current taxable income in its calculation of REIT taxable income.
On October 27, 2011 RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III. As a result, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. On January 24, 2012, RSO reorganized the ownership structure of Apidos CDO I and Apidos CDO III.  As a result, for the period January 1, 2012 through January 23, 2012, the earnings from Apidos CDO I and Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. For the period January 24, 2012 through December 31, 2012 the earnings from Apidos CDO I are included in RSO's calculation of REIT taxable income. On December 11, 2012, RSO reorganized the ownership structure of Apidos CDO III.  As a result, for the period from January 24, 2012 through December 10, 2012 the earnings from Apidos CDO III are included in RSO's calculation of REIT taxable income.  Also as a result of the reorganization on December 11, 2012, for the period December 11, 2012 through December 31, 2012, the earnings from Apidos CDO III are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. 
On November 12, 2012, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I.  As a result, for the period November 12, 2012 through December 31, 2012, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO's calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from November 12, 2012 through December 31, 2012 has been recorded.
On February 13, 2013, RSO reorganized the ownership structure of Apidos Cinco CDO and Whitney CLO I. As a result, for the period January 1, 2013 through February 12, 2013, the earnings from Apidos Cinco CDO and Whitney CLO I are excluded from RSO’s calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from January 1, 2013 through February 12, 2013 has been recorded. Also as a result of the reorganization on February 13, 2013, for the period February 13, 2013 and ending December 31, 2013 the earnings from Apidos Cinco CDO and Whitney CLO I are included in RSO’s calculation of REIT taxable income.
On March 8, 2013 RSO reorganized the ownership structure of Apidos CDO III. As a result, the earnings from Apidos CDO III for the period January 1, 2013 through March 7, 2013 are excluded from RSO’s calculation of REIT taxable income and are subject to corporate tax. Accordingly, a provision for income taxes on the earnings from January 1, 2013 through March 7, 2013 has been recorded. Also as a result of the reorganization on March 8, 2013, for the period March 8, 2013 and ending December 31, 2013 the earnings from Apidos CDO III are included in RSO’s calculation of REIT taxable income.
On September 10, 2013, RSO acquired approximately 9.5% of the equity of Harvest CLO VII, which is a foreign TRS, organized as an exempt company incorporated with limited liability under the laws of Ireland. This equity is directly owned by a domestic qualified REIT subsidiary of RSO and, accordingly, its earnings are included in RSO’s calculation of REIT taxable income.
Effective January 1, 2007, RSO adopted the provisions of FASB's guidance for uncertain tax positions. This implementation did not have an impact on RSO's consolidated balance sheets or consolidated statements of income. The guidance prescribes that a tax position should only be recognized if it is more likely than not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. RSO is required to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period as well as the cumulative amounts recorded in the consolidated balance sheets. RSO will continue to classify any tax penalties as other operating expenses and any interest as interest expense. RSO does not have any unrecognized tax benefits that would affect RSO's financial position.
As of December 31, 2013, RSO had $2.1 million of federal net operating losses and $2.0 million of sate net operating losses. The federal net operating losses will begin to expire in 2032; the state net operating losses will begin to expire in 2032. RSO has concluded that it is more likely than not that all losses will be utilized during their respective carry forward periods; and as such, a valuation allowance has not been established against these deferred tax assets.
As of December 31, 2013, income tax returns for the calendar years 2010 - 2013 remain subject to examination by the IRS and/or any state or local taxing jurisdiction. RSO has not executed any agreements with the IRS or any state and/or local taxing jurisdiction to extend a statute of limitations in relation to any previous year.