2 0 1 6 A N N U A L R E P O R T www.rait.com | NYSE symbol: RAS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 or ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-14760 RAIT FINANCIAL TRUST (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) Two Logan Square, 100 N. 18th Street, 23rd Floor Philadelphia, PA (Address of principal executive offices) 23-2919819 (IRS Employer Identification No.) 19103 (Zip Code) Registrant’s telephone number, including area code: (215) 207-2100 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Shares of Beneficial Interest 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest 7.625% Senior Notes Due 2024 7.125% Senior Notes Due 2019 New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ‘ Non-accelerated filer ‘ (Do not check if a smaller reporting company) È Accelerated filer Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2016 of $3.13, was approximately $283,962,915. As of March 7, 2017, 92,465,095 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding. Portions of the proxy statement for registrant’s 2017 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE TABLE OF CONTENTS FORWARD LOOKING STATEMENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Mine Safety Disclosures Properties Legal Proceedings PART II Item 5. Market for Our Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Financial Statements and Supplementary Data PART III Item 10. Trustees, Executive Officers and Trust Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Item 13. Certain Relationships and Related Transactions and Trustee Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary SIGNATURES EXHIBIT INDEX Page No. 1 3 3 13 59 59 59 60 61 61 63 64 89 91 180 180 181 182 182 182 182 182 182 183 183 183 184 185 FORWARD LOOKING STATEMENTS The Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report contains or incorporates by reference such “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Words such as “anticipates,” “assumes,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial results and performance identify forward-looking statements. Unless we have indicated otherwise, or the context otherwise requires, references in this report to “RAIT,” “we,” “us,” and “our” or similar terms, are to RAIT Financial Trust and its subsidiaries. We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 for these statements. These statements may be made directly in this report and they may also be incorporated by reference in this report to other documents filed with the SEC, and include, but are not limited to, statements about future financial and operating results and performance, statements about our plans, objectives, expectations and intentions with respect to future operations, products and services, and other statements that are not historical facts. These forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements. RAIT’s forward-looking statements include, but are not limited to, statements regarding RAIT’s plans and initiatives to (i) simplify its business model, (ii) focus originations on high credit quality, first lien loans, (iii) adopt a direct loan origination model that facilitates improved credit and long-term borrower relationships, (iv) streamline lending strategy to focus on RAIT’s core competencies, (v) opportunistically divest and maximize the value of RAIT’s legacy REO portfolio and remaining property management operations and, ultimately, minimize REO holdings, (vi) significantly reduce RAIT’s total expense base, (vii) reinvest capital into what RAIT believes is a higher yielding lending business, (viii) achieve RAIT’s asset mix targets, (ix) sell non-core commercial real estate, or CRE, and lower asset management costs, (x) minimize the issuance of mezzanine debt and preferred equity, (xi) optimize the level of working capital on the balance sheet, (xii) achieve our financial targets, (xiii) achieve our capital structure targets, (xiv) reduce reliance on the issuances of corporate debt and/or preferred stock, (xv) reduce leverage, including preferred stock, as a percentage of total assets, (xvi) reduce legacy CDOs as a percentage of total secured indebtedness, (xvii) achieve our targeted dividend payout ratio, (xviii) achieve significant annual expense savings in connection with the Independence Realty Trust, Inc., or IRT, management internalization, including the sale of our multifamily property management business, (xix) exit the commercial property business, and (xx) enhance our long-term prospects and create value for our shareholders. Risks, uncertainties and contingencies that may affect the results expressed or implied by RAIT’s forward- looking statements include, but are not limited to: (i) whether RAIT will be able to continue to implement its strategy to transition RAIT to a more lending focused, simpler, and cost-efficient business model and to deleverage and to generate enhanced returns for its shareholders; (ii) whether RAIT will be able to continue to opportunistically divest and maximize the value of RAIT’s legacy REO portfolio, existing property management operations and the majority of RAIT’s non-lending assets; (iii) whether anticipated cost savings from the IRT management internalization will be achieved; (iv) whether the divestiture of RAIT’s CRE portfolio will lead to lower asset management costs and lower expenses; (v) whether RAIT will be able to reduce compensation and G&A expenses and indebtedness; (vi) whether RAIT’s new leadership will be able to take actions that lead to 1 enhanced value for shareholders; (vii) whether RAIT will be able to create sustainable earnings and grow book value; (viii) whether RAIT will be able to redeploy capital from non-lending related asset sales; (ix) whether RAIT will be able to increase loan origination levels; (x) whether the disposition of non-core assets, reductions in debt levels and expected loan repayments will impact RAIT’s Cash Available for Distribution (CAD); (xi) whether RAIT will continue to pay dividends and the amount of such dividends; (xii) whether RAIT will be able to organically increase reliance on match-funded asset-level debt; (xiii) overall conditions in commercial real estate and the economy generally; (xiv) whether market conditions will enable RAIT to continue to implement our capital recycling and debt reduction plan involving selling properties and repurchasing or paying down our debt; (xv) whether we will be able to originate sufficient bridge loans; (xvi) whether the timing and amount of investments, repayments, any capital raised and our use of leverage will vary from those underlying our assumptions; (xvii) changes in the expected yield of our investments; (xviii) changes in financial markets and interest rates, or to the business or financial condition of RAIT; (xix) whether RAIT will be able to originate loans in the amounts assumed; (xx) whether RAIT will generate any CMBS gain on sale profits; (xxi) whether the amount of loan repayments will be at the level assumed; (xxii) whether our management changes will be successfully implemented; (xxiii) whether RAIT will be able to dispose of its industrial portfolio or sell other properties; (xxiv) the availability of financing and capital, including through the capital and securitization markets; (xxv) risks, disruption, costs and uncertainty caused by or related to the actions of activist shareholders, including that if individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create value for our shareholders, and perceived uncertainties as to our future direction as a result of potential changes to the composition of our Board may lead to the perception of a change in the direction of our business, instability or a lack of continuity which may be exploited by our competitors, cause concern to our current or potential customers, and may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners; and (xxvi) other factors described in this report and RAIT’s other filings with the SEC. The risk factors discussed and identified in Item 1A of this report and in other of our public filings with the SEC, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events. 2 Item 1. Business Our Company PART I We are an internally-managed Maryland real estate investment trust, or REIT, focused on providing commercial real estate financing throughout the United States. As explained below, we plan to continue to opportunistically divest our non-lending businesses and assets, however, presently, we also own and manage a portfolio of commercial real estate properties and manage real estate assets for third parties. We were formed in August 1997 and commenced operations in January 1998. Business Strategy During 2016, we began a strategic transition to concentrate primarily on our commercial real estate, or CRE, lending business. This is a strategic transition to a more cost efficient, lower leveraged and focused business model from being a multi-strategy REIT which also owned and managed CRE assets throughout the United States and managed our interest in IRT. Our transition is ongoing as we plan to continue to divest non- lending related businesses and assets as we did with the sale of our investment in IRT described below. We believe that as we fully implement our strategy we will be able to enhance shareholder value by delivering stable and repeatable risk-adjusted returns. We plan to do that with a significantly lower expense base that matches our lending focused strategy with an appropriate capital structure and lower levels of debt. In connection with executing RAIT’s strategy and transformation initiative, we have identified several key priorities designed to differentiate RAIT, improve RAIT’s margins and enhance shareholder value over time. Our transformational strategy is focused on the following priorities: • Concentrating RAIT’s business on our core middle-market CRE lending business; • Opportunistically divesting and maximizing the value of RAIT’s legacy owned real estate, or REO, portfolio and ultimately minimize our REO holdings; • Opportunistically divesting and maximizing the value of RAIT’s commercial property management business, including our Urban Retail property management business; • Optimizing RAIT’s capital structure and decreasing our outstanding indebtedness; • Reducing RAIT’s total expense base; and • Reallocating RAIT’s capital and cash proceeds from divesting our non-core assets into growing our core middle-market commercial real estate lending activities. 2016 Developments Strategic Accomplishments Key accomplishments in 2016 towards implementing our strategic transition include the following events: • Sale of Our Investment in IRT and Our Multifamily Property Management Business • RAIT sold the external advisor of IRT and RAIT’s multifamily property management business to IRT for $43.0 million in aggregate gross proceeds. • RAIT sold its IRT stock ownership position to IRT, generating $62.2 million in aggregate gross proceeds. • RAIT deconsolidated IRT from its financial statements. • See “IRT Management Internalization” below for additional disclosure about these transactions. 3 • Property Sales • RAIT sold 18 properties which generated aggregate gross proceeds of $337.9 million. • After repayment of debt, RAIT received aggregate net proceeds of approximately $35 million. • See “REO Portfolio” below for additional disclosure about our REO portfolio. • Reductions in Compensation & General and Administrative, or G&A, Expenses • RAIT’s compensation and G&A expenses were $49.0 million for the year ended December 31, 2015 ($18.9 million of which was related to discontinued operations and Urban Retail) and would have been $56.2 million for the year ended December 31, 2016 ($24.5 million of which was related to discontinued operations and Urban Retail). As a result of 2016 strategic initiatives, RAIT’s compensation and G&A expenses declined to $31.7 million for the year ended December 31, 2016. • Reduced our number of employees by approximately 460 employees, from approximately 700 employees to 240 employees. • Debt Reductions • RAIT’s indebtedness, based on principal amount, declined by $664.6 million, or 27.1%, during the year ended December 31, 2016. Total recourse debt, excluding RAIT’s secured warehouse facilities, declined by $56.7 million, or 13.6%, during the year ended December 31, 2016. • Changes in Company Leadership and Board • RAIT announced a new Board leadership structure and executive management changes to oversee and execute RAIT’s strategy and its transition to a more streamlined lending-focused, cost efficient and lower leveraged business model. • On October 24, 2016, RAIT announced that Michael J. Malter, who joined RAIT’s Board in November 2015, was elected by the Board to serve as its Independent Chairman. • Effective December 20, 2016, Scott Davidson, RAIT’s President and the former head of its lending business, was named RAIT’s Chief Executive Officer and, concurrently, was appointed to the Board. • On February 15, 2017, RAIT announced that Thomas D. Wren, a former banking executive and federal banking regulator, had joined the Board as a new independent trustee with substantial financial, regulatory, capital markets and mortgage REIT expertise, the third new Trustee to join RAIT’s nine-person Board since November 2015. • On February 21, 2017, RAIT announced that Paul W. Kopsky, Jr., an accomplished executive with extensive financial and operational leadership expertise across a diverse range of industries, was named to succeed James J. Sebra as RAIT’s Chief Financial Officer and Treasurer. 2016 Business Developments and Financial Results During 2016, we began to implement our strategy to focus on our core CRE lending business line. We also managed our own REO portfolio, managed third-party properties and assets and, prior to the IRT management internalization described below, owned the external advisor of IRT, a REIT which owns a portfolio of multifamily properties, and approximately 15.5% of the outstanding IRT common stock. These business lines, business developments and our investment portfolio resulting from these business lines are described below. During 2016, we generated GAAP net income (loss) allocable to common shares of $(9.8) million, or $(0.11) per common share-diluted, as compared to $7.2 million, or $0.08 per common share-diluted, during 2015. During 2016, our cash available for distribution, or CAD, decreased to $40.6 million, or $0.45 per common share from $66.1 million, or $0.77 per common share for 2015. CAD is a non-GAAP financial measure. For management’s 4 respective definitions and discussion of the usefulness of CAD to investors, analysts and management and a reconciliation of our reported net income (loss) to our CAD, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures.” CRE Lending The core of our business is a full service CRE lending platform focused on first lien loans. We have a disciplined origination model centered on managing credit risk. Our staff of experienced professionals gives us in-house origination, underwriting and credit capabilities with long standing relationships nationwide. We offer customized lending solutions to meet borrower needs and internal credit goals. We have extensive experience with fast-moving, complex transactions and have a reputation to deliver speed and certainty of closing the loans we undertake. We offer tailored middle-market financing solutions and a full complement of lending products for stabilized and light transition CRE. We have robust credit capabilities with a full service underwriting team with a disciplined process providing an independent credit review from our originators to enhance our ability to maintain consistent credit quality. We may also offer mezzanine loans and preferred equity interests in limited circumstances to support first lien loans. These represent a small part of our CRE loan portfolio and we expect to continue to limit our origination of mezzanine loans and preferred equity interests. Our mezzanine loans are subordinate in repayment priority to a senior mortgage loan or loans on a property and are typically secured by pledges of ownership interests, in whole or in part, in the entities that own the real property. We may structure our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan. We generate a return on our preferred equity investments primarily through distributions to us at a fixed rate and, in some instances, the payment of distributions may be subject to there being sufficient net cash flow from the underlying real estate. We use this investment structure as an alternative to a mezzanine loan where the financial needs and tax situation of the borrower, the terms of senior financing secured by the underlying real estate or other circumstances necessitate holding preferred equity. Our CRE loans are in most cases non-recourse or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third-party lenders. We expect our origination of conduit loans to generate fee income for us when we sell the conduit loans to CMBS securitizations. We expect to retain the balance of the assets in this portfolio to generate interest income for us. We rely on diverse sources of funding for our CRE lending business. We are a market leader in floating rate securitization programs and have access to multiple sources of funding including senior debt, convertible securities, preferred securities and common securities. Our strategy involves using multiple sources of short-term financing to originate assets including warehouse facilities, repurchase agreements and bank conduit facilities. Our ultimate goal is to finance these investments on a long-term, non-recourse, match-funded basis or to sell these assets into CMBS securitizations. Match funding enables us to match the interest rates and maturities of our assets with the interest rates and maturities of our financing, thereby reducing interest rate risk and funding risks in financing our portfolio on a long-term basis. Since 2013, we have sold conduit loans to unaffiliated CMBS securitizations for fee income and have sold bridge loans to securitizations we have sponsored and consolidated, and for which we act as servicer and special servicer. During 2016, we sold approximately $35.2 million of conduit loans to unaffiliated CMBS securitizations which generated fee income of $0.2 million. On November 30, 2016, we closed our sixth non- recourse, floating rate CMBS securitization. The transaction involved the sale, by a RAIT subsidiary, of investment grade notes totaling approximately $216.7 million with a weighted average cost of LIBOR plus 2.03%, which provided an advance rate to the RAIT subsidiary of approximately 84.0%. As of December 31, 2016, RAIT affiliates retained all of the below investment grade and unrated subordinated interests from the securitization totaling approximately $41.3 million. In January of 2017, we contributed all $41.3 million of these interests to a venture, in which we retained a 60% interest, and received $16.9 million of proceeds as a result of 5 the contribution. As of December 31, 2016, we financed a majority of our consolidated investments in CRE loans through four of these floating rate CMBS securitizations and two other loan securitizations, RAIT CRE CDO I, Ltd., or RAIT I, and RAIT Preferred Funding II, Ltd., or RAIT II. In the third quarter of 2016, we exercised our rights to unwind one of our floating rate CMBS securitizations and repaid all the notes. We sponsored RAIT I and RAIT II in 2006 and 2007, respectively, and refer to them as our legacy CDOs. We characterize the notes issued by these CMBS securitizations as non-recourse debt to us because the noteholders generally must look to the loans collateralizing their notes for repayment. We serve as the servicer, special servicer and collateral manager for RAIT I and RAIT II. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary” for more information about our use of CMBS financing. We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our financing strategies particularly where the loans we make with the proceeds of financing we obtain are not match funded with the financing. REITs generally are able to enter into transactions to hedge indebtedness used to acquire real estate assets, provided that the total gross income from such hedges and other non-qualifying sources does not exceed 25% of the REIT’s total gross income. We originated $156.8 million of loans during the year ended December 31, 2016 consisting of $143.0 million of floating-rate bridge loans and $13.8 million of fixed-rate conduit loans. CRE loan repayments were $425.0 million for the year ended December 31, 2016. The tables below describe certain characteristics of our commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2016 (dollars in thousands): Commercial Real Estate (CRE) Commercial mortgage loans Mezzanine loans Preferred equity interests Total CRE Book Value $1,161,381 89,856 42,829 $1,294,066 Weighted- Average Coupon 5.8% 9.9% 8.2% 6.1% Range of Maturities Number of Loans Jan. 2017—Dec. 2025 Feb. 2017—Jun. 2027 Jan. 2017—Jan. 2029 94 23 17 134 Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates which differ from current payment terms. We refer to these loans as cash flow loans, the vast majority of which were originated prior to 2011. Although a cash flow loan accrues interest at a stated rate, pursuant to forbearance or other agreements, the borrower is only required to pay interest each month at a minimum rate plus additional interest up to the stated rate to the extent of all cash flow from the property underlying the loan after the payment of property operating expenses. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 2: Summary of Significant Accounting Policies— Revenue Recognition” for further information on these loans. As of December 31, 2016, we held investments we characterized as cash flow loans, with a recorded investment (including accrued interest) of $185.7 million comprised of preferred equity interests totaling $49.5 million, bridge loans totaling $100.6 million and mezzanine loans totaling $35.6 million. Of these cash flow loans, $175.2 million were originated prior to 2011 and $10.5 million were originated in 2013. As of December 31, 2016, our nonaccrual loans total $121.0 million and represent seven loans originated prior to 2008. We remain focused on working with our borrowers on these loans to either sell or refinance the underlying properties as expeditiously as possible. In January of 2017, a property that was part of a portfolio collateralizing one of these loans was sold and the proceeds from the sale were used to repay the allocated unpaid principal balance for this property of $3.5 million with the excess proceeds being applied to the remainder of the loan. Also in January of 2017, a property collateralizing a $2.5 million nonaccrual loan was refinanced with 6 another lender. As of December 31, 2016, we maintained a loan loss of reserve of $12.4 million, representing approximately10% of our nonaccrual loans. We finance our consolidated CRE loans on a long-term basis through securitizations. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securitization Summary” for more information about our securitizations. The charts below describe the property types and the geographic breakdown of our commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2016: Commercial Mortgages, Mezzanine Loans, and Preferred Equity Interests Property Types (a) Other 7.6% Multi-family 24.2% Retail 29.2% Commercial Mortgage Loans, Mezzanine Loans, and Preferred Equity Interests Geographic U.S. Regions (a) West 18.4% Mid-Atlantic 10.7% Southeast 27.9% Office 39.0% Central 36.8% Northeast 6.2% (a) Based on carry amount. REO properties As described above, we continue to execute on our strategy of opportunistically divesting, while maximizing the value of our legacy REO portfolio and ultimately minimizing our REO holdings over time. During 2016, we sold 18 properties for $337.9 million which generated a $53.3 million GAAP gain. The proceeds from the sales were used to reduce debt, and the sales generated $35.0 million of net proceeds to us. We are expecting to dispose of additional REO properties with an aggregate book value as of December 31, 2016 of approximately $540.0 million during 2017. As of December 31, 2016, our real estate portfolio had an aggregate book value of $854.6 million, comprised of $328.0 million of office properties, $147.2 million of multifamily properties, $152.6 million of retail properties, $93.4 million of industrial properties, $81.1 million of properties in redevelopment and $52.3 million of land. We reported an $11.1 million asset impairment for the quarter ended December 31, 2016 related to six properties we expect to sell. The IRT management internalization described below resulted in our deconsolidation of a substantial portion of our investments in real estate during 2016. We have financed our portfolio of investments in commercial real estate through secured mortgages held by either third-party lenders or our commercial real estate securitizations. 7 The table below describes certain characteristics of our REO Portfolio as of December 31, 2016 (dollars in thousands, except average effective rent): Investments in Real Estate Average Physical Occupancy Units/ Square Feet/ Acres Number of Properties Multifamily real estate properties (b) Office real estate properties (c) Industrial real estate properties (c) Retail real estate properties (c) Redevelopment real estate properties (c) Parcels of land $147,201 328,029 93,423 152,629 81,130 52,234 93.2% 1,703 78.3% 2,253,564 76.6% 1,840,577 73.2% 1,493,073 42.4% 1,206,514 13.7 N/A Total $854,646 — 6 14 12 6 2 7 47 Average Effective Rent (a) For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 $ 856 $19.85 $ 3.31 $14.11 $17.92 N/A $ 816 19.56 3.71 14.91 9.18 N/A (a) Based on properties owned as of December 31, 2016. (b) Average effective rent is rent per unit per month and average physical occupancy is the daily average occupied units. (c) Average effective rent is rent per square foot per year and average physical occupancy is the monthly average occupied square feet. The charts below describe the property types and the geographic breakdown of our investments in real estate as of December 31, 2016: Investments in Real Estate Geographic US Regions (a) Investments in Real Estate Property Types (a) West 17.0% Mid- Atlantic 12.0% Land 7.0% Retail 20.0% Southeast 27.0% Industrial 13.0% Central 40.0% Northeast 4.0% (a) Based on carrying amount. Multi-family 16.0% Office 44.0% IRT and IRT Management Internalization At the beginning of 2016, we externally advised and consolidated IRT and owned approximately 15.5% of IRT’s outstanding common stock. During the year ended December 31, 2016, IRT sold three of its real estate properties generating gains on these sales aggregating to $32.3 million. As part of our strategy to focus on CRE lending described above, we entered into a securities and asset purchase agreement, or the IRT internalization agreement, with IRT on September 27, 2016, pursuant to which IRT completed a management internalization and separation from us as we sold our interest in IRT. The IRT internalization agreement required IRT to repurchase all of our holdings of IRT common stock. On October 5, 2016, IRT paid us approximately $62.2 million of the proceeds from an underwritten offering of IRT common stock, or the IRT October 2016 offering, to repurchase the 7,269,719 shares of IRT’s common stock from our subsidiaries at a purchase price of $8.55 per 8 share. This purchase price was equal to the price to the public in the IRT October 2016 offering less underwriting discounts or commissions. As a result of the IRT stock repurchase, we determined that we were no longer the primary beneficiary of IRT, and as a result, RAIT deconsolidated IRT as of October 5, 2016. Prior to the IRT internalization agreement, we identified IRT as one of our business segments. The IRT management internalization contemplated by the IRT internalization agreement was completed on December 20, 2016 and consisted of two parts: • An IRT affiliate purchased Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and • An IRT affiliate purchased identified assets and assumed identified liabilities relating to our multifamily property management business which we refer to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties. The purchase price paid by IRT for the IRT management internalization was $43.0 million. On September 17, 2015, IRT completed its acquisition of Trade Street Residential, Inc., or TSRE. In the TSRE acquisition, IRT paid approximately $139.8 million in cash and issued approximately 15.1 million shares of IRT common stock as consideration. Immediately prior to the TSRE acquisition, the sole third party holder of common units issued by the operating partnership of TSRE, or TSR OP, contributed all of its TSR OP units to IRT’s operating partnership, or IROP, in exchange for approximately 1.9 million common units, or IROP units, issued by IROP. On defined terms and conditions, IROP units are exchangeable for the equivalent number of shares of IRT common stock or the equivalent in cash, at IRT’s option. During the year ended December 31, 2015, IRT recognized a $64.6 million gain from a bargain purchase on the TSRE acquisition and incurred $27.5 million of financing extinguishment and employee separation expenses in connection with the TSRE acquisition. Also, during the year ended December 31, 2015, IRT incurred $13.2 million of acquisition and integration expenses, most of which related to the TSRE acquisition. Asset Management and Loan Servicing We manage a portfolio of real estate related assets. As of December 31, 2016, we had $3.6 billion of assets under management, or AUM. AUM are comprised primarily of our consolidated assets and assets of third parties to which we provide property management services. We serve as collateral manager or servicer and special servicer to the securitizations we consolidate. As described above, as a result of the IRT management internalization, we sold our multifamily property management business and our subsidiary serving as IRT’s external adviser to IRT and deconsolidated IRT’s assets, which contributed to the reduction of our AUM by $1.4 billion during 2016. Our subsidiary, Urban Retail Properties, LLC, or Urban Retail, provides property management services to office and retail properties. We intend to divest Urban Retail during 2017 as part of our strategy to focus on CRE lending. When Urban Retail is divested, we expect that approximately $10.0 million per year would be removed from both our revenues and our expenses, our employee headcount would be reduced by nearly 200, and our AUM would be reduced by approximately $1.4 billion. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Assets Under Management” below. Targeted Capital Structure Strategy We have set a number of capital structure targets and key financial targets in implementing our transformational strategy described above which we expect will reconfigure our balance sheet and affect our sources of working capital. A key element involves selling non-core CRE assets and reallocating our capital into and growing our core CRE lending activities. We plan to increase our reliance on match-funded asset-level debt to finance our investments. We plan to reduce our leverage, as measured by dividing the sum of our total 9 liabilities and preferred equity by our total gross assets, over time and reduce our reliance on issuing corporate debt and preferred equity. We expect to repay our legacy CDOs and reallocate capital to more efficient vehicles. Certain REIT and Investment Company Act Limits On Our Strategies REIT Limits We conduct our operations to qualify as a REIT. We also conduct the operations of our subsidiaries, Taberna Realty Finance Trust, or TRFT, RAIT-Melody 2016 Holdings Trust, or Melody FL-5, and any REITs we may sponsor or otherwise consolidate in the future, which we collectively refer to as our REIT affiliates, to each qualify as a REIT. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 15: Income Taxes” for further discussion. Our exit of our Taberna securitization segment in 2014 did not involve selling TRFT, which continues to hold assets and liabilities unrelated to the Taberna segment. For a discussion of the tax implications of our and our REIT affiliates’ REIT status to us and our shareholders, see “Material U.S. Federal Income Tax Considerations” contained in Exhibit 99.1 to this Annual Report on Form 10-K. To qualify as a REIT, we and our REIT affiliates must continually satisfy various tests regarding sources of income, nature and diversification of assets, amounts distributed to shareholders and the ownership of common shares. In order to satisfy these tests, we and our REIT affiliates may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements may hinder our or our REIT affiliates’ investment performance. These requirements include the following: • For each of ourselves and our REIT affiliates, at least 75% of total assets and 75% of gross income must be derived from qualifying real estate assets, whether or not such assets would otherwise represent our or our REIT affiliates’ best investment alternative. For example, since our investments in the debt or equity of certain securitizations are not qualifying real estate assets, to the extent that we have historically invested in such assets, or may do so in the future, we must hold substantial investments in qualifying real estate assets, including mortgage loans and CMBS, which may have lower yields than such investments. Also, at least 95% of each of our and our REIT affiliates’ gross income in each taxable year, excluding gross income from prohibited transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of shares or securities, which need not have any relation to real property. • A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including any mortgage loans, held in inventory or primarily for sale to customers in the ordinary course of business. The prohibited transaction tax may apply to any sale of assets to a securitization and to any sale of securitization securities, and therefore may limit our and our REIT affiliates’ ability to sell assets to or equity in securitizations and other assets. • Overall, no more than 25% of the value of a REIT’s assets may consist of securities of one or more taxable REIT subsidiaries, or TRSs. During 2016, we restructured certain of our TRS entities by moving four former separate TRSs under a single TRS holding company (RAIT JV TRS Sub, LLC) in order to streamline our business operations and decrease administrative processes. After the sale of IRT Advisors and our multifamily property management business in the IRT management internalizaiton transaction, our TRSs that currently hold assets include: RAIT JV TRS Sub, LLC (the holding company for our interest in RAIT Urban Holdings, LLC, the entities that issued our junior subordinated notes and the entity party to our CMBS facilities referred to below), Taberna Equity Funding, Ltd. (the holding company for equity issued by a securitization) and RAIT Sharpstown TRS LLC (the holding company for a 1% ownership interest of a retail center located in Houston, Texas). Our and our REIT affiliates’ ability to grow or expand the fee-generating businesses held in a TRSs, as well as the business of future TRSs we or our REIT affiliates may form, will be limited by our and our REIT affiliates’ need to meet this 25% test. 10 • The REIT provisions of the Internal Revenue Code limit our and our REIT affiliates’ ability to hedge mortgage-backed securities, preferred securities and related borrowings. Except to the extent provided by the regulations promulgated by the U.S. Treasury Department, or the Treasury regulations, any income from a hedging transaction we or our REIT affiliates enter into in the normal course of business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in the Treasury regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test). To the extent that we or our REIT affiliates enter into other types of hedging transactions, the income from those transactions is likely to be treated as non- qualifying income for purposes of both of the gross income tests. As a result, we or our REIT affiliates might have to limit use of advantageous hedging techniques or implement those hedges through TRSs. This could increase the cost of our or our REIT affiliates’ hedging activities or expose it or us to greater risks associated with changes in interest rates than we or it would otherwise want to bear. There are other risks arising out of our and our REIT affiliates’ need to comply with REIT requirements. See Item 1A—“Risk Factors-Tax Risks” below. Investment Company Act Limits We seek to conduct our operations so that we are not required to register as an investment company. Under Section 3(a)(1) of the Investment Company Act, a company is not deemed to be an “investment company” if: • • it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and it neither is engaged nor proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets exclusive of government securities and cash items on an unconsolidated basis, which we refer to as the 40% test. “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act (relating to issuers whose securities are held by not more than 100 persons or whose securities are held only by qualified purchasers, as defined). We rely on the 40% test because we are a holding company that conducts our businesses through wholly- owned or majority-owned subsidiaries. As a result, the securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets exclusive of government securities and cash items on an unconsolidated basis. Based on the relative value of our investment in TRFT, on the one hand, and our investment in RAIT Partnership, on the other hand, we can comply with the 40% test only if RAIT Partnership itself complies with the 40% test (or an exemption other than those provided by Sections 3(c)(1) or 3(c)(7)). Because the principal exemptions that RAIT Partnership relies upon to allow it to meet the 40% test are those provided by Sections 3(c)(5)(C) or 3(c)(6) (relating to subsidiaries primarily engaged in specified real estate activities), we are limited in the types of businesses in which we may engage through our subsidiaries. None of RAIT, RAIT Partnership or any of their subsidiaries has received a no-action letter from the Securities and Exchange Commission, or SEC, regarding whether it complies with the Investment Company Act or how its investment or financing strategies fit within the exclusions from regulation under the Investment 11 Company Act that it is using. To the extent that the SEC provides more specific or different guidance regarding, for example, the treatment of assets as qualifying real estate assets or real estate-related assets, we may be required to adjust these investment and financing strategies accordingly. See Item 1A—“Risk Factors—Other Regulatory and Legal Risks of Our Business- Loss of our Investment Company Act exemption would affect us adversely.” Competition We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We are seeing increasing amounts of competition from new entrants in the market to originate conduit loans and bridge loans, which may reduce our return on making new conduit loans and bridge loans. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, lenders, governmental bodies and other entities. With respect to our investments in real estate, we face significant competition from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Competition may increase, and other companies and funds with investment objectives similar to ours may be organized in the future. Some of these competitors have, or in the future may have, substantially greater financial resources than we do and generally may be able to accept more risk. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, competition may lead us to pay a greater portion of the origination fees that we expect to collect in our future origination activities to third-party investment banks and brokers that introduce borrowers to us in order to continue to generate new business from these sources. With respect to our Urban Retail property management businesses, we face competition from other property managers with respect to properties owned by unaffiliated third parties, primarily retail properties. Employees As of March 1, 2017, we had 226 employees and believe our relationships with our employees to be good. None of our employees are covered by a collective bargaining agreement. Available Information We file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The internet address of the SEC site is http://www.sec.gov. Our internet address is http://www.rait.com. We make our SEC filings available free of charge on or through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not incorporating by reference in this report any material from our website. 12 Item 1A. Risk Factors Shareholders should carefully consider the following risk factors in conjunction with the other information contained in this report. The risks discussed in this report could adversely affect our business, operating results, prospects and financial condition. This could cause the value of our common shares and other securities to decline and/or you to lose part or all of any investment in our securities. The risks and uncertainties described below are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that, as of the date of this report, we deem immaterial may also harm our business. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Forward- Looking Statements” above in this report. Risks Related to Our Business and Operations General risks Changes in general economic conditions may adversely affect our business. Our business and operations depend on the commercial real estate industry generally, which in turn depends upon broad economic conditions in the U.S. and abroad. A worsening of economic conditions would likely have a negative impact on the commercial real estate industry generally and on our business and operations specifically. Additionally, disruptions in the global economy may also have a negative impact on the commercial real estate market domestically. Adverse conditions in the commercial real estate industry could harm our business and financial condition by, among other factors, reducing the value of our existing assets, limiting our access to debt and equity capital, limiting our ability to originate new commercial real estate debt or acquire or finance investments in real estate and otherwise negatively impacting our operations. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Trends That May Affect Our Business” for a description of some of the specific economic trends that may affect our business. Loss of our management team or the ability to attract and retain key employees could harm our business. The real estate finance business is very labor-intensive. We depend on our management team to manage our investments and attract customers for financing by, among other things, developing relationships with issuers, financial institutions and others. The market for skilled personnel is highly competitive and has historically experienced a high rate of turnover. Due to the nature of our business, we compete for qualified personnel not only with companies in our business, but also in other sectors of the financial services industry. Competition for qualified personnel may lead to increased hiring and retention costs. We cannot guarantee that we will be able to attract or retain qualified personnel at reasonable costs or at all. If we are unable to attract or retain a sufficient number of skilled personnel at manageable costs, it could impair our ability to manage our investments and execute our investment strategies successfully, thereby reducing our earnings. The failure to realize the anticipated benefits of our transformation plan and execution of our strategy— including our transition to a more focused, cost-efficient and lower leveraged business concentrated on our core commercial real estate lending business—could adversely impact our business and financial results. We are pursuing a comprehensive strategy and transformation initiative to drive long-term shareholder value. Pursuant to this initiative, we are transforming into a more focused, cost-efficient and lower leveraged business concentrated on our core commercial real estate lending business. In connection with executing this strategy and transformation initiative, we have identified several key priorities designed to differentiate RAIT, improve our cost structure and enhance shareholder value over time by delivering stable and repeatable risk- adjusted returns. Our transformational strategy is focused on the following priorities: (i) concentrate our business on our core middle-market commercial real estate lending business; (ii) opportunistically divest and maximize the value of our legacy REO portfolio and ultimately minimize our REO holdings; (iii) opportunistically divest 13 and maximize the value of our commercial property management business, including the divesture of our Urban Retail property management business; (iv) optimize our capital structure and reduce our outstanding indebtedness; (v) reduce our total expense base; and (vi) reallocate our capital and cash proceeds from divesting our non-core assets into growing our core middle-market commercial real estate lending activities. As an organization, we may not have the capacity or ability to successfully accomplish all of the priorities we have identified for our strategy and transformation initiative in the timeframe we desire, or at all. In addition, the strategy may not yield the results we currently anticipate (or results that will exceed those that might be obtained under our prior strategy), particularly, if we fail to successfully execute on one or more of the priorities we have identified for our strategy, even if we successfully implement one or more other priorities. As a result, we may not be able to implement and realize the anticipated benefits from our strategy. Events and circumstances, such as financial or unforeseen difficulties, market disruptions, delays and unexpected costs, may occur that could result in our not realizing desired outcomes. If we fail to implement our strategy in accordance with our expectations or achieve some or all of the expected benefits of these activities, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. In addition, even if we successfully implement our strategy, we still may not realize its anticipated benefits. Even if we implement our strategy in accordance with our expectations and the anticipated benefits are substantially realized, there may be consequences or business impacts that were not expected. Additionally, our strategy will bring additional risks to the business such as an increased dependence on our core lending business which could result in the existing risks associated with that business being magnified. Further, as a result of our business transformation plan and the streamlining of our business contemplated thereby, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. The execution of our transformation plan can require a significant amount of management and other employees’ time and focus, which may divert attention from day-to-day operating activities and growing our business. Our transformation plan contemplates that we will sell certain businesses that are no longer central to our strategic objectives, such as our Urban Retail property management business. Our transformation plan also contemplates that we will opportunistically divest and maximize the value of our legacy REO portfolio and ultimately minimize our REO holdings. Any such disposition or attempted disposition is subject to risks, including risks related to the terms and timing of such disposition, risks related to obtaining necessary government or regulatory approvals, risks related to retained liabilities not subject to our control, and risks related to the need to provide transition services to the disposed business, which may result in the diversion of resources and focus. Actions of activist shareholders against us could be disruptive and costly and the possibility that activist shareholders may wage proxy contests or seek representation on, or control of, our Board could cause uncertainty about the strategic direction of our business and an activist campaign that results in a change in control of our Board could trigger change in control provisions or payments under certain of our material contracts and agreements. Shareholders may from time to time engage in proxy solicitations, advance shareholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us. On February 23, 2017, Highland Select Equity Master Fund, L.P., an affiliate of Highland Capital Management, L.P., a Delaware limited partnership, or Highland, purported to notify the Company that it intends to nominate five (5) candidates for election to our Board at our 2017 Annual Meeting of Shareholders, or the 2017 Annual Meeting, which, if elected, would represent more than a majority of the members of our Board. According to the Schedule 13D filed with the SEC by Highland and its affiliates on February 24, 2017, Highland and its affiliates 14 beneficially own approximately 5.9% of our outstanding common stock. On February 23, 2017, Highland and its affiliates filed with the SEC soliciting material under Rule 14a-12 of the Exchange Act confirming their intention to file a preliminary proxy statement and an accompanying proxy card with the SEC to solicit votes for the election of its slate of five trustee nominees to our Board at the 2017 Annual Meeting. While our Board and management team strive to maintain constructive, ongoing communications with all of the Company’s shareholders, including Highland, and welcomes their views and opinions with the goal of enhancing value for all shareholders and the depth and breadth of our Board, an activist campaign such as the proxy contest threatened by Highland and seeks to replace more than a majority of the members of our Board and, thereby seek control of the Company, could have an adverse effect on us because: • Responding to such actions by activist shareholders can disrupt our operations, are costly and time- consuming, and divert the attention of our Board and senior management team from the pursuit of business strategies, which could adversely affect our results of operations and financial condition; • Perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential clients, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners; • These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; • • If individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our shareholders; and If a proxy contest by an activist investor that seeks to replace at least a majority of the members of the Board, such as the proxy contest that is currently being threatened by Highland, was successful, a change in control of the Board may be deemed to have occurred under certain of our material contracts and agreements, and such a change in control may trigger certain fundamental change and/or change in control provisions, payments, and/or redemptions under certain of our outstanding indebtedness, our employment agreements with our named executive officers, our equity compensation plans and possibly other of our plans and agreements. Our succession planning to address the substantial changes to our management resulting from the IRT management internalization may be insufficient or take a longer period than we anticipate which would reduce the effectiveness of the management of our business and increase exposure to disruption if members of current management become unavailable unexpectedly. RAIT has a limited number of executive officers and RAIT has changed its chief executive officer, or CEO, and chief financial officer, or CFO, as a result of the IRT management internalization. RAIT is identifying additional persons to serve in executive officer roles in order to enhance its succession planning but leadership talent within RAIT may not be sufficiently developed and recruitment outside RAIT may not occur within expected time frames to provide for orderly succession in the future which could reduce the effectiveness of the management of our business overall or particular business functions and increase exposure to disruption if members of current management become unexpectedly unavailable. We may not maximize our business performance by effectively prioritizing allocation of capital among our types of investments in CRE loans or balancing these types of investments in a strategic context, which may adversely affect our financial performance. In executing our strategic plan to focus on CRE lending, we regularly consider the allocation of capital to our various types of investments in CRE loans. The allocation of capital among such investments may vary due 15 to market conditions, the expected relative return on equity of each type of investment, the judgment of our management team, the demand in the marketplace for CRE loans and the availability of specific investment opportunities. We also consider the availability and cost of our likely sources of capital. If we fail to appropriately allocate capital and resources across our types of investments in CRE loans or fail to optimize our investment and capital raising opportunities, our financial performance may be adversely affected. As a result of the IRT management internalization, we have made, and expect to continue to make, substantial changes to our management and incur significant expenses related thereto which could materially adversely affect our business, financial condition and results of operations. As a result of the IRT management internalization, Scott F. Schaeffer resigned as our CEO, and Scott L. N. Davidson, who was RAIT’s president, became our CEO as well. In addition, James J. Sebra, our CFO, is expected to resign from such position upon the later to occur of March 31, 2017 or the filing of RAIT’s Form 10-K for the fiscal year ended December 31, 2016 with the SEC and will be replaced by Paul W. Kopsky, Jr., as described above. Our stock price may be adversely affected by market uncertainty concerning our management transition. We may incur substantial severance and recruitment costs. We are required to provide and entitled to receive services under a shared services agreement with IRT and may be adversely affected if we do not provide or receive services at the levels required or to which we are entitled. Our general and administrative expenses after the IRT management internalization could be higher than our current expectations. Any of these foregoing risks could materially adversely affect our business, financial condition and results of operations. We may not realize the anticipated benefits of the IRT management internalization. We intend for the IRT management internalization to be part of our long term strategy of focusing on our core strategy of commercial real estate lending and reallocating capital to the higher yielding lending business and reducing leverage. We may not be able to identify suitable investments for a period of time which may reduce our operating performance. Following the IRT management internalization, we are reliant on IRT for certain transitional services under the shared services agreement with IRT for a period of time after the closing, which occurred on December 20, 2016. If we are unable to internalize or find other providers for these services within a reasonable time period, we may not achieve all of the expected benefits of the IRT management internalization. The failure to manage the IRT management internalization effectively, including failure to smoothly transition services or retain employees, could result in the anticipated benefits of the IRT management internalization not being realized in the timeframe currently anticipated or at all or may require incurring higher expenses than we currently anticipate. The IRT management internalization was negotiated between a special committee of the board of trustees comprised solely of independent trustees, or the special committee, and a special committee of the IRT board of directors comprised solely of independent directors, or the IRT special committee, to address potential conflicts of interest among executive officers shared by RAIT and IRT. The IRT management internalization was negotiated by the special committee on behalf of RAIT with the IRT special committee on behalf of IRT in order for RAIT and IRT to address potential conflicts of interest among executive officers shared by RAIT and IRT, including the following: (i) Mr. Schaeffer’s service as CEO of both RAIT and IRT and as chairman of the RAIT board of trustees and as chairman of the IRT board of directors; and (ii) Mr. Sebra’s service as CFO and treasurer of both RAIT and IRT. As a result, the affiliated officers may have had different interests than we do with respect to the IRT management internalization and the future conduct of the businesses of the companies. While the special committee was responsible for negotiating on behalf of RAIT to address potential conflicts of interest related to the IRT management internalization, including those of the affiliated officers, these potential conflicts would not exist in the case of a transaction negotiated with unaffiliated third parties. 16 The representations, warranties, covenants and indemnities in the IRT internalization agreement and related agreements are subject to limitations and qualifiers, which may limit our ability to enforce any remedy under these agreements. The representations, warranties, covenants and indemnities in the IRT internalization agreement, the related shared services agreement and other agreements related to the IRT management internalization are subject to limitations and qualifiers, which may limit our ability to enforce any remedy under these agreements. These include, without limitation, limitations on liability and materiality qualifiers on certain representations and covenants. We may not be able to hire and retain qualified loan originators or grow and maintain our relationships with key loan brokers, and if we are unable to do so, our ability to implement our business and growth strategies could be limited. We depend on our loan originators to generate borrower clients by, among other things, developing relationships with commercial property owners, real estate agents and brokers, developers, loan brokers and others, which we believe leads to repeat and referral business. Accordingly, we must be able to attract, motivate and retain skilled loan originators. The market for loan originators is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that we will be able to attract or retain qualified loan originators. If we cannot attract, motivate or retain a sufficient number of skilled loan originators, at a reasonable cost or at all, our business could be materially and adversely affected. We also depend on our network of loan brokers, who generate a significant portion of our loan originations. While we strive to cultivate long- standing relationships that generate repeat business for us, brokers are free to transact business with other lenders and have done so in the past and will do so in the future. Our competitors also have relationships with some of our brokers and actively compete with us in bidding on loans shopped by these brokers. We also cannot guarantee that we will be able to maintain or develop new relationships with additional brokers. In addition to other analytical tools, our management team utilizes financial models to evaluate loans and real estate assets, the accuracy and effectiveness of which cannot be guaranteed. In all cases, financial models are only estimates of future results which are based upon assumptions made at the time that the projections are developed. There can be no assurance that management’s projected results will be obtained; actual results may vary significantly from the projections. General economic and industry-specific conditions, which are not predictable, can significantly impact the reliability of projections. Our board of trustees may change our policies without shareholder consent. Our board of trustees reviews our policies developed by management and, in particular, our investment policies. Our board of trustees may amend our policies or approve transactions that deviate from these policies without a vote of or notice to our shareholders. Policy changes could adversely affect the market price of our shares and our ability to make distributions. Our board of trustees cannot take any action to disqualify us as a REIT or to otherwise revoke our election to be taxed as a REIT without the approval of a majority of our outstanding voting shares. Our organizational documents do not limit our ability to enter into new lines of business, and we may enter into new businesses, make future strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties in our business. Our organizational documents do not limit us to our current business lines. Accordingly, we may pursue growth through strategic investments, acquisitions or joint ventures, which may include entering into new lines of business. In addition, we expect opportunities will arise to acquire other companies, including REITs, managers of investment products or originators of real estate debt. To the extent we make strategic investments 17 or acquisitions, enter into joint ventures, or enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with: • • • • the required investment of capital and other resources, the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, combining or integrating operational and management systems and controls; and compliance with applicable regulatory requirements including those required under the Internal Revenue Code and the Investment Company Act. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenue or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputation damage relating to, systems, controls and personnel that are not under our control. We operate in a highly competitive market which may harm our business, financial condition, liquidity and results of operations. Historically, we have been subject to significant competition in all of our business lines. We compete with many third parties engaged in finance and real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms and broker-dealers, property managers, investment advisers, lenders, governmental bodies and other entities. Some of these competitors have, or in the future may have, substantially greater financial resources than we do and generally may be able to accept more risk. As such, they have the ability to make larger loans and to reduce the risk of loss from any one loan by having a more diversified loan portfolio. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of, and greater access to, capital and enhanced operating efficiencies. An increase in the general availability of funds to lenders, or a decrease in the amount of borrowing activity, may increase competition for making loans and may reduce obtainable yields or increase the credit risk inherent in the available loans. Competition may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms and reducing the fee income we realize from the origination, structuring and management of securitizations. It may also make it more difficult to obtain appreciation interests and increase the price, and thus reduce potential yields, on discounted loans we acquire. We face significant competition in our investments in real estate from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to rent space at lower rental rates than we would or providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could adversely affect our revenues and financial performance. We engage in transactions with related parties and our policies and procedures regarding these transactions may be insufficient to address any conflicts of interest that may arise. Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, 18 trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities. These procedures do not guarantee that all potential conflicts will be identified, reviewed or sufficiently addressed. Our transactions with, and investments in, some securitization vehicles may create perceived or actual conflicts of interest. We have engaged in transactions with, and invested in, certain of the securitization vehicles under which we also serve as collateral manager, servicer and/or special servicer, and may do so in the future. These transactions have included, and may include in the future, surrendering for cancellation notes we hold issued by these vehicles and exchanges of our or others’ securities with these vehicles for assets collateralizing these vehicles. In addition, we have previously, and may in the future, purchase investments in these vehicles that are senior or junior to, or have rights and interests different from or adverse to, other investors or credit support providers in the debt or other securities of such securitization vehicles. Such situations may create perceived or actual conflicts of interest between us and such other investors or credit support providers for such investors. Our interests in such transactions and investments may conflict with the interests of such other investors or credit support providers at the time of origination or in the event of a default or restructuring of a securitization vehicle or underlying assets. Furthermore, if we are involved in structuring the securitization vehicles or such securitization vehicles are structured as our subsidiaries, then our managers may have conflicts between us and other entities managed by them that purchase debt or other securities in such securitization vehicles with regard to setting subordination levels, determining interest rates, pricing the securities, providing for divesting or deferring distributions that would otherwise be made to equity interests, or otherwise setting the amounts and priorities of distributions to the holders of debt and equity interests in the securitization vehicles. Although we seek to make decisions with respect to our securitization vehicles in a manner that we believe is fair and consistent with the operative legal documents governing these vehicles, perceived or actual conflicts may create dissatisfaction among the other investors in such vehicles or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and our reputation could be damaged if we fail to deal appropriately with one or more perceived or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, such conflicts of interest could materially adversely affect our ability to manage or generate income or cash flow from our securitizations business, cause harm to our reputation and adversely affect our ability to attract investors for future vehicles. Quarterly results may fluctuate and may not be indicative of future quarterly performance. Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in our investment origination volume, variations in the timing of repayments of debt financing, variations in the timing of property sales, variations in the amount of time between our receipt of the proceeds of a securities offering and our investment of those proceeds in loans or other assets, market conditions that result in increased cost of funds or material fluctuations in the fair value of our assets and liabilities, the degree to which we encounter competition in our markets, general economic conditions and other factors referred to elsewhere in this section. Terrorist attacks and other acts of violence or war may affect the real estate industry generally and our business, financial condition and results of operations. We cannot predict the severity of the effect that potential future terrorist attacks could have on us. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the United States and its allies, and other armed conflicts could cause consumer confidence and spending to 19 decrease or result in increased volatility in the United States and worldwide financial markets and economy. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our assets and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. The economic impact of such events could also adversely affect the credit quality of some of our loans and investments and the property underlying our securities. Losses resulting from these types of events may not be fully insurable. The events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002 (the “TRIA”) and subsequent extensions, including the enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015, which extends TRIA through December 31, 2020, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable opportunities available to us and the pace at which we are able to acquire assets. If the properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our assets. We are subject to risks of loss from weather conditions, man-made or natural disasters and climate change. Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties that collateralize our loans or that we own. Additionally, the value of such properties will potentially be subject to the risks associated with long-term effects of climate change. Future weather conditions, man-made or natural disasters or effects of climate change could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe the properties collateralizing our loan assets and our remaining owned real estate are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants. Any weather conditions, man-made or natural disasters or effect of climate change, whether or not insured, could have a material adverse effect on our financial performance, the market price of our common shares and our ability to pay dividends. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition. Cybersecurity threats or other security breaches could compromise sensitive information belonging to us or our employees, borrowers, lessees, clients and other counterparties and could harm our business and our reputation. We store sensitive data, including our proprietary business information and that of our borrowers, lessees, clients and other counterparties, and confidential employee information, in our data centers and on our networks. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions that could result in unauthorized disclosure or loss of sensitive information. Because the techniques used to obtain unauthorized access to networks, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, in the operation of our business we also use third-party vendors that store certain sensitive data, including confidential information about our employees, and these third parties are subject to their own cybersecurity threats. Any security breach of our own or a third-party vendor’s systems could cause us to be non- 20 compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our business. Risks related to our financing strategy We rely on outside sources of capital to maintain our liquidity and any restrictions on our ability to access these sources would materially adversely affect our financial performance. We require significant outside capital to fund and grow our businesses. A primary source of liquidity for us has been the equity and debt capital markets, including sales of loans to securitizations, repurchase agreements, issuances of common equity, preferred equity and convertible senior notes. Our origination and sales of conduit loans currently depends on our ability to access short term financing through repurchase agreements followed by sales to unaffiliated third-party sponsored CMBS securitizations. Our origination of bridge loans currently depends on our ability to access short term financing through repurchase agreements followed by our ability to use these loans to collateralize securitizations we sponsor and have these securitizations issue debt to unaffiliated investors. If these financing sources were no longer available for these types of assets, our ability to originate these assets and our returns from these assets might be limited or gone. In general, our financial performance would be materially adversely affected if our access to liquidity were restricted, whether by economic conditions or capital market developments affecting commercial real estate or our historical sources of financing or for any other reason. If we fail to secure financing on acceptable terms or in sufficient amounts, our income may be reduced since our ability to originate loans, acquire properties and make other investments would be limited or eliminated. We depend on our portfolio of investments to generate CAD and any significant restriction on our liquidity could impair our ability to pay distributions to our shareholders. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. For information about our available sources of funds, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and the notes to the consolidated financial statements located in Part II, Item 8 of this Annual Report on Form 10-K. Our business is highly leveraged, which could lead to greater losses than if we were not as leveraged. We do and, in the future, intend to use financial leverage in executing our business plan. Such borrowings may take the form of “financing facilities” such as bank credit facilities, credit facilities from government agencies, repurchase agreements and warehouse lines of credit, which are secured revolving lines of credit that we utilize to warehouse portfolios or real estate instruments until we exit them through securitization or other means. We do and, in the future, intend to enter into securitization and other long-term financing transactions to use the proceeds from such transactions to reduce the outstanding balances under these financing facilities. However, such agreements may include a recourse component. Further, any financing facilities that we currently have or may use in the future to finance our assets may require us to provide additional collateral or pay down debt if the market value of our assets pledged or sold to the provider of the credit facility or the repurchase agreement counterparty decline in value. In addition, our borrowings are generally based on floating interest rates, the fluctuation of which could adversely affect our business and results of operations. Our use of leverage in a market that moves adversely to our business interests could result in a substantial loss to us, which would be greater than if we were not leveraged. There can be no assurance that we will be able to utilize financing arrangements in the future on favorable terms, or at all. There can be no assurance that we will be able to obtain, maintain or renew our financing facilities on terms favorable to us or at all. Furthermore, any financing facility that we enter into will be subject to conditions and restrictive covenants relating to our operations, which may inhibit our ability to grow our business and increase revenues. To the extent we breach a covenant or cannot satisfy a condition, such facility may not be available to 21 us, or may be required to be repaid in full or in part, which could limit our ability to pursue our business strategies. Further, such borrowings may limit the length of time during which any given asset may be used as eligible collateral. Additionally, if we are unable to securitize our loans to replenish a warehouse line of credit, we may be required to seek other forms of potentially less attractive financing or otherwise to liquidate our assets. Furthermore, some of our warehouse lines of credit contain cross-default provisions. If a default occurs under one of these warehouse lines of credit and the lenders terminate one or more of these agreements, we may need to enter into replacement agreements with different lenders. There can be no assurance that we will be successful in entering into such replacement agreements on the same terms as the terminated warehouse line of credit. We, or securitizations we sponsor, may issue more unsecured corporate bonds in the future depending on the financing requirements of our business and market conditions. Our failure to maintain the credit ratings on the debt securities so issued could negatively affect our ability to access capital and could increase our interest expense. The credit rating agencies may periodically review our, or such securitizations, capital structure and the quality and stability of the relevant cash flows. Deterioration in such capital structure or the quality and stability of such cash flows could result in a downgrade of the credit ratings on such debt securities. Any negative ratings actions could constrain the capital available to us and could limit our access to funding for our operations. We depend upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest costs could increase, which could have material adverse effect on our results of operations, financial condition and cash flows. Our reliance on debt to finance investments may require us to make balloon payments upon maturity, upon the exercise of any applicable put rights or otherwise, and an increased risk of loss may reduce our return on investments, reduce our ability to pay distributions to our shareholders and possibly result in the foreclosure of any assets subject to secured financing. We have historically incurred debt to finance our investments, which could compound losses and reduce our ability to pay distributions to our shareholders. Our debt service payments could reduce the net income available for distributions to our shareholders and reduce our liquidity available to make distributions to our shareholders each calendar year that are required for REIT qualification. Most of our assets are pledged as collateral for borrowings. In addition, the assets of the securitizations that we consolidate collateralize the debt obligations of the securitizations and are not available to satisfy our other creditors. To the extent that we fail to meet debt service obligations, we risk the loss of some or all of our respective assets to foreclosure or sale to satisfy these debt obligations. Currently, our declaration of trust and bylaws do not impose any limitations on the extent to which we may leverage our respective assets. We are subject to the risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required principal and interest payments and the risk that we will be unable to refinance our indebtedness when it becomes due, or that the terms of such refinancing will not be as favorable as the terms of our indebtedness. Included in our debt instruments are provisions providing for the lump sum payment of significant amounts of principal, whether upon maturity, upon the exercise of any applicable put rights or otherwise, which we refer to as balloon payments. Most of our debt provides for balloon payments that are payable at maturity. If collateral underlying any secured credit facility we are party to defaults or otherwise fails to meet specified conditions, we may have to repay that facility to the extent it was secured by that collateral. Our ability to make these payments when due will depend upon several factors, which may not be in our control. These factors include our liquidity or our ability to convert assets owned by us into liquidity on or prior to such put or maturity dates and the amount by which we have been able to reduce indebtedness prior to such put or maturity date though exchanges, refinancing, extensions, collateralization or other similar transactions (any of which transactions may also have the effect of reducing liquidity or liquid assets). Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available interest rate levels, the lease terms for and 22 equity in any related collateral, our financial condition and the operating history of the collateral. If we are unable to pay, redeem, restructure, refinance, extend or otherwise enter into transactions to satisfy any of our debt, this could result in defaults under, and acceleration of, our debt and we may be required to sell assets in significant amounts and at times when market conditions are not favorable, which could result in our incurring significant losses. Holders of our outstanding convertible senior notes have the right to require us to repurchase all or part of their notes on specified dates and under specified conditions and any such repurchases will reduce our liquidity and may require us to generate additional liquidity which may be less favorable to us than the terms of the convertible senior notes repurchased and so adversely affect our financial performance. Holders of our 7.00% Convertible Senior Notes due 2031, or the 7.0% notes, have the right to require us to repurchase for cash all or part of their notes on each of April 1, 2016, April 1, 2021 and April 1, 2026 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, holders of our 4.00% Convertible Senior Notes due 2033, or the 4.0% notes, have the right to require us to repurchase for cash all or part of their notes on each of October 1, 2018, October 1, 2023 and October 1, 2028 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if we undergo a defined fundamental change, holders of the 7.0% notes and the 4.0% notes may require us to repurchase for cash all or part of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Any such repurchases will reduce our liquidity and may require us to generate additional liquidity which may be less favorable to us than the terms of the convertible senior notes repurchased and so adversely affect our financial performance. Our issuance of Series D preferred shares with redemption rights and warrants and share appreciation rights with put rights may increase our risk of loss if we need to satisfy these redemption rights and put rights. We have issued our Series D preferred shares of beneficial interest which provide a holder with redemption rights in defined circumstances and warrants and share appreciation rights which have put rights in defined circumstances. While these Series D preferred shares and such warrants and share appreciation rights provide that any exercise of such redemption and put rights may be satisfied by RAIT issuing a note, the exercise of these redemption and put rights may adversely affect our liquidity and reduce amounts available for distribution to our shareholders. Events which have occurred or may occur in the future may come within the circumstances giving rise to such redemption and put rights. In addition, RAIT must redeem the Series D preferred shares with up to $44.2 million of net proceeds received from the loans and other investments made with the proceeds of the issuance of the Series D preferred shares. This redemption provision is effective beginning in October 2017 in the case of net proceeds received by RAIT from the sale or payoff of investments other than CMBS loans and beginning in October 2019 includes net proceeds received by RAIT from the sale or payoff of CMBS loans, in each case, at a redemption price of $25.00 per share, plus accumulated and unpaid dividends. The net proceeds used in these redemptions may not be sufficient to redeem the Series D preferred shares or may otherwise adversely affect our liquidity and reduce amounts available for distribution to our shareholders. The securities purchase agreement related to the Series D preferred shares restricts our ability to make certain distributions to our shareholders. The securities purchase agreement pursuant to which the Series D preferred shares were issued includes an agreement by RAIT not to declare any extraordinary dividend except as otherwise required for RAIT to continue to satisfy the requirements for qualification and taxation as a REIT. An extraordinary dividend is defined as any dividend or other distribution (a) on common shares other than regular quarterly dividends on the common shares or (b) on the preferred shares other than in respect of dividends accrued in accordance with the terms expressly applicable to the preferred shares. 23 We may seek to acquire, redeem, restructure, refinance or otherwise enter into transactions to satisfy our debt which may include any combination of material payments of cash, issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods. From time to time our collateralized debt obligation, or CDO, notes payable, convertible senior notes, senior notes and our other indebtedness may trade at discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future principal amounts due upon any applicable put dates, at maturity or upon redemption, or to otherwise benefit RAIT, we may, from time to time, purchase such CDO notes payable, convertible senior notes, senior notes or other indebtedness for cash, in exchange for our equity or debt securities, or for any combination of cash and our equity or debt securities, in each case in open market purchases, privately negotiated transactions, exchange offers and consent solicitations or otherwise. We will evaluate any such transactions in light of then-existing market conditions, contractual restrictions and other factors, taking into account our current liquidity and prospects for future access to capital. The amounts involved in any such transactions, individually or in the aggregate, may be material and may materially reduce our liquidity or reduce or eliminate our ability to convert assets into liquidity. Any material issuances of our equity securities may have a material dilutive effect on our current shareholders. Our financing arrangements contain covenants that restrict our operations, and any default under these arrangements would inhibit our ability to grow our business, increase revenue and pay distributions to our shareholders. Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. These agreements may contain cross- default provisions so that an event of default under one agreement will trigger an event of default under other agreements. Defaults generally give our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating collateral pledged under these agreements. These restrictions may interfere with our ability to obtain financing or to engage in other business activities. Furthermore, our default under any of our financing arrangements could materially reduce our liquidity and our ability to make distributions to our shareholders. A decline in the market value of the assets we finance pursuant to repurchase agreements or warehouse facilities may result in margin calls that may force us to sell assets under adverse market conditions. Our current repurchase agreements allow, and we expect any warehouse facilities and repurchase agreements we enter into in the future to allow, our lender to make margin calls that would require us to make cash payments or deliver additional assets to our lender in the event that there is a decline in the market value of the assets that collateralize our repurchase agreements or debt under our warehouse facilities. As a result, a decline in the market value of assets collateralizing any such debt may result in our lenders initiating margin calls and requiring a pledge of additional collateral or cash. Posting additional collateral or cash to support our borrowings would reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. As a result, we could be forced to sell some of our assets in order to maintain liquidity. Forced sales typically result in lower sales prices than do market sales made in the normal course of business. If our investments were liquidated at prices below the amortized cost basis of such investments, we would incur losses, which could result in a rapid deterioration of our financial condition. We are exposed to loss if lenders under our repurchase agreements, warehouse facilities or other short- term debt liquidate the portfolio assets collateralizing or otherwise providing credit support for such debt. Moreover, assets financed by us pursuant to our repurchase agreements, warehouse facilities or other short- term debt may not be suitable for refinancing through, or sales to, future securitization transactions, which may require us to seek more costly financing for these assets, to liquidate assets or to repurchase these assets . We have entered into repurchase agreements, and may in the future enter into other repurchase agreements, warehouse facilities or other short term debt with similar terms. Our lenders have the right under our current 24 repurchase agreements, and may have the right under such other debt, to liquidate assets acquired thereunder upon the occurrence of certain events, such as an event of default. We are exposed to loss if the proceeds received by the lender upon any such liquidation are insufficient to satisfy our obligation to the lender. We are also subject to the risk that the assets subject to such repurchase agreements, warehouse facilities or other debt with similar terms might not be suitable for refinancing through, or sales to, future securitization transactions. If we were unable to refinance these assets through, or sell these assets to, future securitization transactions, we might be required to seek more costly financing for these assets, to liquidate assets or to repurchase assets under time constraints that may not produce the optimal return to us. Our use of repurchase and warehouse facilities and other financing arrangements is subject to the pre- approval of the lender, which we may be unable to obtain. In order to borrow funds under a repurchase or warehouse agreement or other financing arrangement, the lender has the right to review the potential assets for which we are seeking financing and approve such asset in its sole discretion. Accordingly, we may be unable to obtain the consent of a lender to finance an investment and alternate sources of financing for such asset may not exist. Our use of repurchase agreements to finance our securities and/or loans may give our lenders greater rights in the event that either we or a lender files for bankruptcy, including the right to repudiate our repurchase agreements, which could limit or delay our claims. In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted under applicable insolvency laws to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured claim. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our collateral under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur. Therefore, our use of repurchase agreements to finance our portfolio assets exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or ourselves. If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security and/or loans to us at the end of the transaction term, or if the value of the underlying security and/or loans has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions. When we engage in repurchase transactions, we generally sell securities and/or loans to lenders (i.e., repurchase agreement counterparties) in return for cash from the lenders. The lenders then are obligated to resell the same securities and/or loans to us at the end of the term of the transaction. In a repurchase agreement, the cash we receive from a lender when we initially sell the securities and/or loans to such lender is less than the value of the securities and/or loans sold. If the lender defaults on its obligation to resell the same securities and/or loans to us under the terms of a repurchase agreement, we will incur a loss on the transaction equal to the difference between the value of the securities and/or loans sold and the cash we received from the lender (assuming there was no change in the value of the securities and/or loans). We also would lose money on a repurchase transaction if the value of the underlying securities and/or loans has declined as of the end of the transaction term, as we would have to repurchase the securities and/or loans for their initial value but would receive securities and/or loans worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender will be able to terminate the transaction and cease entering into any other 25 repurchase transactions with us. Our repurchase agreements generally contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements also could declare a default. If a default occurs under any of our repurchase agreements and the lenders terminate one or more of their repurchase agreements, we may need to enter into replacement repurchase agreements with different lenders. There can be no assurance that we will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. Any losses that we incur on our repurchase transactions could adversely affect our earnings. We may be subject to repurchases of loans or indemnification on loans and real estate that we have sold if certain representations or warranties in those sales are breached. If loans that we sell or securitize do not comply with representations and warranties that we make about the loans, the borrowers, or the underlying properties, we may be required to repurchase such loans (including from a trust vehicle used to facilitate a structured financing of the assets through a securitization) or replace them with substitute loans. Additionally, in the case of loans and real estate that we have sold, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically will require a significant allocation of working capital to be carried on our books, and our ability to borrow against such assets may be limited or unavailable. Any significant repurchases or indemnification payments could adversely affect our business. Representations and warranties made by us in connection with loan sales to securitization vehicles may subject us to liability that could result in loan losses and could harm our operating results and, therefore distributions we make to our shareholders. In connection with loan sales to securitization vehicles, we are required to make representations and warranties regarding, among other things, the borrowers, guarantors, collateral, originators and servicers of the loans sold to the depositor of such assets into securitization trusts. In the event of a breach of such representations or warranties, we may be required to repurchase the affected loans at their face value or otherwise make payments to the owner of the loan. While we may have recourse to loan originators (if not us), borrowers, guarantors and/or other third parties whose representations, warranties, certifications, reports and/or other statements or work product we relied upon in making our representations and warranties, there can be no guaranty that such parties will be able to fully or partially cover any liability we may have in such circumstances. Furthermore, if we discover, prior to the securitization of an asset, that there is any fraud or misrepresentation with respect to the origination of such asset by a third party and are unable to force that third party to repurchase the loan, then we may not be able to sell the loan to a securitization or we may have to sell it at a discount. In any such case, we may incur losses and our cash flows may be impaired. Our participation in the market for nonrecourse long-term securitizations may expose us to risks that could result in losses. Following the dislocation of credit markets that commenced in 2007, the market for nonrecourse long-term securitizations has resumed and we have generally participated in that market by contributing loans to securitizations led by various large financial institutions and by leading securitizations on mortgage loans we originated and participation interests therein. We may, in the future, take a larger role in leading securitizations of mortgage loans. To date, when we have acted as a mortgage loan seller into, and as an issuer, sponsor and/or depositor of, securitizations, we have been obligated to assume substantially similar liabilities as were required of a mortgage loan seller prior to the credit market dislocation, including with respect to representations and warranties required to be made for the benefit of investors. In particular, in connection with any particular securitization, we: (i) make certain representations and warranties regarding ourselves and the characteristics of, and origination process for, the mortgage loans that we contribute to the securitization; (ii) undertake to cure, or to repurchase or replace any mortgage loan that we contribute to the securitization that is affected by a material breach of any such representation and warranty or a material loan document deficiency; and (iii) assume, either 26 directly or through the indemnification of third-parties, potential securities law liabilities for disclosure to investors regarding ourselves and the mortgage loans that we contribute to the securitization. When we lead securitizations as issuer, we assume, either directly or through indemnification agreements, additional potential securities law liabilities and third-party liabilities beyond the liabilities we would assume when we act only as a mortgage loan seller into a securitization. As a result of the dislocation of the credit markets, the securitization industry has become subject to additional and changing regulation. For example, pursuant to the Dodd-Frank Act, various federal agencies have promulgated, or are in the process of promulgating, regulations and rules with respect to various issues that affect securitizations, including: (i) a rule requiring that sponsors in securitizations retain 5% of the credit risk associated with securities they issue; (ii) requirements for additional disclosure; (iii) requirements for additional review and reporting (including revisions to Regulation AB); and (iv) restrictions designed to prohibit conflicts of interest. The risk retention rule (as it relates to CMBS) became effective in December 2016 and requires retention of at least 5% of the fair value of all securities issued in connection with a securitization for a certain period of time and can be satisfied by (i) retention of a horizontal tranche (i.e., in one or more subordinate classes), (ii) retention of a vertical security or interest in each class of securities issued in connection with the securitization or (iii) a combination of vertical and horizontal strips. The risk (with respect to CMBS) must be retained by the sponsor, certain mortgage loan originators or, upon satisfaction of certain requirements, up to two third-party purchasers of interests in the securitization. Other regulations have been and may ultimately be adopted. The risk retention rules and other rules and regulations that have been adopted or may be adopted will alter the structure of securitizations in the future and could pose additional risks to or reduce or eliminate the economic benefits of our participation in future securitizations. In addition, such rules and regulations could reduce or eliminate the economic benefits of securitization or discourage traditional issuers, underwriters, subordinated security investors or other participants from participating in future securitizations and affect the availability of securitization platforms into which we can contribute mortgage loans, which may require that we take on additional roles and risks in connection with effectuating securitizations of mortgage loans. Prior to any securitization, we generally finance mortgage loans with relatively short-term facilities until a sufficient portfolio is accumulated. We are subject to the risk that we will not be able to originate or acquire sufficient eligible assets to maximize the efficiency of a securitization. We also bear the risk that we might not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets for a securitization. Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us or one of our subsidiaries. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our assets on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price. If the interest rates on bonds issued in the market for nonrecourse long-term securitizations that we sell our conduit loans into rise at a disproportionate rate to the interest rates we are able to negotiate on our conduit loans, which we refer to as CMBS spreads widening, the profitability of our conduit loan business may be adversely affected. We have historically originated conduit loans primarily to sell them into the market for nonrecourse long- term securitizations. If CMBS spreads widen, we may not be able to sell conduit loans we have originated if the interest rates on such loans are too low to make them attractive assets for purchase by such securitizations or we may be forced to sell conduit loans at a loss. In addition, our ability to originate conduit loans may be adversely affected to the degree we are unable to negotiate higher interest rates on our conduit loans that would reduce CMBS spread widening. Any alternative means we develop to finance conduit loans may increase financing costs from historical levels. CMBS spreads have recently been and may continue to be volatile. As a result, our ability to originate conduit loans, the prices securitizations pay for our conduit loans, and the profitability of our conduit lending business has decreased and may continue to decrease, which has adversely affected, and may continue to adversely affect, our performance. 27 Our access to the CMBS securitization market and the timing of our securitization activities and other factors may greatly affect our quarterly financial results. We expect to distribute the conduit loans we originate through securitizations and, upon completion of a securitization, we will recognize certain non-interest revenues which are included in fee and other income on our consolidated statements of income and cease to earn net interest income on the securitized loans. Our quarterly revenue, operating results and profitability have varied substantially from quarter to quarter based on the frequency, volume and timing of our securitizations. Our securitization activities will be affected by a number of factors, including our loan origination volumes, changes in loan values, quality and performance during the period such loans are on our books and conditions in the securitization and credit markets generally and at the time we seek to launch and complete our securitizations. As a result of these quarterly variations, quarter-to- quarter comparisons of our operating results may not provide an accurate comparison of our current period results of operations. If securities analysts or investors focus on such comparative quarter-to-quarter performance, our stock price performance may be more volatile than if such persons compared a wider period of results of operations. If RAIT I and RAIT II were to fail to meet their performance tests, including over-collateralization requirements, our cash flow would be materially reduced. The terms of RAIT I and RAIT II generally provide that the principal amount of assets must exceed the principal balance of the related securities issued by them by a certain amount, commonly referred to as “over- collateralization.” These terms provide that, if delinquencies and/or losses exceed specified levels based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the securities issued in the securitization, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. In addition, a failure by these securitizations to satisfy an over-collateralization test may result in accelerated distributions to the holders of the senior debt securities issued by them. Our equity holdings, any debt interests and our subordinated management fees, if any, are subordinate in right of payment to the other classes of debt securities issued by the securitization entity. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive cash distributions from assets collateralizing the securities issued by the securitization entity or our ability to effectively manage the assets held in the securitizations. We cannot assure you that any performance test will be satisfied. We currently receive a substantial portion of our cash flow from RAIT I and RAIT II through our retained interests in these securitizations and management fees paid to us for managing these securitizations. If either or both of these securitizations were to fail to meet their respective over-collateralization or other tests, our cash flow would be materially reduced. RAIT I and RAIT II are required to hold auctions of their collateral assets at specified times and under specified conditions and our liquidity, financial performance and our return on the equity we hold in RAIT I and RAIT II may be adversely affected if the proceeds of any auction sales are lower than our valuation of such assets or if we acquire such assets in such auctions on more costly terms than the terms of RAIT I and RAIT II. Under the indentures for the notes, or the CDO notes, issued to unaffiliated investors by RAIT I and RAIT II, since the CDO notes were not redeemed in full prior to the distribution date occurring in November 2016, in the case of RAIT I, and if the CDO notes have not been redeemed in full prior to the distribution date occurring in June 2017, in the case of RAIT II, then an auction of the collateral assets of RAIT I or RAIT II, as relevant, will be conducted by the relevant trustee and, if certain conditions set forth in the relevant indenture are satisfied, such collateral assets will be sold at the auction and the relevant CDO notes will be redeemed, in whole, but not in part, on such distribution date. No redemption of the CDO notes may occur unless proceeds of the auction, together with other defined available redemption funds, are sufficient to pay the defined total senior redemption amount. If such conditions are not satisfied and the auction is not successfully conducted on such distribution 28 date, the relevant trustee will conduct auctions on a periodic basis until the relevant CDO notes are redeemed in full. Our liquidity and financial performance may be adversely affected if the proceeds of any auction sales are lower than our valuation of such assets or if we acquire such assets in such auctions on more costly terms than the terms of RAIT I and RAIT II. In addition, our returns on the preference shares and our other equity we hold in RAIT I and RAIT II may be reduced if auctions are held when the total senior redemption amount does not include the payment of an internal rate of return on such preference shares. We refer to the auctions contemplated by such indentures as the auction process Risks related to our asset management business We receive collateral management fees pursuant to collateral management agreements for services we provide as the collateral manager of RAIT I and RAIT II. If a collateral management agreement is terminated or if the securities serving as collateral for a securitization are prepaid or go into default, the collateral management fees will be reduced or eliminated. We receive collateral management fees pursuant to collateral management agreements for acting as the collateral manager of RAIT I and RAIT II. If all the notes issued by one of those securitizations are redeemed, or if the collateral management agreement is otherwise terminated, we will no longer receive collateral management fees from that securitization. In general, a collateral management agreement may be terminated both with and without cause at the direction of holders of a specified supermajority in principal amount of the notes issued by the securitization. Furthermore, such fees are based on the total amount of collateral held by the securitizations. If the assets serving as collateral for a securitization are prepaid or go into default, we will receive lower collateral management fees than expected or the collateral management fees may be eliminated. In addition, collateral management agreements typically provide that if certain over-collateralization tests are failed, the collateral management agreement may be terminated by a vote of the security holders resulting in our loss of management fees from these securitizations. If any of our securitizations fail to meet over-collateralization tests relevant to the securitization’s most senior existing debt, an event of default may occur. Upon an event of default, our ability to manage the securitization may be terminated and our ability to attempt to cure any defaults in the securitization would be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in those securitizations for an indefinite time. We expect repayments of loans collateralizing RAIT I and RAIT II outside their contractual maturities to continue to increase in 2017 through 2019 which we expect will reduce our returns from these securitizations. We expect repayment of the loans collateralizing RAIT I and RAIT II outside their contractual maturities to continue to increase in 2017 through 2019. We expect this will reduce our returns from these securitizations and we are evaluating alternative strategies seeking to replace these returns. If we are unable to replace these returns, our financial performance may be adversely affected. We expect to undertake similar analysis for any securitization we sponsor as the notes issued by such securitization approach their respective weighted average lives. We receive servicing and special servicing fees pursuant to servicing agreements with the consolidated securitizations we sponsor collateralized primarily by bridge loans, or the FL securitizations, for services we provide as the servicer and special servicer and expect to enter into similar agreements in the future with respect to future similar securitizations . If these or any similar servicing agreements are terminated, if the loans serving as collateral for a securitization are prepaid or go into default or if the notes issued by these securitizations are repaid or redeemed, the servicing fees will be reduced or eliminated. We receive servicing fees pursuant to servicing agreements for acting as the servicer and special servicer of each of the FL securitizations. If all the notes issued by any of the FL securitizations are repaid or redeemed, or if 29 a servicing agreement is otherwise terminated, we will no longer receive servicing fees from the affected FL securitization. In general, these servicing agreements may be terminated upon the occurrence of a termination event, which includes our failure to remit required payments, make required advances, material breaches of covenants or representations, defined bankruptcy and insolvency events and a ratings downgrade citing servicing concerns as a material factor. Furthermore, the fees payable by each securitization are based on the total amount of collateral held by the securitization. If the assets serving as collateral for a securitization are prepaid or go into default, we will receive lower servicing fees than expected or the servicing fees may be eliminated. We may enter into additional similar servicing agreements in the future in connection with future securitizations. If we lose our rating as a commercial mortgage loan primary servicer and special servicer by Standard & Poor’s and by Morningstar, our fee income might be reduced. We are rated as a commercial mortgage loan primary servicer and special servicer by Standard & Poor’s and by Morningstar. If we were to lose either of these ratings, we might need to incur additional expenses in order to regain our rating or obtain comparable credentials from other persons to continue to provide servicing services generating fee income under our arrangements with securitizations or enter into sub-servicing or other arrangements with third parties in order to continue to earn such fees. Such expenses or arrangements might reduce our fee income. Risks relating to financial reporting requirements and fair value determinations If we deconsolidate any of RAIT I, RAIT II or the FL securitizations, it may have a material effect on our financial statements. Our consolidated financial statements reflect our accounts and the accounts of our subsidiaries and other entities in which we have a controlling financial interest. If we were to determine that our interests in any of these entities no longer made us have a controlling financial interest, our determination to consolidate such entities would change. If we deconsolidate any of these entities for these or any other reasons, the assets, liabilities, equity and income in our financial statements may be changed significantly. If we fail to maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results and may be required to incur substantial costs and divert management resources. We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the accuracy of our financial statements. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected, on a timely basis. Although we continuously monitor the design, implementation and operating effectiveness of our internal controls over financial reporting and disclosure controls and procedures, there can be no assurance that significant deficiencies or material weaknesses will not occur in the future. If we fail to maintain effective internal controls over financial reporting and disclosure controls and procedures in the future, it could result in a material misstatement of our financial statements that may not be prevented or detected on a timely basis, which could cause stakeholders to lose confidence in our reported financial information. Our inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other things, 30 cause us to fail to file timely our periodic reports with the SEC (which may limit our ability to access the capital markets); prevent us from providing reliable and accurate financial information and forecasts or from avoiding or detecting fraud; or require us to incur additional costs or divert management resources to achieve compliance. Our financial statements may be materially impacted if our estimates, including loan loss reserves, prove to be inaccurate. Financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to: (i) assessing the adequacy of the allowance for loan losses; (ii) determining the fair value of financial instruments; (iii) assessing other than temporary impairments on securities; and (iv) assessing impairments on real estate held for use or held for sale. As these estimates, judgments and assumptions are inherently uncertain, especially in turbulent economic times, our actual financial results may differ from these estimates. Accounting standards for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our consolidated financial statements. Accounting standards for transfers of financial assets, securitization transactions, consolidation of variable interest entities, or VIEs, convertible debt securities that may be settled in cash and other aspects of our anticipated operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our shareholders. Changes in accounting interpretations or assumptions could impact our consolidated financial statements, result in a need to restate our financial results and affect our ability to timely prepare our consolidated financial statements. Our inability to timely prepare our consolidated financial statements in the future would likely adversely affect the trading prices of our common shares or other securities significantly. A portion of our assets and liabilities are recorded at fair value using unobservable inputs and, as a result, there may be uncertainty as to the value of these investments. We reflect certain derivative instruments and other assets and liabilities at fair value in our balance sheet, with all changes in fair value recorded in earnings. Most of these investments are securities or other assets that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. For further discussion of the fair value of our financial instruments, see Part II, Item 8, “Financial Statements and Supplementary Data—Note 2: Summary of Significant Accounting Policies—Fair Value of Financial Investments.” We value these investments quarterly at fair value. Because such valuations are inherently uncertain, may fluctuate over short periods of time and are based on assumptions and estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. If our determinations regarding the fair value of these investments are not realized, we could record a loss upon their disposal. When we acquire properties through the foreclosure of commercial real estate loans, we may realize losses if the fair value of the property internally determined upon such acquisition is less than the previous recorded investment of the foreclosed loan. We periodically acquire properties through the foreclosure of commercial real estate loans. Upon acquisition, we value the property and its related assets and liabilities. We determine the fair values based primarily upon discounted cash flow or capitalization rate models, the use of which requires critical assumptions 31 including discount rates, capitalization rates, vacancy rates and growth rates based, in part, on the properties’ operating history and third-party data. We may realize losses if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan. Changes in interest rates and changes in interest rate spreads may reduce the value of our investments and reduce our interest income. Changes in interest rates and changes in interest rate spreads affect the market value of our investment portfolio. In general, the market value of a loan will change in inverse relation to an interest rate change where a loan has a fixed interest rate or only limited interest rate adjustments. Accordingly, in a period of rising interest rates, the market value of such a loan will decrease. Moreover, in a period of declining interest rates, real estate loans with rates that are fixed or variable only to a limited extent may have less value than other income- producing securities due to possible prepayments. Interest rate changes will also affect the return we obtain on new loans. In particular, during a period of declining rates, our reinvestment of loan repayments may be at lower rates than we obtained in prior investments or on the repaid loans. Also, increases in interest rates on debt we incur may not be reflected in increased rates of return on the investments funded through such debt, which would reduce our return on those investments. Accordingly, interest rate changes may materially affect the total return on our investment portfolio, which in turn will affect the amount available for distribution to shareholders. To the extent the spread in interest rates between loans in our portfolio and our underlying sources of capital decreases, the value of our loans and interest income may be adversely affected. The value of our investments depends on conditions beyond our control. Our investments include loans secured directly or indirectly by real estate, interests in entities whose principal or sole assets are real estate or direct ownership of real estate. As a result, the value of these investments depends primarily upon the value of the real estate underlying these investments which is affected by numerous factors beyond our control including general and local economic conditions, neighborhood values, competitive overbuilding, weather, casualty losses, occupancy rates and other factors beyond our control. The value of this underlying real estate may also be affected by factors such as the costs of compliance with use, occupancy and similar regulations, potential or actual liabilities under applicable environmental laws, changes in interest rates and the availability of financing. Income from a property will be reduced if a significant number of tenants are unable to pay rent or if available space cannot be rented on favorable terms. Operating and other expenses of this underlying real estate, particularly significant expenses such as mortgage payments, insurance, real estate taxes and maintenance costs, generally do not decrease when income decreases and, even if revenue increases, operating and other expenses may increase faster than revenues. Any investment may also be affected by a borrower’s failure to comply with the terms of our investment, its bankruptcy, insolvency or reorganization or its properties becoming subject to foreclosure proceedings, all of which may require us to become involved in expensive and time-consuming litigation. Some of our investments defer some portion of our return to loan maturity or the mandatory redemption date. The borrower’s ability to satisfy these deferred obligations may depend upon its ability to obtain suitable refinancing or to otherwise raise a substantial amount of cash. These risks may be subject to the same considerations we describe in this “Risks relating to our commercial real estate, or CRE, real estate lending business” section. Risks related to our investments We have a concentration of investments in the commercial real estate sector and may have concentrations from time to time in certain property types, locations, tenants and borrowers, which may increase our exposure to the risks of certain economic downturns. We operate in the commercial real estate sector, including the financing and ownership of multifamily and other properties. Such concentration in one economic sector may increase the volatility of our returns and may 32 also expose us to the risk of economic downturns in this sector to a greater extent than if our portfolio also included other sectors of the economy. Declining real estate values may reduce the level of new mortgage and other real estate-related loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans or refinance our loans if the value of real estate weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our recorded investment in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate/acquire/sell loans, which would materially and adversely affect our results of operations, financial condition, liquidity and business. In addition, we are not required to observe specific diversification criteria relating to property types, locations, tenants or borrowers. A limited degree of diversification increases risk because the aggregate return of our business may be adversely affected by the unfavorable performance of a single property type, single tenant, single market or even a single investment. To the extent that our portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset may result in defaults on a number of our assets within a short time period. Additionally, borrower concentration, in which a particular borrower is, or a group of related borrowers are, associated with multiple real properties securing mortgage loans or securities held by us, magnifies the risks presented by the possible poor performance of such borrower(s). We may have material geographic concentrations related to our investments in commercial real estate loans and properties. The REITs and real estate operating companies in whose securities we invest in may also have material geographic concentrations related to their investments in real estate, loans secured by real estate or other investments. We also have material concentrations in the property types that comprise our commercial loan portfolio and in the industry sectors that comprise our unsecured securities portfolio. We also may have material concentrations in the sponsors of properties that comprise our commercial loan portfolio. Where we have any kind of concentration risk in our investments, an adverse development in that area of concentration could reduce the value of our investment and our return on that investment and, if the concentration affects a material amount of our investments, impair our ability to execute our investment strategies successfully, reduce our earnings and reduce our ability to make distributions. Our due diligence efforts before making an investment may not identify all the risks related to that investment. Before originating a loan or investment for, or making a loan to or investment in, an entity, we will assess the strength and skills of the entity’s management and other factors that we believe will determine the success of the loan or investment. In making the assessment and otherwise conducting customary due diligence, we expect to rely on available resources and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. As a result, there can be no assurance that the due diligence processes we conduct will uncover all relevant facts or that any investment will be successful. Our investments are relatively illiquid which may make it difficult for us to sell such investments if the need arises and any sales may be at a loss to us. Our commercial real estate loans and our investments in real estate are relatively illiquid investments and we may be unable to vary our portfolio promptly in response to changing economic, financial and investment conditions or dispose of these assets quickly or at all in the event we need additional liquidity. A portion of these investments may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises and may impair the value of these investments. Any sales of investments we make may result in our recognizing a loss on the sale. 33 Our investments in securitizations are exposed to greater uncertainty and risk of loss than investments in higher grade securities in these securitizations. When we securitize assets such as commercial mortgage loans and mezzanine loans, the various tranches of investment grade and non-investment grade debt obligations and equity securities have differing priorities and rights to the cash flows of the underlying assets being securitized. We structured our securitization transactions to enable us to place debt and equity securities with investors in the capital markets at various pricing levels based on the credit position created for each tranche of debt and equity securities. The higher rated debt tranches have priority over the lower rated debt securities and the equity securities issued by the particular securitization entity with respect to payments of interest and principal using the cash flows from the collateral assets. The relative cost of capital increases as each tranche of capital becomes further subordinated, as does the associated risk of loss if cash flows from the assets are insufficient to repay fully interest and principal or pay dividends. Since, in many cases, we own the non-investment grade and unrated debt and equity classes of securitizations, we are in a subordinated and/or “first loss” position because the rights of the securities that we hold are subordinate in right of payment and in liquidation to the rights of higher rated debt securities issued by the securitization entities. Accordingly, we have incurred and may in the future incur significant losses when investing in these securities. In the event of default, we may not be able to recover any or all of our respective investments in these securities. In addition, we may experience significant losses if the underlying portfolio has been overvalued or if the values subsequently decline and, as a result, less collateral is available to satisfy interest, principal and dividend payments due on the related securities. The prices of lower credit quality securities are generally less sensitive to interest rate changes than higher rated investments, but are more sensitive to economic downturns or developments specific to a particular issuer. Current credit market conditions have caused a decline in the price of lower credit quality securities because the ability of obligors on the underlying assets to make principal, interest and dividend payments may be impaired. In addition, existing credit support in a number of the securitizations in which we have invested have been, and may in the future be, insufficient to protect us against loss of our investments in these securities. Risks relating to our commercial real estate, or CRE, real estate lending business The commercial mortgage loans in which we invest and the commercial mortgage loans underlying the CMBS in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us that may result in reduced earnings or losses and reduce our ability to pay distributions to our shareholders. We hold substantial portfolios of commercial mortgage loans and CMBS which are secured by apartment or other commercial property and are subject to risks of delinquency and foreclosure. The ability of a borrower to repay a non-recourse loan secured by an income-producing property typically depends primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances. In the event of any default under a commercial mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the 34 event of the bankruptcy of a commercial mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a commercial mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. CMBS evidence interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage-backed securities in which we invest are subject to all of the risks of the underlying mortgage loans. Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results. We maintain loan loss reserves to protect against probable, incurred losses and conduct a review of the appropriateness of these reserves on a quarterly basis. Our loan loss reserves reflect management’s then-current estimation of the probability and severity of losses within our portfolio, based on this quarterly review. Our determination of loan loss reserves relies on significant estimates regarding the fair value of loan collateral. The estimation of these fair values is a complex and subjective process. As such, there can be no assurance that management’s judgment will prove to be correct and that reserves will be adequate over time to protect against future losses. Such losses could be caused by factors including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate, markets in which our borrowers or their properties are located or an inability to collect accrued interest receivable on loans which accrue interest at a higher rate than their stated pay rate. If our reserves for loan losses prove inadequate we will suffer additional losses which may have a material adverse effect on our financial performance and results of operations. Prepayment rates on mortgage loans cannot be predicted with certainty and prepayments may result in losses to the value of our assets. The frequency at which prepayments (including voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on our investments can adversely impact our business. Prepayment rates cannot be predicted with certainty, making it impossible to completely insulate us from prepayment or other such risks. Prepayments of our investments in loans may adversely impact our portfolio because investments may experience outright losses in an environment of faster actual or anticipated prepayments or may underperform relative to hedges that the management team may have constructed for such investments (resulting in a loss to our overall portfolio). Additionally, borrowers are more likely to prepay when the prevailing level of interest rates falls, thereby exposing us to the risk that the prepayment proceeds may be reinvested only at a lower interest rate than that borne by the prepaid obligation. Our subordinated real estate investments such as mezzanine loans and preferred equity interests in entities owning real estate involve increased risk of loss. We invest in mezzanine loans and other forms of subordinated financing, such as investments consisting of preferred equity interests in entities owning real estate. Because of their subordinate position, these subordinated investments carry a greater credit risk than senior lien financing, including a substantially greater risk of non- payment. If a borrower defaults on our subordinated investment or on debt senior to us, our subordinated investment will be satisfied only after the senior debt is paid off, which may result in our being unable to recover the full amount, or any, of our investment. A decline in the real estate market could reduce the value of the property so that the aggregate outstanding balances of senior liens may exceed the value of the underlying property. Where debt senior to our investment exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” 35 periods) and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. In the event of a default on a senior loan, we may elect to make payments, if we have the right to do so, in order to prevent foreclosure on the senior loans. When we originate or acquire a subordinated investment, we typically do not have the right to service senior loans. The servicers of the senior loans are responsible to the holders of those loans, whose interests will likely not coincide with ours, particularly in the event of a default. Accordingly, the senior loans may not be serviced in a manner advantageous to us. It is also possible that, in some cases, a “due on sale” clause included in a senior mortgage, which accelerates the amount due under the senior mortgage in case of the sale of the property, may apply to the sale of the property if we foreclose, increasing our risk of loss. Our investments in subordinate loans, subordinate participation interests in loans and subordinate CMBS rank junior to other senior debt and we may be unable to recover our investment in these loans. We may originate or acquire subordinate loans (including mezzanine loans), subordinate participation interests in loans and subordinate CMBS. In the event a borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on a loan to us or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend loan documents, assign our loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. In general, losses on a property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated security holder (generally, the “B-Piece” buyer) and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of securities junior to those in which we may invest, we may not be able to recover all of our investment in the securities we purchased. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage-backed securities, the securities in which we may invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgage loans underlying the mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal in these securities. We may make equity and preferred equity investments which involve a greater risk of loss than traditional debt financing. We may invest in equity and preferred equity interests in entities owning real estate. Such investments are subordinate to debt financing and are not secured. Should the issuer default on our investment, in most instances we would only be able to proceed against the entity that issued the equity in accordance with the terms of the security, and not any property owned by the entity. Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our capital after any creditors to the entity are paid. As a result, we may not recover some or all of our capital, which could result in losses. 36 The vast majority of the mortgage loans that we originate or purchase, and those underlying the CMBS in which we invest, are nonrecourse loans and the assets securing the loans may not be sufficient to protect us from a partial or complete loss if the borrower defaults on the loan. Except for customary nonrecourse carve-outs for certain actions and environmental liability, most commercial mortgage loans, including those underlying the CMBS in which we invest, are effectively nonrecourse obligations of the sponsor and borrower, meaning that there is no recourse against the assets of the borrower or sponsor other than the underlying collateral. In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. Even if a mortgage loan is recourse to the borrower (or if a nonrecourse carve-out to the borrower applies), in most cases, the borrower’s assets are limited primarily to its interest in the related mortgaged property. Further, although a mortgage loan may provide for limited recourse to a principal or affiliate of the related borrower, there is no assurance of any recovery from such principal or affiliate will be made or that such principal’s or affiliate’s assets would be sufficient to pay any otherwise recoverable claim. Certain balance sheet loans may be more illiquid and involve a greater risk of loss than long-term mortgage loans. We originate and acquire balance sheet loans generally having maturities of three years or less, that provide interim financing to borrowers seeking short-term capital for the acquisition or transition (for example, lease up and/or rehabilitation) of commercial real estate. Such a borrower under an interim loan often has identified a transitional asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the interim loan, and we bear the risk that we may not recover some or all of our initial expenditure. In addition, borrowers usually use the proceeds of a long-term mortgage loan to repay an interim loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our interim loan, which could depend on market conditions and other factors. Further, interim loans may be relatively less liquid than loans against stabilized properties due to their short life, the more limited availability of financing through securitizations than for conduit loans, any unstabilized nature of the underlying real estate and the difficulty of recovery in the event of a borrower’s default. This lack of liquidity may significantly impede our ability to respond to adverse changes in the performance of our interim loan portfolio and may adversely affect the value of the portfolio. Such “liquidity risk” may be difficult or impossible to hedge against and may also make it difficult to effect a sale of such assets as we may need or desire. As a result, if we are required to liquidate all or a portion of our interim loan portfolio quickly, we may realize significantly less than the value at which such investments were previously recorded, which may fail to maximize the value of the investments or result in a loss. We are subject to additional risks associated with loan participations because our ability to exercise our rights may be restricted by the terms of the participation. Some of our loans are participation interests or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. 37 We may originate or acquire B-Notes, a form of subordinated mortgage loan, and we may be subject to additional risks relating to the negotiated structure and terms of the transaction, which may result in losses to us. We may originate or acquire B-Notes. A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note owners after payment to the A-Note owners. However, since each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may be limited in certain investments and circumstances. Further, B-Notes typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties. B-Notes also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments. We may not control the special servicing of the mortgage loans or other debt underlying the debt securities in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interest. In circumstances where we do not maintain a first mortgage position, overall control over the special servicing of the mortgage loans or other debt underlying the debt securities in which we invest may be held by a directing certificate holder which is typically appointed by the holders of the most subordinate class of such debt security then outstanding. We ordinarily do not have the right to appoint the directing certificate holder. In connection with the servicing of the specially serviced loans, the related special servicer may, at the direction of the directing certificate holder, take actions that could adversely affect our interest. Risks related to our investments in real estate Reduction in occupancy and rent levels on multifamily properties could adversely affect their value and cash flow. Occupancy and rent levels at a multifamily property may be adversely affected by: • • • • • • • • • local, regional or national economic conditions, which may limit the amount of rent that can be charged for rental units or result in a reduction in timely rent payments; construction of additional housing units in the same market; local military base or industrial/business closings; in the case of student housing facilities, the financial wellbeing of and/or developments at, the college or university to which it relates, competition from on-campus housing units, the physical layout of the housing, and a higher turnover rate than other types of multifamily tenants, which in certain cases is compounded by the fact that student leases are available for periods of less than 12 months; the tenant mix (such as tenants being predominantly students, military personnel, corporate tenants or employees of a particular business); national, regional and local politics, including current or future rent stabilization and rent control laws and agreements; trends in the senior housing market; the level of mortgage interest rates, which may encourage tenants in multifamily properties to purchase housing; and a lack of amenities, unattractive physical attributes or bad reputation of the mortgaged property. 38 A significant tenant ceasing to operate at a retail property could adversely affect its value and cash flow. The value of retail properties is significantly affected by the quality of the tenants as well as fundamental aspects of real estate, such as location and market demographics. The correlation between the success of tenant business and a retail property’s value may be more direct with respect to retail properties than other types of commercial property because a component of the total rent paid by certain retail tenants is often tied to a percentage of gross sales. There is no guarantee that any tenant will continue to occupy space in the related retail property. The presence of significant tenants or anchor tenants is an important consideration at a retail property. A retail “anchor tenant” or “shadow-anchor tenant” plays a key role in attracting customers to a retail property and making a retail property a desirable location for other tenants, whether or not it is located on the Mortgaged Property. A significant tenant or anchor tenant ceasing to do business at a retail property could result in realized losses on the mortgage loans. The loss of a significant tenant or anchor tenants may result from the tenant’s voluntary decision not to renew a lease or to terminate it in accordance with its terms, the bankruptcy or economic decline of the tenant, the tenant’s general cessation of business activities or other reasons (including co-tenancy provisions permitting a tenant to terminate a lease prior to its term). Some tenants at retail properties may be entitled to terminate their leases or pay reduced rent if sales are below certain target levels, or if an anchor tenant or one or more of the larger tenants cease operations at that property or fail to open. If anchor stores in a mortgaged property were to close, the borrower may be unable to replace those anchor tenants in a timely manner on similar terms, and customer traffic may be reduced, possibly affecting sales at the remaining retail tenants. The lack of replacement anchors and a reduction in rental income from remaining tenants may adversely affect the borrower’s ability to pay current debt service or successfully refinance the mortgage loan at maturity. These risks with respect to an anchored retail property may be increased when the property is a single tenant property. In addition, various anchor parcels and/or anchor improvements at a mortgaged property may be owned by the anchor tenant (or an affiliate of the anchor tenant) or by a third party, rather than the related borrower, and therefore not be part of the related mortgaged property and the related borrower may not receive rental income from such anchor tenant. Current levels of property income may not be maintained due to varying tenant occupancy. Rental payments from tenants of retail properties typically comprise the largest portion of the net operating income of those mortgaged properties. Tenants at our retail properties may be paying rent but are not yet in occupancy or have signed leases but have not yet started paying rent and/or are not yet in occupancy. Tenants at our retail properties may be in a rent abatement period. There can be no assurance that such tenants will be in a position to pay full rent when the abatement period expires. Risks applicable to anchor tenants (such as bankruptcy, failure to renew leases, early terminations of leases and vacancies) also apply to other tenants. We cannot assure you that the rate of occupancy at the stores will remain at the current levels or that the net operating income contributed by our retail properties will remain at its current or past levels. Competition may adversely affect the value and cash flow from retail properties. Retail properties face competition from sources outside their local real estate market. For example, all of the following compete with more traditional retail properties for consumer business: • • • factory outlet centers; discount shopping centers and clubs; video shopping networks; 39 • • • • • • • video stores; book stores; catalogue retailers; home shopping networks; direct mail; internet websites; and telemarketers. Continued growth of these alternative retail outlets (which often have lower operating costs) could adversely affect the rents collectible at our retail properties that operate as retail properties as well as the market value of our retail properties. Moreover, additional competing retail properties have been and may in the future be built in the areas where the retail properties are located. Such competition could result in a reduction of income from our retail properties. In addition, although renovations and expansion at our retail properties will generally enhance the value of those properties over time, in the short term, construction and renovation work at such properties may negatively impact net operating income as customers may be deterred from shopping at or near a construction site. Economic decline in tenant businesses or changes in demographic conditions could adversely affect the value and cash flow from office properties. Economic decline in the businesses operated by the tenants of office properties may increase the likelihood that the tenants may be unable to pay their rent, which could result in realized losses on the mortgage loans. A number of economic and demographic factors may adversely affect the value of office properties, including: • • • • • • • • • • the quality and diversity of an office building’s tenants (or reliance on a single or dominant tenant); the quality of property management; provisions in tenant leases that may include early termination provisions; an economic decline in the business operated by the tenants; the physical attributes of the building in relation to competing buildings (e.g., age, condition, design, location, access to transportation and ability to offer certain amenities, including, without limitation, current business wiring requirements); the desirability of the area as a business location; the strength and nature of the local economy (including labor costs and quality, tax environment and quality of life for employees); an adverse change in population, patterns of telecommuting or sharing of office space, and employment growth (which creates demand for office space); competition from other office properties in the same market could decrease occupancy or rental rates at office properties; and decreased occupancy or rental revenues could adversely affect property cash flow. Moreover, the cost of refitting office space for a new tenant is often higher than the cost of refitting other types of property. 40 These risks may be increased if rental revenue depends on a single tenant, on a few tenants, if the property is owner occupied or if there is a significant concentration of tenants in a particular business or industry. In addition, adverse developments in the local, regional and national economies can affect the ability of a landlord to incur the cost of providing services at an office property, and the ability of a landlord to provide services to an office property can have a significant effect on the success of the property. Further, technological developments can affect the viability of office properties by rendering facilities obsolete or by reducing the size of the workforce necessary to perform office tasks, thus reducing demand for office space. If one or more of the larger tenants at a particular office property were to close or remain vacant, we cannot assure you that such tenants would be replaced in a timely manner or that such replacement tenants would be without incurring material additional costs to the related borrower, thus adversely affecting property cash flow. Risks particular to industrial properties could adversely affect the value and cash flow from industrial properties. Industrial properties may be adversely affected by reduced demand for industrial space occasioned by a decline in a particular industry segment (for example, a decline in defense spending), and a particular industrial property that suited the needs of its original tenant may be difficult to re-let to another tenant or may become functionally obsolete relative to newer properties. Furthermore, lease terms with respect to industrial properties are generally for shorter periods of time and may result in a substantial percentage of leases expiring in the same year at any particular industrial property. In addition, industrial properties are often more prone to environmental concerns due to the nature of items being stored or type of work conducted at the property. Further, industrial properties may have tenants that are subject to risks unique to their business, such as cold storage facilities. Because of seasonal use, leases at such facilities are customarily for shorter terms, making income potentially more volatile than for properties with longer term leases. In addition, such facilities require customized refrigeration design, rendering them less readily convertible to alternative uses. Site characteristics at industrial properties may impose restrictions that may limit the properties’ suitability for tenants and affect the value of the properties. Site characteristics which affect the value of an industrial property include: • • • • • • • clear ceiling heights; column spacing; number of bays (loading docks) and bay depths; truck turning radius; divisibility; zoning restrictions; and overall functionality and accessibility. An industrial property also requires availability of labor sources, proximity to supply sources and customers, and accessibility to rail lines, major roadways and other distribution channels. Properties used for industrial purposes may be more prone to environmental concerns than other property types. Increased environmental risks could adversely affect the value and cash flow from industrial properties. Risks associated with tenants generally could adversely affect the cash flow from properties Cash flow from our properties will be affected by the expiration of leases and our ability to renew the leases or to relet the space on comparable terms. We generally rely on periodic lease or rental payments or guest fees 41 from tenants to pay for maintenance and other operating expenses of the building, to fund capital improvements and to service the related obligation and any other debt or obligations it may have outstanding. There can be no assurance that tenants will renew leases upon expiration or that, if renewed, the terms would be similar to or more favorable than the terms of the prior lease or that the tenants will continue operations throughout the term of their leases. Our properties may have significant portions of month-to-month tenants or may have leases of short duration. Such leases do not provide the same stability as longer-term leases. Cash flow from properties would be adversely affected if tenants were unable to pay rent or if space was unable to be rented on favorable terms or at all. Changes in payment patterns by tenants may result from a variety of social, legal and economic factors, including, without limitation, the rate of inflation and unemployment levels and may be reflected in the rental rates offered for comparable space. In addition, upon re-letting or renewing existing leases, we will likely be required to pay leasing commissions and tenant improvement costs, which may adversely affect cash flow from the relevant property. We cannot assure you that (1) leases that expire can be renewed, (2) the space covered by leases that expire or are terminated can be re-let in a timely manner at comparable rents or on comparable terms or (3) we will have the cash or be able to obtain the financing to fund any required tenant improvements. Further, lease provisions among tenants may conflict in certain instances, or leases may contain restrictions on the use of parcels near the related property for which there is no corresponding restrictive covenant of record, in each case creating termination or other risks. Income from and the market value of the relevant properties would be adversely affected if vacant space in such properties could not be leased for a significant period of time, if tenants were unable to meet their lease obligations or if, for any other reason, rental payments could not be collected or if one or more tenants ceased operations at such property. Upon the occurrence of an event of default by a tenant, delays and costs in enforcing the lessor’s rights could occur. If we are not able to re-let the expiring or terminated space under as favorable conditions due to a decrease in the market rate for similar space, then cash flow from the relevant property may be adversely affected. Similarly, our inability to fully or favorably re-let the premises may adversely impact our ability to finance or sell the related property in order to make any required balloon payment. Uninsured and underinsured losses may affect the value of, or our return from, our real estate. Our properties, and the properties underlying our loans, have comprehensive insurance in amounts we believe are sufficient to permit the replacement of the properties in the event of a total loss, subject to applicable deductibles. There are, however, certain types of losses, such as earthquakes, sinkholes, floods, hurricanes and terrorism that may be uninsurable or not economically insurable. Also, inflation, changes in building codes and ordinances, environmental considerations and other factors might make it impractical to use insurance proceeds to replace a damaged or destroyed property. If any of these or similar events occurs, it may reduce our return from an affected property and the value of our investment. Real estate with environmental problems may create liabilities and exposure to losses. The existence of hazardous or toxic substances on a property will adversely affect its value and our ability to sell or borrow against the property. Contamination of real estate by hazardous substances or toxic wastes not only may give rise to a lien on that property to assure payment of the cost of remediation, but also can result in liability to us as owner, operator or lender for that cost. Many environmental laws can impose liability whether we know of, or are responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses, and may materially limit our use of our properties and our ability to make distributions to our shareholders. In addition, future or amended laws, or more stringent interpretations or enforcement policies with respect to existing environmental requirements, may increase our exposure to environmental liability. 42 If we are unable to improve the performance of commercial real estate properties we take control of in connection with restructurings, workouts and foreclosures of investments, our financial performance may be adversely affected. We have taken control of properties underlying our commercial real estate investments in connection with restructurings, workouts and foreclosures of these investments. If we are unable to improve the performance of these properties from their performance under their prior owners, our cash flow may be adversely affected if the properties’ cash flow is insufficient to support payments due on any related debt and we may not be able to sell these properties at a price that will allow us to recover our investment. We may need to make significant capital improvements to our properties in order to remain competitive. Our investments in real estate may face competition from newer, more updated properties. In order to remain competitive, we may need to make significant capital improvements to these properties. In addition, if we need to re-lease a property, we may need to make significant tenant improvements. Any financing of such improvements may reduce our ability to operate the property profitably and, if financing is not available, we may use our available cash resources which would reduce our cash flow, liquidity and ability to make distributions to shareholders. Lease expirations, lease defaults and lease terminations may adversely affect our revenue. Lease expirations, lease defaults and lease terminations may result in reduced revenue from our real estate if the lease payments received from replacement tenants are less than the lease payments received from the expiring, defaulting or terminating tenants. In addition, lease defaults by one or more significant tenants, lease terminations by tenants following events causing significant damage to the property or takings by eminent domain, or the failure of tenants under expiring leases to elect to renew their leases, could cause us to experience long periods with reduced or no revenue from a property and to incur substantial capital expenditures in order to obtain replacement tenants. See Item 2—“Properties,” for a ten-year lease expiration schedule for our non- residential properties as of December 31, 2016. Risks relating to our use of derivatives and hedging instruments Complying with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs. Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our shareholders. Subject to maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held, compliance with REIT rules, and other changing 43 market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things: • • • • • • interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; due to a credit loss or other factors, the duration of the hedge may not match the duration of the related liability; applicable law may require mandatory clearing of certain interest rate hedges we may wish to use, which may raise costs; the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign its side of the hedging transaction; the hedging counterparty owing money in the hedging transaction may default on its obligation to pay; • we may fail to recalculate, readjust and execute hedges in an efficient manner; and • legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategies. Any hedging activity in which we engage may materially and adversely affect our results of operations and cash flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest rates or credit spreads may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and furthermore may expose us to risk of loss. In addition, some hedging instruments involve additional risk because they are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, we cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, regulatory requirements with respect to derivatives, including eligibility of counterparties, reporting, recordkeeping, exchange of margin, financial responsibility or segregation of customer funds and positions are still under development and could impact our hedging transactions and how we and our counterparty must manage such transactions. We are subject to counterparty risk associated with our hedging activities. We are subject to credit risk with respect to the counterparties to derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of OTC instruments). If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom we enter into a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price. 44 We may enter into hedging transactions that could expose us to contingent liabilities in the future. Subject to maintaining our qualification as a REIT, part of our investment strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due with respect to an early termination would generally be equal to the unrealized loss of such open transaction positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely affect our results of operations and financial condition. We may fail to qualify for, or choose not to elect, hedge accounting treatment, which could adversely affect our operating results. We intend to record derivative and hedging transactions in accordance with Topic 815 of the Financial Accounting Standards Board’s Accounting Standard Codification, or Topic 815. Under these standards, we may fail to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the Topic 815 definition of a derivative (such as short sales), we fail to satisfy Topic 815 hedge documentation and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for, or choose not to elect, hedge accounting treatment, our operating results may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or item. Rules under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, or Dodd- Frank Act, may require that we post cash collateral to secure our hedging transactions and any posting of such collateral could reduce our liquidity or limit our ability to hedge. The Dodd-Frank Act covers certain hedging instruments we may use in our risk management activities. The Dodd-Frank Act and related SEC and U.S. Commodity Futures Trading Commission, or CFTC, regulations that have been adopted to date include significant provisions regarding the regulation of derivatives (including mandatory clearing and margin requirements). Mandatory central clearing requires that we post cash collateral to secure our hedging transactions. Any posting of such collateral could reduce our liquidity or limit our ability to hedge. If we enter into certain hedging transactions or otherwise invest in certain derivative instruments, failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements which could materially adversely affect our business and financial condition. Rules under the Dodd-Frank Act establish a comprehensive regulatory framework for derivative contracts commonly referred to as “swaps.” Under this regulatory framework, mortgage real estate investment trusts, or REITs, that trade in commodity interest positions (including swaps) are considered “commodity pools” and the operators of such REITs would be considered “commodity pool operators,” or CPOs. Absent relief, a CPO must register with the CFTC and become a member of the National Futures Association, or NFA, which requires compliance with NFA’s rules and renders such CPO subject to regulation by the CFTC, including with respect to disclosure, reporting, recordkeeping and business conduct. We may from time to time, directly or indirectly, invest in instruments that meet the definition of “swap” under the new Dodd-Frank Act rules, which may subject us to oversight by the CFTC. In the event that we invest in commodity interests, absent relief, we would be required to register as a CPO. We believe RAIT and its affiliates that could be considered CPOs have taken and will continue to take all 45 appropriate steps needed to maintain such relief. In addition, RAIT and its affiliates may in the future claim a different exemption from registration as a CPO with the CFTC. Therefore, unlike a registered CPO, we will not be required to provide prospective investors with a CFTC compliant disclosure document, nor will we be required to provide investors with periodic account statements or certified annual reports that satisfy the requirements of CFTC rules applicable to registered CPOs, in connection with any offerings of shares. As an alternative to an exemption from registration, RAIT or its affiliates may register as a CPO with the CFTC and avail itself of certain disclosure, reporting and record-keeping relief under CFTC Rule 4.7. The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including anti-fraud and anti-manipulation provisions. Among other things, the CFTC may suspend or revoke the registration of a person who fails to comply, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. Additionally, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event we fail to receive interpretive relief from the CFTC on this matter, are unable to claim an exemption from registration and fail to comply with the regulatory requirements of these new rules, we may be unable to use certain types of hedging instruments or we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could adversely affect our results of operations and financial condition. During 2016, interest rate swap agreements relating to RAIT I and RAIT II terminated in accordance with their terms which could expose us to increased interest rate risk. During 2016, interest rate swap agreements relating to RAIT I and RAIT II terminated in accordance with their terms. This could expose us to the risk that interest RAIT I and RAIT II pay on their respective CDO notes will be higher than the interest paid on the assets collateralizing the CDO notes. Tax Risks We and our REIT affiliates may fail to qualify as a REIT, and such failure to qualify would have significant adverse consequences on the value of our common shares. In addition, if we fail, or any REIT Affiliate fails, to qualify as a REIT, our respective dividends will not be deductible, and the entity will be subject to corporate-level tax on its net taxable income, which would reduce the cash available to make distributions. We believe that we have been organized and operated in a manner that will allow us to qualify as a REIT. We have not requested, and do not plan to request, a ruling from the IRS that we and our REIT affiliates qualify as a REIT and any statements in our filings or the filings of our REIT affiliates with the SEC are not binding on the IRS or any court. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions, for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may also affect our abilities and those of our REIT affiliates to qualify as a REIT. In order to qualify as a REIT, we and our REIT affiliates must each satisfy a number of requirements, including requirements regarding the composition of our respective assets and sources of our respective gross income. Also, we must each make distributions to our respective shareholders aggregating annually at least 90% of our respective net taxable incomes, excluding net capital gains. In addition, our respective ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership or REIT for U.S. federal income tax purposes. As an example, to the extent we invest in preferred equity securities of other REIT issuers, our qualification as a REIT will depend upon the continued qualification of such issuers as REITs under the Internal Revenue Code. Accordingly, unlike other REITs, we and our REIT affiliates may be subject to additional risk 46 regarding our respective ability to qualify and maintain our respective qualification as a REIT. The reduction in our rate of originating new assets, operations and liquidity may adversely impact our and our REIT affiliates’ ability to meet REIT requirements and we and our REIT affiliates may be less able to make changes to our respective investment portfolios to adjust our respective REIT qualifying assets and income depending on our respective ability to deploy capital and maintain assets under management. There can be no assurance that we and our REIT affiliates will be successful in operating in a manner that will allow us to each qualify as a REIT. Because we receive significant distributions from TRFT, and may in the future receive significant distributions from other of our REIT affiliates, the failure of one or more of such REIT affiliates to maintain its REIT status could cause us to lose our REIT status. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our respective ability to qualify as a REIT or the desirability of an investment in a REIT relative to other investments. If we or any of our REIT affiliates fail to qualify as a REIT or lose our respective qualification as a REIT at any time, we, or such REIT affiliate, would face serious tax consequences that would substantially reduce the funds available for distribution to our respective shareholders for each of the years involved because: • we, or such REIT affiliate, would not be allowed a deduction for distributions to our respective shareholders in computing taxable income and would be subject to U.S. federal income tax at regular corporate rates; • we, or such REIT affiliate, also could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and • unless statutory relief provisions apply, we, or such REIT affiliate, could not elect to be taxed as a REIT for four taxable years following the year of disqualification. In addition, if we, or such REIT affiliate, fail to qualify as a REIT, such entity will not be required to make distributions to its shareholders, and all distributions to shareholders will be subject to tax as regular corporate dividends to the extent of current and accumulated earnings and profits. Complying with REIT requirements may cause us to forgo otherwise attractive opportunities. To qualify as a REIT, we and our REIT affiliates must each continually satisfy various tests regarding sources of income, nature and diversification of assets, amounts distributed to shareholders and the ownership of common shares. In order to satisfy these tests, we and our REIT affiliates may be required to forgo investments that might otherwise be made. Accordingly, compliance with the REIT requirements may hinder our and our REIT affiliates’ investment performance. In particular, at least 75% of our and our REIT affiliates total assets at the end of each calendar quarter must each consist of real estate assets, government securities, and cash or cash items. For this purpose, “real estate assets” generally include interests in real property, such as land, buildings, leasehold interests in real property, stock of other entities that qualify as REITs, interests in mortgage loans secured by real property, investments in stock or debt instruments during the one-year period following the receipt of new capital and regular or residual interests in a real estate mortgage investment conduit, or REMIC. In addition, the amount of securities of a single issuer that we and each of our REIT affiliates hold must generally not exceed either 5% of the value of our gross assets or 10% of the vote or value of the issuer’s outstanding securities. Certain of the assets that we or our REIT affiliates hold or intend to hold will not be qualified real estate assets for the purposes of the REIT asset tests. In addition, although preferred equity securities of REITs should generally be treated as qualified real estate assets, this will require that (i) they are treated as equity for U.S. tax purposes, and (ii) their issuers maintain their qualification as REITs. CMBS should generally qualify as real estate assets. However, to the extent that we or our REIT affiliates own non-REMIC collateralized mortgage 47 obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non- real estate assets, or debt securities issued by corporations that are not secured by mortgages on real property, those securities will likely not be qualifying real estate assets for purposes of the REIT asset tests. We and our REIT affiliates generally will be treated as the owner of any assets that collateralize a securitization transaction to the extent that we or such affiliates retain all of the equity of the securitization entity and do not make an election to treat such securitization entity as a TRS, as described in further detail below. As noted above, in order to comply with the REIT asset tests and 75% gross income test, at least 75% of each of our respective total assets and 75% of gross income must be derived from qualifying real estate assets, whether or not such assets would otherwise represent our respective best investment alternative. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including any mortgage loans, held in inventory or primarily for sale to customers in the ordinary course of business. The prohibited transaction tax may apply to any sale of assets to a securitization and to any sale of securitization securities, and therefore may limit our respective ability to sell assets to or equity in securitizations and other assets. It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, holding non- qualifying REIT assets or engaging in securitization transactions through our TRSs, subject to certain limitations as described below. To the extent that we and our REIT affiliates engage in such activities through TRSs, the income associated with such activities may be subject to full U.S. federal corporate income tax. We have federal and state tax obligations which could reduce our ability to pay distributions to our shareholders. Even if we qualify as REITs for U.S. federal income tax purposes, we will be required to pay U.S. federal, state and local taxes on income and property. In addition, our domestic TRSs are fully taxable corporations that will be subject to taxes on their income, and they may be limited in their ability to deduct interest payments made to us. We also will be subject to a 100% penalty tax on certain amounts if the economic arrangements among us and TRSs are not comparable to similar arrangements among unrelated parties or if we receive payments for inventory or property held for sale to customers in the ordinary course of business. We may be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to shares held by “disqualified organizations.” In addition, under certain circumstances we could be subject to a penalty tax for failure to meet certain REIT requirements but nonetheless maintains its qualification as a REIT. For example, we may be required to pay a penalty tax with respect to income earned in connection with securitization equity in the event such income is determined not to be qualifying income for purposes of the REIT 95% gross income test but we are otherwise able to remain qualified as a REIT. To the extent that we or the TRSs are required to pay U.S. federal, state or local taxes, we will have less to distribute to shareholders. Failure to make required distributions would subject us to tax, which would reduce the ability to pay distributions to our shareholders. In order to qualify as a REIT, we and our REIT affiliates must each distribute to our respective shareholders each calendar year at least 90% of our respective REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we and our REIT affiliates each satisfy the 90% distribution requirement, but distribute less than 100% of net taxable income, we or such affiliate will be subject to U.S. federal corporate income tax. In addition, we or our REIT affiliates will incur a 4% 48 nondeductible excise tax on the amount, if any, by which our respective distributions in any calendar year are less than the sum of: • • • 85% of ordinary income for that year; 95% of capital gain net income for that year; and 100% undistributed taxable income from prior years. We and our REIT affiliates each intend to distribute our respective net income to our respective shareholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. There is no requirement that any TRS of ours or our REIT affiliates distribute their after-tax net income to us or our REIT affiliates and such TRSs may, to the extent consistent with maintaining our or our REIT affiliates’ qualification as a REIT, determine not to make any current distributions to us or our REIT affiliates. Our or our REIT affiliates’ respective taxable income may substantially exceed our or their respective net income as determined by accounting principles generally accepted in the United States, or GAAP, because, for example, expected capital losses will be deducted in determining our respective GAAP net income, but may not be deductible in computing our or their respective taxable income. GAAP net income may also be reduced to the extent we or our REIT affiliates have to “markdown” the value of our respective assets to reflect their current value. Prior to the sale of such assets, those mark-downs do not comparably reduce taxable income. In addition, we or our REIT affiliates may invest in assets including the equity of securitization entities that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. This taxable income may arise for us in the following ways: • Repurchase of our debt at a discount, including our convertible senior notes or CDO notes payable, will generally result in our recognizing REIT taxable income in the form of cancellation of indebtedness income generally equal to the amount of the discount. • Origination of loans with appreciation interests may be deemed to have original issue discount for federal income tax purposes. Original issue discount is generally equal to the difference between an obligation’s issue price and its stated redemption price at maturity. This “discount” must be recognized as income over the life of the loan even though the corresponding cash will not be received until maturity. • Our or our REIT affiliates’ loan terms may provide for both an interest “pay” rate and “accrual” rate. When this occurs, we recognize interest based on the sum of the pay rate and the accrual rate, but only receive cash at the pay rate until maturity of the loan, at which time all accrued interest is due and payable. • Our or our REIT affiliates’ loans or unconsolidated real estate may contain provisions whereby the benefit of any principal amortization of the underlying senior debt inures to us or our REIT affiliates. We or our REIT affiliates recognize this benefit as income as the amortization occurs, with no related cash receipts until repayment of our loan. • Sales or other dispositions of investments in real estate, as well as significant modifications to loan terms may result in timing differences between income recognition and cash receipts. Although some types of taxable income are excluded to the extent they exceed 5% of our net income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any taxable income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that we or it regard as unfavorable in order to satisfy the distribution requirement and to avoid U.S. federal corporate income tax and the 4% deductible excise tax in that year. 49 If we were to make a taxable distribution of shares of our stock, shareholders may be required to sell such shares or sell other assets owned by them in order to pay any tax imposed on such distribution. We may distribute taxable dividends that are payable in shares of our common stock. If we were to make such a taxable distribution of shares of our stock, shareholders would be required to include the full amount of such distribution as income. As a result, a shareholder may be required to pay tax with respect to such dividends in excess of cash received. Accordingly, shareholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a shareholder sells the shares it receives as a dividend in order to pay such tax, the sale proceeds may be less than the amount included in income with respect to the dividend. Moreover, in the case of a taxable distribution of shares of our stock with respect to which any withholding tax is imposed on a non-U.S. shareholder, we may have to withhold or dispose of part of the shares in such distribution and use such withheld shares or the proceeds of such disposition to satisfy the withholding tax imposed. While the IRS in certain private letter rulings has ruled that a distribution of cash or shares at the election of a REIT’s shareholders may qualify as a taxable stock dividend if certain requirements are met, it is unclear whether and to what extent we will be able to pay taxable dividends in cash and shares of common stock in any future period. In addition, if a significant number of our shareholders determine to sell shares of our Class A common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our Class A common stock. Distributions payable by REITs do not qualify for the reduced tax rates available for some dividends. The maximum tax rate applicable to income from ‘‘qualified dividends’’ payable to domestic shareholders that are individuals, trusts and estates is currently 20%. Distributions of ordinary income payable by REITs, however, generally are not eligible for these reduced rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay qualified dividends, which could adversely affect the value of the stock of REITs, including our common stock. Qualifying as a REIT involves highly technical and complex provisions of the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for federal income tax purposes. The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring collateral mortgage obligations (‘‘CMOs’’), which would be treated as prohibited transactions for federal income tax purposes. Net income that we derive from a prohibited transaction is subject to a 100% tax. The term ‘‘prohibited transaction’’ generally includes a sale or other disposition of property (including agency securities, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us. We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for federal income tax purposes. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, as is the case with our securitization business, although such income will be subject to tax in the hands of the corporation at regular corporate rates. 50 We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the structures we utilize for our CMO transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held ‘‘primarily for sale to customers in the ordinary course of a trade or business’’ depends on the particular facts and circumstances. We intend to structure our activities to avoid prohibited transaction characterization, but no assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. Our taxable income is calculated differently than net income based on GAAP. Our taxable income may substantially differ from our net income based on GAAP. For example, interest income on our mortgage related securities does not necessarily accrue under an identical schedule for U.S. federal income tax purposes as for accounting purposes. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 15: Income Taxes” for further information. Rapid changes in the values of our target assets may make it more difficult for us to maintain our qualification as a REIT or our exemption from the Investment Company Act. If the fair market value or income potential of our assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, we may need to increase our real estate assets and income or liquidate our non-REIT-qualifying assets to maintain our REIT qualification or our exemption from the Investment Company Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. We may have to make decisions that we otherwise would not make absent the REIT and Investment Company Act considerations. The Company’s qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that the Company acquires, and the inaccuracy of any such opinions, advice or statements may adversely affect the Company’s REIT qualification and result in significant corporate-level tax. When purchasing securities, the Company may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies for purposes of the REIT income tests. In addition, when purchasing the equity tranche of a securitization, the Company may rely on opinions or advice of counsel regarding the qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect the Company’s REIT qualification and result in significant corporate-level tax. New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT or could reduce the market price of our common shares. The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in us. The rules dealing with U.S. federal income taxation are continually under review by Congress, the IRS, and the U.S. Department of the Treasury. According to publicly released statements, a top legislative priority of the new Congress and administration may be to enact significant reform of the Internal Revenue Code, 51 including significant changes to taxation of business entities and the deductibility of interest expense and capital investment. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on us or an investment in our securities, and we cannot, at this time, determine whether any such changes will adversely affect our taxation or the taxation of our shareholders. Revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us, or could reduce the market price of our common shares. If our securitizations are subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to distribute to us and pay their creditors. We own foreign securitizations. There is a specific exemption from U.S. federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We intend that the consolidated securitization subsidiaries and any other non-U.S. securitizations that are TRSs will rely on that exemption or otherwise operate in a manner so that they will not be subject to U.S. federal income tax on their net income at the entity level. If the IRS were to succeed in challenging the tax treatment of our securitizations, it could greatly reduce the amount that those securitizations would have available to distribute to their shareholders and to pay to their creditors. Any reduced distributions would reduce amounts available for distribution to our shareholders. Our and our REIT affiliates’ ownership of and relationship with TRSs will be limited, and a failure to comply with the limits would jeopardize our and its REIT qualification and may result in the application of a 100% excise tax. A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Any domestic TRSs that we or our REIT affiliates own or that we or our REIT affiliates acquire in the future will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution but will not be required to be distributed. The value of the securities that we or our REIT affiliates hold in TRSs may not be subject to precise valuation. Accordingly, there can be no assurance that we or our REIT affiliates will be able to comply with the 25% limitation discussed above or avoid application of the 100% excise tax discussed above. Compliance with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Internal Revenue Code limit our ability to hedge mortgage-backed securities, preferred securities and related borrowings. Except to the extent provided by the regulations promulgated by the U.S. Treasury Department, or the Treasury regulations, any income from a hedging transaction we enter into in the normal course of business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in the Treasury regulations before the close of the 52 day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test). To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result, we might have to limit use of advantageous hedging techniques or implement those hedges through TRSs. This could increase the cost of our hedging activities or expose it or us to greater risks associated with changes in interest rates than we or it would otherwise want to bear. Fees that we or our REIT affiliates receive will not be REIT qualifying income. We and our REIT affiliates must satisfy two gross income tests annually to maintain qualification as a REIT. First, at least 75% of a REIT’s gross income for each taxable year must consist of defined types of income that derive, directly or indirectly, from investments relating to real property or mortgages on real property or temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes: • • • rents from real property, interest on debt secured by mortgages on real property or on interests in real property, and dividends or other distributions on and gain from the sale of shares in other REITs. Second, in general, at least 95% of a REIT’s gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, dividends, other types of interest, gain from the sale or disposition of stock or securities, income from certain interest rate hedging contracts, or any combination of the foregoing. Gross income from any origination fees we or our REIT affiliates obtain or from our sale of property that are held primarily for sale to customers in the ordinary course of business is excluded from both income tests. Any origination fees we or our REIT affiliates receive will not be qualifying income for purposes of the 75% or 95% gross income tests applicable to REITs under the Internal Revenue Code. We typically receive, and our REIT affiliates may receive, initial payments, or “points,” from borrowers as commitment fees or additional interest. So long as the payment is for the use of money, rather than for other services provided by us or our REIT affiliates, we believe that this income should not be classified as non-qualifying origination fees. However, the Internal Revenue Service may seek to reclassify this income as origination fees instead of commitment fees or interest. If we cannot satisfy the Internal Revenue Code’s income tests as a result of a successful challenge of our classification of this income, we may not qualify as a REIT. Any fees for services, such as advisory fees or broker-dealer fees, received by us or our REIT affiliates will not qualify for either income test. Any such fees earned by a TRS of ours or of one of our REIT affiliates would not be subject to tax, and any distributions from TRSs would be qualifying income for purposes of the 95% gross income test but not for the 75% gross income test. A portion of the dividends we distribute may be deemed a return of capital for federal income tax purposes. The amount of dividends we distribute to our common and preferred shareholders in a given quarter may not correspond to our taxable income for such quarter. Consequently, a portion of the dividends we distribute may be deemed a return of capital for federal income tax purposes, and will not be taxable but will reduce shareholders’ basis in the underlying common or preferred shares. 53 Our ability to use TRSs, and consequently our ability to establish fee-generating businesses and invest in securitizations, will be limited by the election made by us to be taxed as a REIT, which may adversely affect returns to our shareholders. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s assets may consist of securities of one or more TRSs. We and TRFT currently own, and we, TRFT and any other REIT affiliates may own in the future, interests in additional TRSs. However, our ability to expand the fee-generating businesses of our and TRFT’s current TRSs and future TRSs we or our REIT affiliates may form, will be limited by our and our REIT affiliates need to meet this 25% test, which may adversely affect distributions we pay to our shareholders. If TRFT fails to qualify as a REIT, then we also would very likely fail to qualify as a REIT and if any other significant REIT affiliate fails to qualify as a REIT, it would adversely affect our ability to qualify as a REIT. TRFT is a REIT subject to all of the risks discussed above with respect to RAIT. If TRFT fails to qualify as a REIT, then we also would very likely fail to qualify as a REIT, because the income we receive from, and assets we hold through, TRFT make up a significant portion of our total income and assets and materially affect our ability to meet REIT qualification tests. The same would be true with respect to other REIT affiliates if the income derived from such REIT affiliate becomes a significant part of our income. Other Regulatory and Legal Risks of Our Business Our reputation, business and operations could be adversely affected by regulatory compliance failures. Potential regulatory action poses a significant risk to our reputation and thereby to our business. Our business is subject to extensive regulation in the United States. We operate our business so as to comply with the Internal Revenue Code’s REIT rules and regulations and so as to remain exempt from registration as an investment company under the Investment Company Act. In addition, we are subject to regulation under the Exchange Act and various other statutes. A number of our investing activities, such as our lending business, are subject to regulation by various U.S. state regulators. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of our business, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply with the obligations imposed by any of the regulations binding on us or to maintain any of the licenses required to be maintained by us could result in investigations, sanctions, monetary penalties and reputational damage. Loss of our Investment Company Act exemption would affect us adversely. We seek to conduct our operations so that we are not required to register as an investment company. Under Section 3(a)(1) of the Investment Company Act, a company is not deemed to be an “investment company” if: • • it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and it neither is engaged nor proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets exclusive of government securities and cash items on an unconsolidated basis, which we refer to as the 40% test. “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act (relating to issuers whose securities are held by not more than 100 persons or whose securities are held only by qualified purchasers, as defined). 54 We rely on the 40% test because we are a holding company that conducts our businesses through wholly- owned or majority-owned subsidiaries. As a result, the securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets exclusive of government securities and cash items on an unconsolidated basis. Based on the relative value of our investment in TRFT, on the one hand, and our investment in RAIT Partnership, on the other hand, we can comply with the 40% test only if RAIT Partnership itself complies with the 40% test (or an exemption other than those provided by Sections 3(c)(1) or 3(c)(7)). Because the principal exemptions that RAIT Partnership relies upon to allow it to meet the 40% test are those provided by Sections 3(c)(5)(C) or 3(c)(6) (relating to subsidiaries primarily engaged in specified real estate activities), we are limited in the types of businesses in which we may engage through our subsidiaries. Because RAIT Partnership and the two wholly-owned subsidiaries through which we hold 100% of the partnership interests in RAIT Partnership—RAIT General, Inc. and RAIT Limited, Inc.—will not be relying on Section 3(c)(1) or 3(c)(7) for their respective Investment Company Act exemptions, our investments in these securities will not constitute “investment securities” for purposes of the 40% test if RAIT Partnership is otherwise exempt from the Investment Company Act. RAIT Partnership, our subsidiary that holds, directly and through wholly-owned or majority-owned subsidiaries, a substantial portion of our assets, intends to conduct its operations so that it is not required to register as an investment company in reliance on the exemption from Investment Company Act regulation provided under Section 3(c)(5)(C). RAIT Partnership may also from time to time rely on the exemption from Investment Company Act regulation provided under Section 3(c)(6). Any entity relying on Section 3(c)(5)(C) for its Investment Company Act exemption must have at least 55% of its portfolio invested in qualifying assets (which in general must consist of mortgage loans, mortgage backed securities that represent the entire ownership in a pool of mortgage loans and other liens on and interests in real estate) and another 25% of its portfolio invested in other real estate-related assets. Based on no-action letters issued by the staff of the SEC, we classify our investments in mortgage loans as qualifying assets, as long as the loans are “fully secured” by an interest in real estate. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then we consider the loan to be a qualifying asset. We do not consider loans with loan-to- value ratios in excess of 100% to be qualifying assets that come within the 55% basket, but only real estate- related assets that come within the 25% basket. Based on a no-action letter issued by the staff of the SEC, we treat most of our mezzanine loans as qualifying assets because we usually obtain a first lien position on the entire ownership interest of a special purpose entity, or SPE, that owns only real property, or that owns the entire ownership interest in a second SPE that owns only real property, and otherwise comes within the conditions of the no-action letter, and we treat any remaining mezzanine loans as real estate-related assets that come within the 25% basket. The treatment of other investments as qualifying assets and real estate-related assets, including equity investments in subsidiaries, is based on the characteristics of the underlying asset, in the case of a directly held investment, or the characteristics of the assets of the subsidiary, in the case of equity investments in subsidiaries. Any entity relying on Section 3(c)(6) for its Investment Company Act exemption must be primarily engaged, directly or through majority-owned subsidiaries, in one or more specified businesses, including a business described in Section 3(c)(5)(C), or in one or more of such businesses (from which not less than 25% of its gross income during its last fiscal year was derived), together with an additional business or businesses other than investing, reinvesting, owning, holding or trading in securities. TRFT, like RAIT, is a holding company that conducts its operations through subsidiaries. Accordingly, we intend to monitor TRFT’s holdings such that it will satisfy the 40% test. Similar to securities issued to us, the securities issued to TRFT by its subsidiaries that are excepted from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities TRFT 55 may own, may not have a combined value in excess of 40% of the value of its total assets on an unconsolidated basis. This requirement limits the types of businesses in which TRFT may engage through these subsidiaries. We make the determination of whether an entity is a majority-owned subsidiary of RAIT, RAIT Partnership or TRFT. The Investment Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The Investment Company Act further defines voting securities as any security presently entitling its owner or holder to vote for the election of trustees of a company. We treat companies, including future securitization subsidiaries, in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. Neither RAIT, RAIT Partnership nor TRFT has requested the SEC to approve our treatment of any company as a majority-owned subsidiary and the SEC has not done so. If the SEC were to disagree with our treatment of one or more companies, including securitizations, as majority-owned subsidiaries, we would need to adjust our respective investment strategies and invest our respective assets in order to continue to pass the 40% test. Any such adjustment in its investment strategy could have a material adverse effect on TRFT and us. A majority of TRFT’s subsidiaries are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Act with respect to the assets in which they can invest to avoid being regulated as an investment company. In particular, TRFT’s subsidiaries that are securitizations generally rely on Rule 3a-7, an exemption from the Investment Company Act provided for certain structured financing vehicles that pool income-producing assets and issue securities backed by those assets. Such structured financings may not engage in portfolio management practices resembling those employed by mutual funds. Accordingly, each TRFT securitization subsidiary that relies on Rule 3a-7 is subject to an indenture which contains specific guidelines and restrictions limiting the discretion of the securitization. The indenture prohibits the securitization from acquiring and disposing of assets primarily for the purpose of recognizing gains or decreasing losses resulting from market value changes. Certain sales and purchases of assets, such as dispositions of collateral that has gone into default or is at risk of imminent default, may be made so long as they do not violate the guidelines contained in each indenture and are not based primarily on changes in market value. The proceeds of permitted dispositions may be reinvested in collateral that is consistent with the credit profile of the securitization under specific and predetermined guidelines. In addition, absent obtaining further guidance from the SEC, substitutions of assets may not be made solely for the purpose of enhancing the investment returns of the holders of the equity securities issued by the securitization. As a result of these restrictions, TRFT’s securitization subsidiaries may suffer losses on their assets and TRFT may suffer losses on its investments in its securitization subsidiaries. If the combined value of the investment securities issued to TRFT by its subsidiaries that are excepted by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities TRFT may own, exceeds 40% of TRFT’s total assets on an unconsolidated basis, TRFT may be required either to substantially change the manner in which it conducts its operations or to rely on Section 3(c)(1) or 3(c)(7) to avoid having to register as an investment company. As a result of the relative values of RAIT Partnership and TRFT, it is likely that TRFT would rely on the Section 3(c)(1) or 3(c)(7) exemptions, which would increase the assets we hold included in the 40% basket for purposes of the 40% test, which would increase the effects that variations in the value of RAIT Partnership’s assets would have on its ability to comply with the 40% test and, accordingly, our ability to remain exempt from registration as an investment company. None of RAIT, RAIT Partnership or TRFT has received a no-action letter from the SEC regarding whether it complies with the Investment Company Act or how its investment or financing strategies fit within the exclusions from regulation under the Investment Company Act that it is using. To the extent that the SEC provides more specific or different guidance regarding, for example, the treatment of assets as qualifying real estate assets or real estate-related assets, we may be required to adjust these investment and financing strategies accordingly. Any additional guidance from the SEC could provide additional flexibility to us and TRFT, or it could further inhibit the ability of TRFT and our combined company to pursue our respective investment and 56 financing strategies which could have a material adverse effect on us. See Item 1—“Business—Certain REIT and Investment Company Act Limits On Our Strategies-Investment Company Act Limits.” Our ownership limitation may restrict business combination opportunities. To qualify as a REIT under the Internal Revenue Code, no more than 50% in value of our outstanding capital shares may be owned, directly or indirectly, by five or fewer individuals during the last half of each taxable year. To preserve our REIT qualification, our declaration of trust generally prohibits any person from owning more than 8.5% or, with respect to our original promoter, Resource America, Inc., 15%, of our outstanding common shares and provides that: • A transfer that violates the limitation is void. • A transferee gets no rights to the shares that violate the limitation. • • Shares acquired that violate the limitation transfer automatically to a trust whose trustee has all voting and other rights. Shares in the trust will be sold and the record holder will receive the net proceeds of the sale. The ownership limitation may discourage a takeover or other transaction that our shareholders believe to be desirable. Preferred shares may prevent change in control. Our declaration of trust authorizes our board of trustees to issue preferred shares, to establish the preferences and rights of any preferred shares issued, to classify any unissued preferred shares and reclassify any previously classified but unissued preferred shares, without shareholder approval. The issuance of preferred shares could delay or prevent a change in control, apart from the ownership limitation, even if a majority of our shareholders want control to change. Maryland anti-takeover statutes may restrict business combination opportunities. As a Maryland REIT, we are subject to various provisions of Maryland law which impose restrictions and require that specified procedures be followed with respect to the acquisition of “control shares” representing at least ten percent of our aggregate voting power and certain takeover offers and business combinations, including, but not limited to, combinations with persons who own one-tenth or more of our outstanding shares. While we have elected to “opt out” of the control share acquisition statute, our board of trustees has the right to rescind the election at any time without notice to our shareholders. If our subsidiaries that are not registered as investment advisers under the Investment Advisers Act that provide collateral management, servicing or advisory services to securitizations or other investment vehicles were required to so register, it could hinder our operating performance and negatively impact our business and subject us to additional regulatory burdens and costs that we are not currently subject. Where our subsidiary provides collateral management, servicing or advisory services solely to one or more entities that do not invest in “securities” or regarding assets that are not “securities portfolios” that provide sufficient “regulatory assets under management”, as such terms are defined in the Investment Advisers Act, such subsidiary will not engage in activities that would require it to register as an investment adviser under the Investment Advisers Act. We have determined that none of RAIT Partnership or RAIT’s affiliates providing servicing to the FL securitizations need to register as an investment adviser for RAIT Partnership’s collateral management services to RAIT I and RAIT II or RAIT’s affiliates providing servicing to the FL securitizations, respectively. We have not requested the SEC to approve our determination that these subsidiaries do not need to register as investment advisers under the Investment Advisers Act and the SEC has not done so. If the SEC or 57 any applicable state regulatory authority were to disagree with our determination, we would need to register those companies as investment advisers and comply with all applicable requirements, which might require those subsidiaries to adjust the manner in which they provide services which could hinder their respective operating performance and negatively impact their respective business and subject them to additional regulatory burdens and costs that they are not currently subject to. Our settlement in 2015 with the SEC of its investigation concerning our subsidiary, Taberna Capital Management, LLC, or TCM, restricts our ability to serve as an investment advisor until September 2018, which may require us to forgo opportunities. We may be subject to “lender liability” litigation. In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We cannot assure you that such claims will not arise or that we will not be subject to significant liability if a claim of this type were to arise. Risks relating to our securities We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future or the amount of any dividends. Our board of trustees will determine the amount and timing of distributions. In making this determination, our trustees will consider all relevant factors, including REIT minimum distribution requirements, the amount of cash available for distribution, restrictions under Maryland law, capital expenditures and reserve requirements and general operational requirements. We cannot assure you that we will be able to make distributions in the future or in amounts similar to our past distributions. We may need to fund distributions through borrowings, returning capital or selling assets, which may be available only at commercially unattractive terms, if at all. Any of the foregoing could adversely affect the market price of our common shares. The price of our common shares and other securities historically has been volatile. This volatility may affect the price at which anyone holding our common shares or other securities could sell them, and the sale of substantial amounts of our common shares or such other securities could adversely affect the price of our common shares or such other securities. The market price for our common shares has varied between a high of $3.91 on February 16, 2017 and a low of $2.41 on November 4, 2016 in the twelve month period ending on March 7, 2017. This volatility may affect the price at which you could sell the common shares. Other securities we have issued have also had volatile market prices. The market prices of our securities are likely to continue to be volatile and the trading volume subject to significant fluctuations in response to market and other factors, including the other risk factors discussed in this report; variations in our quarterly operating results from our expectations or those of securities analysts or investors, downward revisions in securities analysts’ estimates, and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments. This volatility and other factors may cause the market price and demand for our common shares to fluctuate substantially, which may limit or prevent investors from readily selling their common shares, may induce shareholder activism and may otherwise negatively affect the price or liquidity of our common shares. 58 Future sales of our common shares in the public market could lower the market price for our common shares and adversely impact the trading price of the notes. In the future, we may sell additional common shares to raise capital. In addition, a substantial number of our common shares are reserved for issuance upon the exercise of the issued and issuable warrants, or the warrants, described below (see Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources-Series D preferred shares”) and upon conversion of our outstanding senior convertible notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common shares. The issuance and sale of substantial amounts of common shares, or the perception that such issuances and sales may occur, could adversely affect the market price of our common shares and impair our ability to raise capital through the sale of additional equity securities. Item 1B. Unresolved Staff Comments None. Item 2. Properties For our investments in real estate, the leases for our multi-family properties are generally one-year or less and leases for our office and retail properties are operating leases. The following table represents a ten-year lease expiration schedule for our non-residential properties as of December 31, 2016. Year of Lease Expiration (December 31,) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 and thereafter Total Number of Leases Expiring during the Year Rentable Square Feet Subject to Expiring Leases Final Annualized Rent under Expiring Leases (in 000’s) (a) Final Annualized Rent per Square Foot under Expiring Leases Percentage of Total Final Annualized Base Rent Under Expiring Leases 212 71 53 49 36 18 17 10 6 16 5 493 757,901 342,490 314,696 664,023 391,656 770,443 347,522 159,053 50,532 187,466 147,387 $10,490,060 $ 4,922,111 $ 3,237,401 $ 6,751,580 $ 4,824,074 $ 7,508,860 $ 6,976,807 $ 2,313,718 $ 807,069 $ 2,738,918 $ 1,342,599 4,133,169 $51,913,197 $13.84 $14.37 $10.29 $10.17 $12.32 $ 9.75 $20.08 $14.55 $15.97 $14.61 $ 9.11 $12.56 20.2% 9.5% 6.2% 13.0% 9.3% 14.5% 13.4% 4.5% 1.6% 5.3% 2.6% 100% Cumulative Total 20.2% 29.7% 35.9% 48.9% 58.2% 72.7% 86.1% 90.6% 92.1% 97.4% 100.0% (a) “Final Annualized Rent” for each lease scheduled to expire represents the cash rental rates of the respective tenants for the final month prior to expiration multiplied by 12. For a description of our investments in real estate, see Item 1—“Business—Our Investment Portfolio— Investments in real estate” and Item 8—“Financial Statements and Supplementary Data—Schedule III.” Item 3. Legal Proceedings We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the 59 litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable. 60 PART II Item 5. Market for Our Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Our common shares trade on the New York Stock Exchange, or the NYSE, under the symbol “RAS.” We have adopted a Code of Business Conduct and Ethics, which we refer to as the Code, for our trustees, officers and employees intended to satisfy New York Stock Exchange listing standards and the definition of a “code of ethics” set forth in Item 406 of Regulation S-K. Any information relating to amendments to the Code or waivers of a provision of the Code otherwise required to be disclosed pursuant to Item 5.05 of Form 8-K will be disclosed through our website. MARKET PRICE OF AND DIVIDENDS ON OUR COMMON SHARES The following table shows the high and low reported sales prices per common share on the NYSE composite transactions reporting system and the quarterly cash dividends declared per common share for the periods indicated. For further discussion of our dividend policies, see Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations-REIT Taxable Income.” Past price performance is not necessarily indicative of likely future performance. Because the market price of our common shares will fluctuate, you are urged to obtain current market prices for our common shares. 2015 2016 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Price Range of Common Shares High Low Dividends Declared $7.85 7.08 6.24 5.45 $3.23 3.39 3.40 3.45 $6.62 6.04 4.77 2.25 $1.85 2.73 2.88 2.41 $0.18 0.18 0.18 0.09 0.09 0.09 0.09 0.09 As of March 7, 2017, there were 92,465,095 of our common shares outstanding held by 370 holders of record. Our Series A Cumulative Redeemable Preferred Shares, or Series A Preferred Shares, are listed on the NYSE and traded under the symbol “RAS PrA.” Since their date of original issuance, RAIT has declared and paid all specified quarterly dividends and no dividends are currently in arrears on the Series A Preferred Shares. Our Series B Cumulative Redeemable Preferred Shares, or Series B Preferred Shares, are listed on the NYSE and traded under the symbol “RAS PrB.” Since their date of original issuance, RAIT has declared and paid all specified quarterly dividends and no dividends are currently in arrears on the Series B Preferred Shares. Our Series C Cumulative Redeemable Preferred Shares, or Series C Preferred Shares, are listed on the NYSE and traded under the symbol “RAS PrC.” Since their date of original issuance, RAIT has declared and paid all specified quarterly dividends and no dividends are currently in arrears on the Series C Preferred Shares. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 11: Series D Preferred Shares” for the terms of the purchase agreement limiting our ability to declare dividends. 61 PERFORMANCE GRAPH The following graph compares the index of the cumulative total shareholder return on our common shares for the measurement period commencing December 31, 2011 and ending December 31, 2016 with the cumulative total returns of the National Association of Real Estate Investment Trusts (NAREIT) Mortgage REIT index, the NAREIT Equity index and the S&P 500 Index. The following graph assumes that each index was 100 on the initial day of the relevant measurement period and that all dividends were reinvested. X E D N I N R U T E R R E D L O H E R A H S L A T O T E V T A L U M U C I 250 200 150 100 50 - RAIT NAREIT Mortgage NAREIT Equity S&P 500 12/31/11 100.00 100.00 100.00 100.00 12/31/12 125.32 119.89 118.06 116.00 12/31/13 210.05 117.54 120.98 153.57 12/31/14 195.77 138.56 157.44 174.60 12/31/15 84.99 126.25 162.48 177.01 12/31/16 117.10 155.10 176.32 197.79 Unregistered Sales of Equity Securities and Use of Proceeds We withheld the following common shares to satisfy tax withholding obligations during the quarter ending December 31, 2016 arising from the vesting of restricted share awards made pursuant to the RAIT Financial Trust 2012 Incentive Award Plan. These common shares may be deemed to be “issuer purchases” of common shares that are required to be disclosed pursuant to the item. Period 10/01/2016 to 10/31/2016 11/01/2016 to 11/30/2016 12/01/2016 to 12/31/2016 Total Total Number of Shares Purchased — — Price Paid per Share $ — $ — 122,541 (1) $3.35 (1) 122,541 (1) $3.35 (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs — — — — — — — (1) The price reported is the price paid per share using our closing stock price on the New York Stock Exchange on the vesting date of the relevant award. 62 Item 6. Selected Financial Data The following selected financial data information should be read in conjunction with Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including the notes thereto, included elsewhere herein (dollars in thousands, except share and per share data). Operating Data: Net interest margin Property income Total revenue Interest expense Real estate operating expenses Provision for losses Total expenses Operating income (loss) Loss on deconsolidation of variable interest entities Change in fair value of financial instruments Income (loss) from continuing operations Income (loss) from discontinued operations Gain (loss) on disposal of discontinued operations Net income (loss) Net income (loss) allocable to common As of and For the Years Ended December 31 2016 2015 2014 2013 2012 $ 53,397 $ 69,182 $ 112,836 173,607 (55,049) (56,894) (8,050) (219,381) (45,774) — (5,946) (37,879) 40,144 47,808 50,073 124,157 211,614 (61,750) (62,726) (8,300) (219,992) (8,378) — 11,638 28,593 34,900 — 63,493 103,109 113,110 238,204 (47,860) (59,948) (5,500) (195,928) 42,276 (215,804) (98,752) (292,830) 2,855 $ 103,852 96,428 220,631 37,601 52,237 3,000 157,282 63,349 $ 84,145 88,205 177,606 40,042 49,032 2,000 147,712 29,894 — (344,426) (286,919) 1,555 — (201,787) (168,995) 654 — — — (289,975) (285,364) (168,341) shares (9,820) 7,158 (318,504) (308,008) (182,805) Earnings (loss) per share from continuing operations: Basic Diluted Earnings (loss) per share: Basic Diluted Balance Sheet Data: Investment in mortgages, loans and preferred $ $ $ $ (0.77) $ (0.77) $ (0.11) $ (0.11) $ (0.03) $ (0.03) $ 0.08 $ 0.08 $ (3.93) $ (3.93) $ (4.56) $ (4.56) $ (3.92) $ (3.92) $ (4.54) $ (4.54) $ (3.76) (3.76) (3.75) (3.75) equity interests, at amortized cost Investments in real estate, net Investments in securities, at fair value Assets of discontinued operations Total assets Total indebtedness Liabilities of discontinued operations Total liabilities Total equity Other Data: Common shares outstanding, at period end Book value per share Ratio of earnings to fixed charges and $ 1,280,285 $ 1,606,486 $ 1,383,218 1,006,235 31,412 691,798 3,485,673 2,209,882 388,974 2,818,523 587,842 986,942 — 1,383,547 4,415,928 2,399,475 952,530 3,617,160 744,741 716,432 — — 2,406,843 1,751,082 — 1,947,492 377,770 $ 1,099,422 829,865 567,302 182,069 3,008,305 2,002,997 106,134 2,319,645 688,660 $ 1,044,729 776,907 655,509 146,825 2,904,246 1,726,035 94,734 2,014,122 890,124 92,295,478 91,586,767 $ 1.52 $ 1.88 $ 82,506,606 1.89 71,447,437 5.62 $ 58,913,142 11.16 $ preferred share dividends 1.1X 1.2X — (1) — (1) — (1) (1) The ratio of earnings to fixed charges and preferred share dividends for the years ended December 31, 2014, 2013, and 2012 is deficient by $319.0 million, $308.0 million, and $183.0 million, respectively. 63 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are an internally-managed Maryland real estate investment trust, or REIT, focused on providing commercial real estate financing throughout the United States. As explained below, we plan to continue to opportunistically divest our non-lending businesses and assets, however, presently, we also own and manage a portfolio of commercial real estate properties and manage real estate assets for third parties. We were formed in August 1997 and commenced operations in January 1998. See “Part I—Item 1. Business” above, or the business description, which is incorporated herein by reference, for further description of our company, business strategy, 2016 developments, targeted capital structure strategy and other matters. See also Part II, Item 8, “Financial Statements and Supplementary Data— Note 21: Subsequent Events.” As described in the business description, we are implementing a strategy to transition RAIT to a streamlined business model that is focused on our core CRE lending business. We began executing this strategy in 2016 and will continue this pursuit throughout 2017. As described in the business description, our transformational strategy is focused on: • • • • • concentrating RAIT’s business on our core middle-market CRE lending business; opportunistically divesting, while maximizing the value of, our legacy REO portfolio and ultimately minimizing our REO holdings; opportunistically divesting and maximizing the value of our commercial property management operations, including our Urban Retail property management business; optimizing our capital structure and reducing our outstanding indebtedness; reducing our total expense base; and • most importantly, reallocating capital into and growing our core middle market CRE lending activities. Our transition is ongoing and, once completed, will result in a simpler, more cost efficient and lower leveraged business model that is focused on the core CRE business. We believe that we will be able to enhance shareholder value by delivering stable and repeatable risk-adjusted returns. We expect to accomplish that with a significantly lower expense base that matches our lending focused strategy with an appropriate capital structure and lower levels of debt. We believe we made significant progress executing our strategy to return to our focus on CRE lending including the following steps: • The IRT management internalization resulted in IRT paying RAIT $43.0 million to acquire IRT’s external advisor and our multifamily property management business and $62.2 million for our entire IRT common stock position. RAIT incurred $6.2 million of internalization and transition expenses and the divestiture and deconsolidation of IRT and our multifamily property management business lowered our compensation and G&A expense run rate by approximately $15.0 million. These transactions led to the operations of IRT and our multifamily property management business being presented as discontinued operations in our financial results. • We expect to divest Urban Retail, our commercial property focused property management business. Once Urban is divested, we expect our revenues and our expenses to each decline by approximately $10 million. • We ended 2016 with a REO property portfolio with an aggregate book value of $855 million. We have been opportunistically selling down our REO property portfolio. We sold 19 properties for 64 $375 million in aggregate gross proceeds during 2016 through January 2017. After costs and repaying related indebtedness, we received net proceeds of approximately $41 million. As of December 31, 2016, we identified 36 properties for disposition, aggregating $540 million of book value. One of these properties was sold in January 2017 for $36.7 million. We expect to sell or dispose of the remainder of the $540 million of properties during 2017. • The cumulative effect of these initiatives has led to a 35% reduction in our base compensation and G&A expense run rate from $49 million in 2015 to approximately $32 million in 2016. We are targeting more expense reductions as the transformation continues into 2017. • Our strategy also contemplates reducing our overall leverage. During 2016, RAIT’s indebtedness declined by $665 million or 27% from $2.5 billion to $1.8 billion, and total recourse debt, excluding RAIT’s secured credit facilities, declined by $57 million or 13.6%. RAIT’s corporate leverage, excluding deconsolidated subsidiaries, declined from 83% to 76% at the end of 2016. We anticipate recycling between approximately $175 million to $225 million through this capital reallocation in 2017 which we believe has the potential of generating approximately $600 million to $800 million in new loan originations, and we have been building a loan origination pipeline to match our capital generation. See the business description and “Liquidity and Capital Resources” below for further discussion of our longer term target capital structure goals including leverage. • In support of our return to our core CRE lending strategy, we implemented management and board changes to better align with our strategic direction: • RAIT announced a new Board leadership structure and executive management changes to oversee and execute RAIT’s strategy and its transition to a more streamlined lending-focused, cost efficient and lower leveraged business model. • On October 24, 2016, RAIT announced that Michael J. Malter, who joined RAIT’s Board in November 2015, was elected by the Board to serve as its Independent Chairman. • Effective December 20, 2016, Scott Davidson, RAIT’s President and former head of its lending business, was named RAIT’s Chief Executive Officer and, concurrently, was appointed to the Board. • On February 15, 2017, RAIT announced that Thomas D. Wren, a former banking executive and federal banking regulator, had joined the Board as a new independent trustee with substantial financial, regulatory, capital markets and mortgage REIT expertise, the third new Trustee to join RAIT’s nine-person Board since November 2015. • On February 21, 2017, RAIT announced that Paul W. Kopsky, Jr., an accomplished executive with extensive financial and operational leadership expertise across a diverse range of industries, was named to succeed James J. Sebra as RAIT’s Chief Financial Officer and Treasurer. During 2016, we generated GAAP net income (loss) allocable to common shares of $(9.8) million, or $(0.11) per common share-diluted, as compared to $7.2 million, or $0.08 per common share-diluted, during 2015. During 2016, our cash available for distribution, or CAD, decreased to $40.6 million, or $0.45 per common share, from $66.1 million, or $0.77 per common share for 2015. CAD is a non-GAAP financial measure. For management’s definitions and discussion of the usefulness of CAD to investors and management and a reconciliation of our reported net income (loss) to our CAD, see “Non-GAAP Financial Measures” below. For 2016, our CRE lending business originated $157 million of loans and completed its 6th floating rate loan securitization in November 2016, which we refer to as RAIT FL6. RAIT FL6 was a $258 million floating rate loan securitization and issued $217 million of investment grade bonds with a weighted average interest cost of LIBOR plus 2%. See “Securitization Summary” below for further discussion of FL6. 65 Trends That May Affect Our Business The following trends may affect our business: Trends relating to capital markets. We are generally seeing more volatility in the capital markets relevant to our common and preferred shares and our recourse indebtedness, which may affect our ability to raise capital through public offerings of our securities in these categories in the next year. Trends relating to CRE debt market maturities. We believe a sizable amount of CRE debt held by CMBS issuers, banks, life insurance companies and other financing sources will mature each year for the next several years. We believe these maturities will drive refinancing and create opportunities for us to originate CRE loans Trends Relating to Originating and Financing Conduit Loans and Bridge Loans. Our loan origination volume was lower during 2016 as compared to historical levels due to volatility in interest rates and bond spreads, along with the use of capital to retire our corporate unsecured debt. We are expecting increased amounts of loan repayments in 2017, as compared to historical periods, as borrowers seek to take advantage of the strong real estate market fundamentals and either sell or refinance their properties. As a result, given higher levels of competition, we expect loan origination volumes to increase in 2017 and future periods as capital is recycled from REO property sales and as loans repayments and as borrowers seek to refinance their loans. However, competition to originate loans is increasing as market participants seek to capitalize on the sizeable level of commercial real estate loans that are maturing in 2017 and 2018. Trends Relating to Investments in Real Estate. We have been opportunistically selling down our REO property portfolio. As of December 31, 2016, we identified 36 properties for disposition, aggregating $540 million of book value. One of these properties was sold in January 2017 for $36.7 million. We expect to sell or dispose of the remainder of the $540 million during 2017. From a performance perspective, we expect the occupancy and rental rates of our office and retail properties to improve or remain stable during 2017 as a result of stable leasing activity during 2016 in our office and retail portfolios and stable or improved economic conditions within the relevant markets of our office and retail properties. Interest rate environment. While interest rates in 2016 continued to remain at historically low levels, volatility increased as the Federal Reserve began to tighten monetary policies in the second half of 2016. We believe market participants expect that the future interest rate environment will be higher than 2016 as the Federal Reserve pursues its unemployment and inflationary goals. In the event interest rates rise significantly, we may be impacted, see our discussion below under Item 7A—“Quantitative and Qualitative Disclosures About Market Risk- Interest Rate Risk Management” for a summary of the possible effects on our income and expenses. We use floating rate facilities and long-term floating rate securitization bonds to finance our investments. To the extent the fixed interest rate on our commercial loans do not appropriately match the floating interest rate on the securitization bonds the loans collateralize, we may utilize interest rate derivative contracts to convert our floating rate liabilities into fixed-rate liabilities, effectively match funding our assets with our liabilities. Prepayment rates. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates on our assets also may be affected by other factors, including, without limitation, conditions in the housing, real estate and financial markets, general economic conditions and the relative interest rates on adjustable-rate and fixed-rate loans. See “Securitization Summary” below for a discussion of the impact of prepayments on the returns we receive from our retained interests in our consolidated securitizations. As a result of the current low interest rate environment, there may be an increase in prepayment rates in our commercial loan portfolio, which could decrease our net investment income, and a corresponding increase in prepayment rates of our debt securities, which may result in our recognizing non-cash expenses due to fair value adjustments. Our CRE loan portfolio continues to experience elevated levels of loan payoffs as borrowers are taking advantage of the strong real estate markets to either sell or refinance their properties. As a result, our net interest margin has declined from 2015 through 2016 as loans repay and leverage declines. Loan repayments were $425.0 million during 2016. 66 Transitional Impact of Strategy. We expect that our implementation of the transformative strategy to focus RAIT on CRE lending described above will cause 2017 to be a transitional year for RAIT. As described above, RAIT is implementing a strategy which will continue RAIT’s transition away from real estate ownership. This has resulted, and we expect it to continue to result, in a large volume of asset sales and a sizeable deleveraging to RAIT’s balance sheet. Since most of the debt securing our REO properties collateralizes securitizations, loan repayments and asset sales result in a deleveraging because of the sequential pay structures of the securitization. We expect our net interest margin and property net operating income to decline in 2017 as compared to 2016. While we are expecting to see a reduction in costs, we do not expect the savings to offset the reduction in earnings from asset sales and loan repayments. Assets Under Management Assets under management, or AUM, is an operating measure representing the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our performance. AUM includes our total investment portfolio and assets managed for third parties. The table below summarizes our AUM as of December 31, 2016 and December 31, 2015 (dollars in thousands): Commercial real estate portfolio (1) IRT (2) Property management (3) Total AUM as of December 31, 2016 $2,159,152 — 1,416,072 AUM as of December 31, 2015 $2,772,750 1,372,015 1,778,836 $3,575,224 $5,923,601 (1) As of December 31, 2016 and December 31, 2015, our commercial real estate portfolio was comprised of $411.7 million and $554.0 million, respectively, of assets collateralizing RAIT I and RAIT II, $854.6 million and $1.1 billion, respectively, of investments in real estate of RAIT, and $103.4 million and $188.0 million, respectively, of commercial mortgage loans, mezzanine loans and preferred equity interests that were not securitized. As of December 31, 2016 and 2015, our commercial real estate portfolio was also comprised of $789.4 million and $885.1 million, respectively, of assets collateralizing our floating rate securitizations. (2) The IRT management internalization, which occurred in December of 2016, decreased our AUM by approximately $1.4 billion as IRT became the manager of its real estate assets, our multifamily real estate assets and third-party real estate assets, which is included within the commercial real estate portfolio in the table above. (3) Urban Retail provides management and/or leasing services to 75 properties with 17,406,808 square feet in 26 states as of December 31, 2016. As noted above, we intend to divest Urban Retail during 2017 as part of our strategy to focus on CRE lending. When Urban Retail is divested, we expect that our AUM would be reduced by approximately $1.4 billion. Securitization Summary Overview. We have used securitizations to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolios for the long-term. A securitization is a structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the securitization liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower 67 than the average yield of the loans collateralizing the securitization. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the securitization are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Historically, the stated maturity of the debt issued by a securitization we have sponsored and consolidated has been between 15 and 17 years. However, we expect the weighted average life of such debt to be shorter than the stated maturity due to the financial condition of the borrowers on the underlying loans and the characteristics of such loans, including the existence and frequency of exercise of any permitted prepayment, the prevailing level of interest rates, the actual default rate and the actual level of any recoveries on any defaulted loans. Debt issued by these securitizations is non-recourse to RAIT and payable solely from the payments by the borrowers on the loans collateralizing these securitizations. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions. As of December 31, 2016, we have sponsored six securitizations with varying amounts of retained or residual interests held by us which we consolidate in our financial statements as follows: RAIT I, RAIT II, RAIT 2014-FL3 Trust, or RAIT FL3, RAIT 2015-FL4 Trust, or RAIT FL4 and RAIT 2015-FL5 Trust, or RAIT FL5, and RAIT 2016-FL6, or RAIT-FL6. As discussed below, we exercised our rights and unwound two other securitizations we had sponsored, RAIT 2013-FL1 Trust, or RAIT FL1, in 2015 and RAIT 2014-FL2 Trust, or RAIT FL2, in the third quarter of 2016. We refer to RAIT FL1, RAIT FL2, RAIT FL3, RAIT FL4, RAIT FL5 and RAIT FL6 as the FL securitizations. The assets and liabilities of these securitizations are presented at amortized cost in our consolidated financial statements. We originated substantially all of the loans collateralizing RAIT I, RAIT II and the FL securitizations. We serve as the collateral manager, servicer and special servicer on RAIT I and RAIT II and as servicer and special servicer for each of the FL securitizations. Over time, our returns on and cash flows from our retained interests in our securitizations generally decrease as the senior classes of debt bearing relatively lower interest rates are paid down by collateral pool payments and other proceeds leaving more junior classes of debt bearing relatively higher interest rates on the smaller collateral pool. As a result, we continue to evaluate strategies to manage the returns on our capital allocated to our retained interests in each of our securitizations consistent with our rights and obligations under our securitizations and relevant market conditions, which may include, without limitation, unwinding a securitization and rolling the remaining collateral over to a new securitization and may involve, where applicable, selling our properties securing loans included in the collateral pool and repaying such loans. With respect to our floating rate CMBS securitizations described below, we have implemented a process of unwinding the FL securitizations when, because of loan repayments, the securitizations become inefficient. Securitization Performance. RAIT I and RAIT II contain interest coverage triggers, or IC triggers, and over collateralization triggers, or OC triggers, that must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns. If the IC triggers or OC triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable, or other actions permitted under the relevant securitization indenture. As of the most recent payment information, all applicable IC triggers and OC triggers continue to be met for RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these securitizations. The FL securitizations do not have IC triggers and OC triggers. Repayment of the loans collateralizing RAIT I and RAIT II outside their contractual maturities increased during 2016, and we expect it to continue to increase in 2017 through 2019. In addition, we have 36 properties held for disposition with an aggregate net book value of $540 million as of December 31, 2016. The related indebtedness of these properties is expected to be repaid with the proceeds of any sales, which primarily includes paying down the most senior notes outstanding issued by RAIT I and RAIT II, as applicable. We continue to 68 evaluate our real estate portfolio with regards to identifying other possible properties to sell as part of our previously disclosed capital recycling and debt reduction plan. Because we own properties that are financed, in part, by loans collateralizing RAIT I and RAIT II, sales of our properties could result in a significant reduction of our securitization notes payable. These repayments have reduced our returns from these securitizations and we expect future repayments to continue to reduce these returns. We continue to evaluate alternative strategies seeking to replace these returns. If the CDO notes issued by RAIT I and RAIT II have not been redeemed in full prior to the distribution date occurring in May 2017, in the case of RAIT I, and June 2017, in the case of RAIT II, then an auction of the collateral assets of RAIT I or RAIT II, as relevant, will be conducted by the relevant trustee periodically thereafter and, if certain conditions set forth in the relevant indenture are satisfied, such collateral assets will be sold at the auction and the relevant CDO notes will be redeemed, in whole, but not in part, on such distribution date. The first two auctions for RAIT I were held in November 2016 and February 2017, but no sale occurred as no bids were received. A summary of the investments in our consolidated securitizations as of the most recent payment information is as follows: Our Legacy Securitizations We sponsored two securitizations in 2006 and 2007. • RAIT I—We closed RAIT I in 2006. RAIT I is collateralized by $608.9 million principal amount of commercial real estate loans and participations, of which $23.9 million is defaulted. The current OC test is passing at 138.6% with an OC trigger of 116.2%. All of the notes issued by this securitization are performing in accordance with their terms. We currently own $46.1 million of the securities that were originally rated investment grade and $200 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $24.9 million of the securities of RAIT I we own as collateral for the senior secured notes we issued. We have converted certain of the loans that collateralize RAIT I to real estate owned, thereby acquiring ownership of the related real estate property and leaving the loans and any other indebtedness encumbering the property outstanding. Upon these conversions, we consolidate the assets, liabilities and operations of the real estate properties, including any loans secured by the properties owed to unaffiliated lenders, and the loans collateralizing RAIT I secured by these properties remain outstanding, but are eliminated in consolidation. For a description of the encumbrances on our investments in real estate held by RAIT I and RAIT II, see Item 8—“Financial Statements and Supplementary Data—Schedule III.” • RAIT II—We closed RAIT II in 2007. RAIT II is collateralized by $383.2 million principal amount of commercial real estate loans and participations, of which $18.5 million is defaulted. The current OC test is passing at 140.9% with an OC trigger of 111.7%. All of the notes issued by this securitization are performing in accordance with their terms. We currently own $92.0 million of the securities that were originally rated investment grade and $140.7 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $49.5 million of the securities we own issued by RAIT II as collateral for senior secured notes we issued. We have converted certain of the loans that collateralize RAIT II to real estate owned, thereby acquiring ownership of the related real estate property and leaving the loans and any other indebtedness encumbering the property outstanding. Upon these conversions, we consolidate the assets, liabilities and operations of the real estate properties, including any loans secured by the properties owed to unaffiliated lenders, and the loans collateralizing RAIT II secured by these properties remain outstanding, but are eliminated in consolidation. For a description of the encumbrances on our investments in real estate held by RAIT I and RAIT II, see Item 8—“Financial Statements and Supplementary Data—Schedule III.” 69 Our Floating Rate CMBS Securitizations Since 2013, we have become a leader in floating rate CMBS securitizations. We have issued six non- recourse floating rate CMBS securitizations since 2013 and expect these securitizations to remain a significant part of our business. • RAIT FL1— During the third quarter of 2015, RAIT exercised its right to unwind RAIT 2013-FL1 Trust, or RAIT FL1, and repaid the outstanding notes. We refinanced the $55.0 million of remaining loans through our warehouse financing arrangement. Loan repayments in RAIT FL1 decreased the efficiency of the securitization and by unwinding this securitization, we increased our returns on our remaining assets. • RAIT FL2—During the third quarter of 2016, RAIT exercised its right to unwind RAIT FL2 and repaid the outstanding notes. We refinanced the $99.8 million of remaining loans through our warehouse financing arrangement. Loan repayments in RAIT FL 2 decreased the efficiency of the securitization and by unwinding this securitization, we increased our returns on our remaining assets. • RAIT FL3—We closed RAIT FL3 in 2014. RAIT FL3 is collateralized by $85.7 million of bridge loans and participations, none of which are in default. RAIT FL3 issued classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $48.3 million to investors. All of the notes issued by this securitization are performing in accordance with their terms. We currently hold unrated classes of junior notes, including a class with an aggregate principal balance of $37.4 million, and the equity, or the retained interests, of RAIT FL3. • RAIT FL4—We closed RAIT FL4 in 2015. RAIT FL4 is collateralized by $149.4 million of bridge loans and participations, none of which are in default. RAIT FL4 issued classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $108.0 million. We currently hold the unrated classes of junior notes, including a class with an aggregate principal balance of $41.4 million, and the equity, or the retained interests, of RAIT FL4. • RAIT FL5—We closed RAIT FL5 in 2015. RAIT FL5 has $326.1 million of total collateral at par value, none of which is in default. RAIT FL5 has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $265.3 million to investors. In February 2016, we contributed our junior notes and equity of RAIT FL5 to a venture. The venture, in which we have retained a 60% interest, owns the unrated classes of junior notes and the equity, or the retained interests, of RAIT FL5. We received approximately $24.8 million of capital as a result of this contribution. In March 2016, we sold $23.0 million of investment grade notes. The unrated classes of junior notes have an aggregate principal balance of $60.8 million. • RAIT FL6—We closed RAIT FL6 in 2016. RAIT FL6 has $257.9 million of total collateral at par value, none of which is in default. RAIT FL6 has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $216.6 million to investors. In January 2017, we contributed our junior notes and equity of RAIT FL6 to a venture. The venture, in which we have retained a 60% interest, owns the unrated classes of junior notes and the equity, or the retained interests, of RAIT FL6. We received approximately $17.0 million of capital as a result of this contribution. The unrated classes of junior notes have an aggregate principal balance of $41.3 million. IRT Management Internalization Prior to the IRT management internalization on December 20, 2016, we externally advised IRT and through October 5, 2016, we consolidated IRT and owned approximately 15.5% of IRT’s outstanding common stock. As part of our strategy to focus on CRE lending described above, we entered into a securities and asset purchase agreement, or the IRT internalization agreement, with IRT on September 27, 2016, pursuant to which IRT completed a management internalization and separation from us, and we sold our interest in IRT. The IRT internalization agreement required IRT to repurchase our holdings of IRT common stock. On October 5, 2016, 70 IRT paid us approximately $62.2 million of the proceeds from an underwritten offering of IRT common stock, or the IRT October 2016 offering, to repurchase the 7,269,719 shares of IRT’s common stock from our subsidiaries at a purchase price of $8.55 per share. This purchase price was equal to the price to the public in the IRT October 2016 offering less underwriting discounts or commissions. The IRT repurchased shares represented all of the shares of IRT common stock we owned. We used approximately $43.7 million of the proceeds we received from selling our IRT common stock to repay seven mezzanine loans. Participation interests in these mezzanine loans were held as collateral for our consolidated securitization, RAIT II, and certain other legacy securitizations that we no longer consolidate. As a result of the IRT stock repurchase, RAIT determined that it no longer is the primary beneficiary of IRT, and as a result, RAIT deconsolidated IRT as of October 5, 2016. Prior to this deconsolidation, we identified IRT as one of our business segments. The IRT management internalization contemplated by the IRT internalization agreement was completed on December 20, 2016 and consisted of two parts: • An IRT affiliate purchased Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and • An IRT affiliate purchased identified assets and the assumed identified liabilities relating to our multifamily property management business which we refer to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties. The purchase price paid by IRT for the IRT management internalization was $43.0 million. Taberna Exit We disclosed in September 2014 that we were undertaking to exit our Taberna securitization segment, which included TCM’s business serving as collateral manager of three securitizations, which we refer to as T1, T8 and T9, and our holdings of securities issued by those securitizations. In December 2014, we assigned or delegated all of TCM’s remaining collateral management agreements to a third party. In 2015, we sold all of our holdings of the related securities. The December 2014 transactions resulted in our deconsolidation of T8 and T9, the two of these three securitizations we had previously consolidated. In September 2015, TCM entered into a settlement with the SEC to resolve a non-public investigation by the SEC staff into certain transactions by TCM included in the Taberna securitization segment. Our exit of the Taberna securitization segment did not include TRFT or any of TRFT’s subsidiaries that were not involved in the Taberna securitization segment. REIT Taxable Income To qualify as a REIT, we are required to make annual dividend payments to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, to avoid certain U.S. federal excise taxes, we are required to make dividend payments to our shareholders in an amount at least equal to 90% of our REIT taxable income for each year. Because we expect to pay dividends based on the foregoing requirements, and not based on our earnings computed in accordance with GAAP, we expect that our dividends may at times be more or less than our reported earnings as computed in accordance with GAAP. Our board of trustees monitors RAIT’s REIT taxable income and all available net operating losses not utilized in prior years. In May 2011, our board reinstated our regular quarterly dividends on our common shares. Our board of trustees reserves the right to change its dividend policy at any time or from time to time in its sole discretion but expects to continue to declare dividends in at least the amount necessary to maintain RAIT’s REIT status. Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income determined in accordance with GAAP as a measure of operating 71 performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Our total taxable income represents the aggregate amount of taxable income generated by us and by our domestic and foreign TRSs. REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP. REIT taxable income excludes the undistributed taxable income of our domestic TRSs, which is not included in REIT taxable income until distributed to us. Subject to TRS value limitations, there is no requirement that our domestic TRSs distribute their earnings to us. REIT taxable income, however, generally includes the taxable income of our foreign TRSs because we will generally be required to recognize and report our taxable income on a current basis. Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of dividends to our shareholders, we believe that presenting the information management uses to calculate REIT net taxable income is useful to investors in understanding the amount of the minimum dividends that we must make to our shareholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures as determined and reported by other companies. The table below reconciles the differences between reported net income (loss), total taxable income and estimated REIT taxable income for the three years ended December 31, 2016 (dollars in thousands): Net income (loss), as reported Add (deduct): Provision for losses Charge-offs on allowance for losses Domestic TRS book-to-total taxable income differences: Income tax provision (benefit) Stock compensation, forfeitures and other temporary tax differences Capital losses carryforward (offsetting capital gains) Gain on conversion of OP units Book to tax differences on gain from sale of assets Depreciation and amortization differences on real estate Capital losses not offsetting capital gains and other temporary tax differences Change in fair value of financial instruments, net of noncontrolling interests Net (gains) losses on deconsolidation of VIEs Amortization of intangible assets CDO investments aggregate book-to-taxable income differences (1) Convertible debt retirement premium Asset Impairments Other book to tax differences Total taxable income (loss) Taxable (income) loss attributable to domestic TRS entities Dividends paid by domestic TRS entities Allocable share of income from OP and tax partnerships Net income from IRT (net of taxable dividends received) Distributions designated as capital gain distributions Deductible preferred dividends (2) Deductible common dividends Net operating loss deduction For the Years Ended December 31 2016 2015 2014 $ 50,073 $ 63,493 $(289,975) 8,050 (2,810) 8,300 (416) 5,500 (11,254) 2,550 2,798 (2,147) 2,686 (32,500) — 8,122 24,076 3,123 — — 10,986 11,832 — — (731) — — — — — 5,946 (7,962) 6,561 (11,743) — 1,591 98,752 215,804 2,774 — — 38,337 (2,181) 100,948 (2,933) 39,030 — (33,149) (38,503) (19,201) (15,547) (30,645) — — — 9,716 99,680 (5,473) 5,886 — (29,267) (52,447) (7,996) (10,383) — (19,074) — — 4,362 4,011 12,397 5,086 — — — (21,494) — — Estimated REIT taxable income (loss) (3) $ — $ — $ — 72 (1) Amounts reflect the aggregate book-to-taxable income differences and are primarily comprised of (a) unrealized gains on interest rate hedges within CDO entities that TRFT consolidated, (b) amortization of original issue discounts and debt issuance costs and (c) differences in tax year-ends between TRFT and its CDO investments. (2) Dividends paid deduction for preferred dividends is limited to the lesser of (i) REIT taxable income, or (ii) amount of preferred dividends paid. (3) As of December 31, 2016, RAIT has an estimated net operating loss carryforward of approximately $40 million that may be used to offset its REIT taxable income in the future. For the year ended December 31, 2016, the tax classification of our dividends on common shares was as follows: Declaration Date 12/7/2015 3/14/2016 6/15/2016 9/19/2016 Record Date Payment Date Dividend Paid Ordinary Income Qualified Dividend Capital Gain Distribution Unrecaptured Sec. 1250 Gain Return of Capital 1/8/2016 4/8/2016 7/8/2016 10/7/2016 1/29/2016 4/29/2016 7/29/2016 10/31/2016 $0.0900 0.0900 0.0900 0.0900 $0.0427 0.0427 0.0427 0.0427 $0.0427 0.0427 0.0427 0.0427 $0.0473 0.0473 0.0473 0.0473 $0.3600 $0.1708 $0.1708 $0.1892 $0.0186 0.0186 0.0186 0.0186 $0.0744 $— — — — $— The preferred dividends that we paid in 2016 were classified as 47.44% ordinary dividend including 47.44% (of total preferred distributions) that was eligible for qualified dividend treatment and 52.56% as capital gain including 20.62% (of total) classified as unrecaptured Internal Revenue Code section 1250 gain. For the year ended December 31, 2015, the tax classification of our dividends on common shares was as follows: Declaration Date 12/18/2014 3/16/2015 6/22/2015 9/17/2015 Record Date Payment Date Dividend Paid Ordinary Income Qualified Dividend Capital Gain Distribution Unrecaptured Sec. 1250 Gain Return of Capital 1/9/2015 4/10/2015 7/10/2015 10/9/2015 1/30/2015 4/30/2015 7/31/2015 10/30/2015 $0.1800 0.1800 0.1800 0.1800 $0.0374 0.0374 0.0374 0.0374 $0.0107 0.0107 0.0107 0.0107 $0.0953 0.0953 0.0953 0.0953 $0.0385 0.0385 0.0385 0.0385 $0.0473 0.0473 0.0473 0.0473 $0.7200 $0.1496 $0.0428 $0.3812 $0.1540 $0.1892 The preferred dividends that we paid in 2015 were classified as 28.2% ordinary dividend including 8.1% (of total preferred distributions) that was eligible for qualified dividend treatment and 71.8% as capital gain including 29.0% (of total) classified as unrecaptured Internal Revenue Code section 1250 gain. For the year ended December 31, 2014, the tax classification of our dividends on common shares was as follows: Declaration Date 12/12/2013 3/18/2014 6/12/2014 9/15/2014 Record Date Payment Date Dividend Paid Ordinary Income Qualified Dividend 1/7/2014 4/4/2014 7/11/2014 10/7/2014 1/31/2014 4/30/2014 7/31/2014 10/31/2014 $0.1600 0.1700 0.1800 0.1800 $0.0031 0.0033 0.0035 0.0035 $0.0004 0.0005 0.0005 0.0005 $0.6900 0.0134 $0.0019 73 Capital Gain Distribution Unrecaptured Sec. 1250 Gain Return of Capital $— — — — $— $— — — — $— $0.1569 0.1667 0.1765 0.1765 $0.6766 The preferred dividends that we paid in 2014 were classified as 100% ordinary dividend including 12.4% (of total preferred distributions) that was eligible for qualified dividend treatment. Results of Operations Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Revenue Net interest margin. Net interest margin decreased $15.8 million, or 23%, to $53.4 million for the year ended December 31, 2016 from $69.2 million for the year ended December 31, 2015. Investment interest income decreased $9.2 million driven by lower interest income from $425.0 million of loan payoffs during 2016. Investment interest expense increased $6.6 million due to the RAIT FL5 securitization issued in December 2015 and increases in LIBOR partially offset by a decrease in interest expense due to a reduction in securitization- related indebtedness due to repayments of the underlying loans. Property income. Property income decreased $11.4 million to $112.8 million for the year ended December 31, 2016 from $124.2 million for the year ended December 31, 2015. The decrease is primarily attributable to $27.4 million of property income related to 30 properties disposed of or deconsolidated after January 1, 2015, partially offset by the following: i) $1.9 million of property income from 5 new properties acquired or consolidated since December 31, 2015; ii) $13.4 million of property income from 11 properties acquired during the year ended December 31, 2015 present for a full year of operation in 2016; and iii) $0.7 million of property income from improved occupancy and rental rates in 2016 as compared to 2015 in the remaining properties. Fee and other income. Fee and other income decreased $10.9 million to $7.4 million for the year ended December 31, 2016 from $18.3 million for the year ended December 31, 2015. The decrease is primarily attributable to a decrease of $3.9 million of fee income at our retail and office property management company, a decrease in CMBS income of $6.3 million, and a decrease in application fee income from our lending business of $0.7 million during the year ended December 31, 2016 as compared to the same period in 2015. Expenses Interest expense. Interest expense decreased $6.8 million to $55.0 million for the year ended December 31, 2016 from $61.8 million for the year ended December 31, 2015. This decrease is primarily attributable to a $4.2 million decrease in interest expense related to pay downs of our convertible and senior notes that occurred in 2016 as well as a $2.1 million decrease in interest expense related to pay downs on our CDO notes. Real estate operating expense. Real estate operating expense decreased $5.8 million to $56.9 million for the year ended December 31, 2016 from $62.7 million for the year ended December 31, 2015. The decrease is primarily attributable to $15.3 million of real estate operating expenses related to 30 properties disposed of or deconsolidated after January 1, 2015, partially offset by the following: i) $0.8 million of real estate operating expenses from 5 properties acquired since December 31, 2015; and ii) $8.5 million of real estate operating expenses from 11 properties acquired during the year ended December 31, 2015 present for a full year of operation in 2016. Property management expense. Property management expense increased $0.2 million to $9.5 million for the year ended December 31, 2016 from $9.3 million for the year ended December 31, 2015. Compensation expense. Compensation expense increased $3.1 million to $18.4 million for the year ended December 31, 2016 from $15.3 million for the year ended December 31, 2015. This is primarily due to less compensation expense being deferred as direct loan origination costs due to a lower volume of loan originations during 2016. 74 General and administrative expense. General and administrative expense decreased $1.4 million to $13.3 million for the year ended December 31, 2016 from $14.7 million for the year ended December 31, 2015. This decrease is primarily due to a $1.2 million decrease in professional fees. Acquisition expense. Acquisition expense decreased $1.7 million to $0.6 million for the year ended December 31, 2016 from $2.3 million for the year ended December 31, 2015. This decrease was attributable to a decrease in dead deal costs for the year ended December 31, 2016 as compared to the same period in 2015. Provision for loan losses. Provision for loan losses decreased $0.2 million to $8.1 million for the year ended December 31, 2016 from $8.3 million for the year ended December 31, 2015. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and recognize additional provisions for loan losses as circumstances or conditions change. Depreciation and amortization expense. Depreciation and amortization expense increased $5.8 million to $51.3 million for the year ended December 31, 2016 from $45.5 million for the year ended December 31, 2015. The increase is primarily attributable to $5.3 million of accelerated amortization expense on our customer relationships intangible assets. The remaining increase primarily relates to $0.9 million of depreciation and amortization expense from 5 new properties acquired or consolidated since December 31, 2015 and $9.0 million of depreciation and amortization expenses from 11 properties acquired during the year ended December 31, 2015 present for a full year of operation in 2016, partially offset by a decrease of $9.6 million of depreciation and amortization expense related to 30 properties that were disposed of or deconsolidated after January 1, 2015. IRT internalization expense. During the year ended December 31, 2016, we incurred $6.3 million of expense related to stock based compensation and bonuses attributable to the internalization of IRT. Other income (expense) Gains (losses) on assets. During the year ended December 31, 2016, sixteen multifamily properties, one office building and one parcel of land were sold resulting in a net gain of $53.3 million. Gain on extinguishment of debt. During the year ended December 31, 2016, we recognized a gain on extinguishment of debt of $1.3 million. This includes a $2.3 million gain on the extinguishment of the mortgage indebtedness on three of our multifamily properties upon their sale as they were sold for less than their outstanding indebtedness and the outstanding indebtedness has been satisfied. This was offset by a loss on the extinguishment of debt of $1.3 million related to repurchases and redemptions of our indebtedness, primarily driven by the write-off of the unamortized deferred financing costs associated with the indebtedness. Asset impairment. During the year ended December 31, 2016, we recognized impairment of $25.2 million on five office properties, one retail property, and five multifamily properties that are expected to be sold. We also expensed tenant improvements and straight-line rent receivables aggregating $1.7 million associated with tenants that vacated our properties early. We also recognized a loss on our retail property management subsidiary’s investment in an unconsolidated entity of $0.9 million and recognized impairment of $10.0 million on ten of our industrial properties because they are expected to be disposed of at a loss before the end of their useful lives. Our exposure to this industrial portfolio began with a mezzanine loan originated in 2006 which we converted to real estate owned in late 2015. 75 Change in fair value of financial instruments. During the year ended December 31, 2016, the change in fair value of financial instruments decreased our net income by $5.9 million. The fair value adjustments we recorded were as follows (dollars in thousands): Description Change in fair value of trading securities and security-related receivables Change in fair value of junior subordinated notes Change in fair value of derivatives Change in fair value of warrants and investor SARs Change in fair value of financial instruments For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 $ — (1,318) (428) (4,200) $(5,946) $ (172) 2,598 28 9,184 $11,638 The changes in the fair value for the trading securities and security-related receivables and the junior subordinated notes was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives was primarily due to changes in interest rates. The change in fair value of the warrants and investor SARs was primarily due to changes in the reference stock price and volatility. Income tax benefit (provision). For the year ended December 31, 2016, the income tax provision was driven by taxable income generated from the IRT management internalization transaction and recording a valuation allowance against our net deferred tax assets related to our other taxable operations. For the year ended December 31, 2015, the income tax provision was driven by the profitable performance of our taxable operations. Income (loss) from discontinued operations. During the year ended December 31, 2016, income (loss) from discontinued operations reflected recurring activity from our discontinued operations including a full year of IRT’s ownership of the TSRE portfolio, which was the primary driver behind a $13.9 million improvement in IRT’s operating income in 2016 as compared to 2015 and IRT’s gains on the sales of three of its real estate assets of $32.3 million in 2016. During the year ended December 31, 2015, income (loss) from discontinued operations reflected recurring activity from our discontinued operations as well as IRT’s gain on the TSRE merger of $64.6 million, net of financing extinguishment and employee separation expenses related to the TSRE merger of $27.5 million and acquisition and integration expenses of $13.2 million. Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Revenue Net interest margin. Net interest margin decreased $33.9 million to $69.2 million for the year ended December 31, 2015 from $103.1 million for the year ended December 31, 2014. The primary drivers of the decrease in net interest margin include a $22.8 million decrease resulting from the deconsolidation of the T8 and T9 securitizations in December 2014, a $15.6 million decrease associated with loan payoffs during 2014 and 2015, an $8.5 million decrease associated with loans that converted to real estate in 2014 and 2015 and a $14.9 million decrease resulting from non-recurring transactions that occurred in 2014 with no such transactions occurring in 2015. These decreases were partially offset by $31.4 million of interest income on new loans funded during 2014 and 2015. Rental income. Rental income increased $11.1 million to $124.2 million for the year ended December 31, 2015 from $113.1 million for the year ended December 31, 2014. The increase is primarily attributable to $1.6 million of rental income from 11 new properties acquired or consolidated since December 31, 2015, $10.1 million from the properties acquired during the year ended December 31, 2014 present for a full year of operations in 2015 and $5.8 million from improved occupancy and rental rates in 2015 as compared to 2014 in 76 our other consolidated properties. The increase was partially offset by $6.4 million of rental income related to properties that were disposed or deconsolidated since December 1, 2014. Fee and other income. Fee and other income decreased $3.7 million to $18.3 million for the year ended December 31, 2015 from $22.0 million for the year ended December 31, 2014. The decrease is primarily attributable to a $2.2 million decrease in conduit fee income generated during the year ended December 31, 2015 as compared to the year ended December 31, 2014 as a result of the market conditions described in “Overview” and a $1.0 million decrease in collateral management fees due to the sale of collateral management contracts in December 2014, and a $0.4 million decrease in fee income earned by our multifamily property management company. Expenses Interest expense. Interest expense increased $13.9 million to $61.8 million for the year ended December 31, 2015 from $47.9 million for the year ended December 31, 2014. This increase is primarily attributable to $4.9 million of interest expense from the increase in our loans payable on real estate, $1.3 million related to our 7.625% senior notes issued in April 2014, $3.2 million related to our 7.125% senior notes issued in August 2014, and $5.0 million related to our senior secured notes present in 2015 but previously eliminated in consolidation with the Taberna securitizations. Real estate operating expense. Real estate operating expense increased $2.8 million to $62.7 million for the year ended December 31, 2015 from $59.9 million for the year ended December 31, 2014. The increase is primarily attributable to $0.2 million of real estate operating expenses from 11 new properties acquired or consolidated since December 31, 2015 and $4.8 million from the properties acquired during the year ended December 31, 2014 present for a full year of operations in 2015. The increase was partially offset by $1.1 million from improved efficiency in 2015 as compared to 2014 in our other consolidated properties and $3.3 million of real estate operating expenses related to properties that were disposed or deconsolidated after December 31, 2014. Compensation expense. Compensation expense decreased $0.6 million to $15.3 million for the year ended December 31, 2015 from $15.9 million for the year ended December 31, 2014. This decrease is primarily attributable to less compensation expense being deferred as direct loan origination costs due to a lower volume of loan originations during 2015. General and administrative expense. General and administrative expense increased $1.2 million to $14.7 million for the year ended December 31, 2015 from $13.5 million for the year ended December 31, 2014. This increase is primarily attributable to an increase of $1.5 million in professional service fees. Acquisition and integration expense. Acquisition and integration expense increased $1.8 million to $2.3 million for the year ended December 31, 2015 from $0.5 million for the year ended December 31, 2014. This increase was primarily attributable to an increase in dead deal costs in the year ended December 31, 2015 compared to the same period in 2014. Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan portfolios. The provision for losses increased by $2.8 million for the year ended December 31, 2015 to $8.3 million as compared to $5.5 million for the year ended December 31, 2014. Our provisioning for loan losses increased primarily related to an increase in the number of impaired loans during the year. While our non-accrual loans decreased to 2.2% of our loan portfolio, the increase in our impaired loans as of December 31, 2015 was principally related to a first-mortgage loan, which was collateralized by seven properties with an unpaid principal balance of $74.8 million. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and recognize additional provisions for loan losses as circumstances or conditions change. 77 Depreciation and amortization expense. Depreciation and amortization expense increased $1.5 million to $45.5 million for the year ended December 31, 2015 from $44.0 million for the year ended December 31, 2014. The increase is primarily attributable to $0.9 million of depreciation and amortization from 11 new properties acquired or consolidated since December 31, 2015, and $3.1 million from the properties acquired during the year ended December 31, 2014 present for a full year of operations in 2015. The increase was partially offset by $2.3 million of depreciation and amortization expense related to properties that were disposed or deconsolidated after December 31, 2014. Other income (expense) Other income (expense). During the year ended December 31, 2014, other income (expense) included a $21.5 million settlement charge relating to our agreement in principle to settle the SEC investigation of TCM. During the year ended December 31, 2015, other income (expense) included additional legal costs associated with the settlement of the SEC investigation of TCM. In September 2015, this matter was settled with SEC for $21.5 million. Gains (losses) on assets. During the year ended December 31, 2015, gains (losses) on assets included $37.4 million primarily related to the dispositions of six multifamily properties, one office property, and two parcels of land. During the year ended December 31, 2014, gains (losses) on assets included a $7.7 million loss on sale of an asset held by T8 and T9 which resulted from the illiquid nature of the investment, a $3.0 million charge off for certain assets that were previously disposed of and a $0.3 million loss related to the disposition of a real estate property. This was partially offset by a $5.7 million gain on property acquisitions in 2014 as the fair value of the properties acquired exceeded the purchase price. Gains (losses) on extinguishment of debt. Gains (losses) on extinguishment of debt during the year ended December 31, 2014 was due to the repurchase of $5.8 million principal amount of RAIT I debt from the market for $3.4 million. Asset Impairment. During the year ended December 31, 2015, we recognized asset impairment on real estate assets of $8.2 million as we determined it was more likely than not that we would dispose of the assets before the end of their previously estimated useful lives and a portion of our recorded investment in those assets was determined not to be recoverable. Gains (losses) on deconsolidation of VIEs. On December 19, 2014, our subsidiary assigned or delegated its rights and responsibilities as collateral manager for the consolidated T8 and T9 securitizations. As of that date, we no longer were the collateral manager for these securitizations. As a result, we determined that we were no longer the primary beneficiary of T8 and T9, deconsolidated the two securitizations on that date and incurred a loss of $215.8 million. Net gain on sale of collateral management contracts. On December 19, 2014, our subsidiary assigned or delegated its rights and responsibilities as collateral manager for three securitizations, which we refer to as T1, T8 and T9, included in the Taberna business which we exited in December 2014. We recorded a gain of $4.5 million, net of severance and other costs associated with exiting the Taberna collateral management business. Change in fair value of financial instruments. During the year ended December 31, 2015, the change in fair value of financial instruments increased our net income by $11.6 million. During the year ended December 31, 78 2014, the change in fair value of financial instruments reduced our net income by $98.8 million. The fair value adjustments we recorded were as follows (dollars in thousands): Description Change in fair value of trading securities and security-related receivables Change in fair value of CDO notes payable, trust preferred obligations and junior subordinated notes Change in fair value of derivatives Change in fair value of warrants and investor SARs For the Year Ended December 31, 2015 For the Year Ended December 31, 2014 $ (172) $ 10,682 2,598 28 9,184 (101,675) (16,352) 8,593 Change in fair value of financial instruments $11,638 $ (98,752) The changes in the fair value for the trading securities and security-related receivables, CDO notes payable, and other liabilities for which the fair value option was elected was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was also due to required repayments at par of senior CDO notes due to OC failures when the CDO notes being repaid have a fair value of less than par. The changes in the fair value of derivatives was primarily due to changes in interest rates. The change in fair value of the warrants and investor SARs was primarily due to changes in the reference stock price and volatility. Income tax benefit (provision). Income tax benefit (provision) for the year ended December 31, 2015 decreased net income by $2.8 million due to the profitable performance of our taxable operations. During 2015, we utilized net operating loss carryforwards to reduce our current tax expense, however this was offset by the recognition of a deferred tax expense associated with the utilization of net operating loss carryforwards. Income tax benefit (provision) for the year ended December 31, 2014 increased net income by $2.1 million due to the reversal of a valuation allowance associated with deferred tax assets recorded for net operating loss carryforwards. Income (loss) from discontinued operations. During the year ended December 31, 2015, income (loss) from discontinued operations reflected recurring activity from our discontinued operations as well as IRT’s gain on the TSRE merger of $64.6 million, net of financing extinguishment and employee separation expenses related to the TSRE merger of $27.5 million and acquisition and integration expenses of $13.2 million. During the year ended December 31, 2014 income (loss) from discontinued operations reflected recurring activity from our discontinued operations which was driven by $4.5 million of operating income at IRT. Non-GAAP Financial Measures Cash Available for Distribution Cash available for distribution, or CAD, is a non-GAAP financial measure. We believe that CAD provides investors, analysts and management with a meaningful indicator of operating performance. Management also uses CAD, among other measures, to evaluate profitability and our board of trustees considers CAD in determining our quarterly cash distributions. The compensation committee of our board used CAD as a performance metric in establishing performance-based compensation awards for 2016 and 2015 for some of our executive officers. We also believe that CAD is useful because it adjusts for a variety of noncash items (such as depreciation and amortization, equity-based compensation, realized gain (loss) on assets, provision for loan losses and non-cash interest income and expense items). Furthermore, CAD removes the effect of two securitizations, which we refer to as T8 and T9, which we consolidated until we exited the Taberna business in December 2014. 79 We calculate CAD by subtracting from or adding to net income (loss) attributable to common shareholders the following items: depreciation and amortization items including, depreciation and amortization, straight-line rental income or expense, amortization of in place leases, amortization of deferred financing costs, amortization of discount on financings and equity-based compensation; changes in the fair value of our financial instruments, including such changes reflected in T8 and T9; net interest income from T8 and T9; realized gains (losses) on assets; provision for loan losses; asset impairments; acquisition gains or losses and transaction costs; certain fee income eliminated in consolidation that is attributable to third parties; and one-time events pursuant to changes in GAAP and certain other non-recurring items. In the quarter ended March 31, 2016, we changed our method of calculating CAD to exclude the impact of real property sales from CAD. We made this change in response to investor feedback to focus CAD on our core business activities. In addition, we provide guidance regarding our expected CAD in future periods and this change removes variability resulting from the ultimate timing of future property sales. We have amended our comparable prior period disclosures to conform with the current period presentation for this change. CAD should not be considered as an alternative to net income (loss) or cash generated from operating activities, determined in accordance with GAAP, as an indicator of operating performance. For example, CAD does not adjust for the accrual of income and expenses that may not be received or paid in cash during the associated periods. Please refer to our consolidated financial statements prepared in accordance with GAAP in Part II, Item 8, “Financial Statements and Supplementary Data.” In addition, our methodology for calculating CAD may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies. Set forth below is a reconciliation of CAD to net income (loss) allocable to common shares for the years ended December 31, 2016, 2015, and 2014 (dollars in thousands, except share information). The reconciliation of CAD to net income (loss) for the years ended December 31, 2015 and 2014 has been conformed to reflect the presentation of IRT, IRT’s external advisory and our multifamily property management business as discontinued operations. The calculation of CAD was not affected by this change in presentation. Please see Part II, Item 8, 80 “Financial Statements and Supplementary Data—Note 9: Discontinued Operations” for further information regarding the presentation of these entities or distinguishable components of RAIT as discontinued operations. Cash Available for Distribution: Net income (loss) allocable to common shares Adjustments: Depreciation and amortization expense Change in fair value of financial instruments (Gains) losses on assets (Gains) losses on deconsolidation of VIEs (Gains) losses on extinguishment of debt T8 and T9 securitizations, net effect Deferred income tax (benefit) provision Straight-line rental adjustments Equity-based compensation Acquisition and integration expenses Origination fees and other deferred items Provision for losses IRT internalization and management transition expenses Asset impairment Discontinued operations and noncontrolling interest effect of certain adjustments For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 For the Year Ended December 31, 2014 Per Share (1) Amount Amount Per Share (2) Amount Per Share (3) $ (9,820) $(0.11) $ 7,158 $ 0.08 $(318,504) $(3.92) 51,304 0.56 45,505 0.54 44,006 0.54 5,946 (53,272) 0.07 (0.58) (11,638) (37,393) (0.14) (0.44) 98,752 8,252 1.21 0.10 — (1,331) — 2,213 (1,369) 3,396 624 34,063 8,050 — (0.01) — 0.02 (0.02) 0.04 0.01 0.37 0.09 6,271 37,785 0.07 0.41 — — — 2,484 95 3,970 2,332 32,093 8,300 — 8,179 — — — — 0.05 0.03 0.38 0.10 0.10 215,804 (2,421) (26,931) — 1,111 4,201 526 24,489 5,500 — — 2.66 (0.03) (0.33) 0.01 0.05 0 0.30 0.07 — (43,272) (0.47) 5,061 0.06 2,739 0.03 Cash Available for Distribution $ 40,588 $ 0.45 $ 66,146 $ 0.77 $ 57,524 $ 0.71 (1) (2) (3) Based on 91,153,861 weighted-average shares outstanding for the year ended December 31, 2016. Based on 85,524,073 weighted-average shares outstanding for the year ended December 31, 2015. Based on 81,328,129 weighted-average shares outstanding for the year ended December 31, 2014. Funds from Operations We believe that funds from operations, or FFO, which is a non-GAAP financial measure, is an additional appropriate measure of the operating performance of a REIT. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss allocated to common shares (computed in accordance with GAAP), excluding real estate-related depreciation and amortization expense, gains or losses on sales of real estate and the cumulative effect of changes in accounting principles. Our management utilizes FFO as a measure of our operating performance. FFO is not an equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. FFO should not be considered as an alternative to net income or as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity. 81 In the quarter ended September 30, 2016, we changed our method of calculating FFO to exclude the impact of asset impairment. We have amended our comparable prior period disclosures to conform with the current period presentation for this change. Set forth below is a reconciliation of FFO to net income (loss) allocable to common shares for the years ended December 31, 2016, 2015, and 2014 (dollars in thousands, except share information). The reconciliation of FFO to net income (loss) for the years ended December 31, 2015 and 2014 has been conformed to reflect the presentation of IRT, IRT’s external advisory and our multifamily property management business as discontinued operations. The calculation of FFO was not affected by this change in presentation. Please see Part II, Item 8, “Financial Statements and Supplementary Data—Note 9: Discontinued Operations” for further information regarding the presentation of these entities or distinguishable components of RAIT as discontinued operations. For the Year Ended December 31, 2016 Per Share (1) Amount For the Year Ended December 31, 2015 Per Share (2) Amount For the Year Ended December 31, 2014 Per Share (3) Amount $ (9,820) $(0.11) $ 7,158 $ 0.08 $(318,504) $(3.92) 35,570 (53,272) 37,785 0.39 (0.58) 0.41 36,951 (37,102) 8,179 0.43 (0.43) 0.10 35,882 319 — 0.44 — — Funds From Operations: Net income (loss) allocable to common shares Adjustments: Real estate depreciation and amortization (Gains) losses on the sale of real estate Asset impairment Adjustments related to discontinued operations (1,747) (0.02) (2,267) (0.03) 2,738 0.03 Funds From Operations $ 8,516 $ 0.09 $ 12,919 $ 0.15 $(279,565) $(3.44) (1) Based on 91,153,861 weighted-average shares outstanding for the year ended December 31, 2016. (2) Based on 85,524,073 weighted-average shares outstanding for the year ended December 31, 2015. (3) Based on 81,328,129 weighted-average shares outstanding for the year ended December 31, 2014. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs. See “Part I- Item 1. Business” above, or the business description, which is incorporated herein by reference, for further description of our targeted capital structure strategy which is part of our transformative strategy to return to our core strategy of focusing primarily on being a CRE lender. During 2016, we made significant progress towards this targeted capital structure in a number of areas. We made progress in deleveraging as proceeds from asset sales have been used to reduce our overall indebtedness. In 2016 and January 2017, we repaid approximately $56.7 million and $17.3 million, respectively, of our unsecured debt obligations and approximately $760.0 million and $84.0 million, respectively, of our secured debt obligations. In addition, during 2016, the payoff of our legacy CDOs has accelerated and leverage (excluding IRT) has been reduced. See “Securitization Summary” above for further discussion of our strategy with respect to our legacy CDOs. We have also implemented expense reduction strategies through structural changes resulting from the IRT management internalization, the contemplated divestiture of Urban Retail and divestiture of our CRE portfolio which we expect will lead to lower asset management costs and reduce our ratio of compensation and G&A expenses to our equity over time and thereby enhance our liquidity. We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months and the foreseeable future. 82 Our primary cash requirements are as follows: • • • • • to make investments and fund the associated costs; to repay our indebtedness, including repurchasing, redeeming or retiring our debt before it becomes due; to pay our expenses, including compensation to our employees; to pay U.S. federal, state, and local taxes of our TRSs; and to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT. We intend to meet these liquidity requirements primarily through the following: • • • • • • the use of our cash and cash equivalent balances of $110.5 million as of December 31, 2016; cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our commercial real estate platform; proceeds from the sales of assets, including the property sales described in “Overview” above; proceeds from future borrowings, including our CMBS facilities and loan participations; proceeds from alternative sources of financing, such as joint ventures or sales of our retained interests in securitizations we sponsor; and proceeds from future offerings of our securities, including through our DRSPP and ATM programs discussed below. Cash Flows As of December 31, 2016 and 2015, we maintained cash and cash equivalents of $110.5 million and $87.5 million, respectively. Our cash and cash equivalents, inclusive of cash and cash equivalents related to discontinued operations, were generated from the following activities (dollars in thousands): Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash and cash equivalents Net change in cash and cash equivalents from discontinued operations Cash and cash equivalents at beginning of period For the Years Ended December 31 2016 2015 2014 $ 109,232 609,447 (734,034) $ 87,871 (403,112) 319,401 $ 49,309 (635,102) 618,672 (15,355) 4,160 32,879 38,305 87,581 (23,542) 106,963 (11,429) 85,513 Cash and cash equivalents at end of period $ 110,531 $ 87,581 $ 106,963 Cash flows from operating activities for the year ended December 31, 2016, as compared to the same period in 2015, increased $22.2 million primarily due to the timing of payments for various accounts payable, accrued expenses and other liabilities, and a decrease in accrued interest receivable that related to the payoff of loans whose accrual of interest accrual terms differed from their current payment terms. Cash flows from operating activities for the year ended December 31, 2015, as compared to the same period in 2014, increase primarily due to sales of conduit loans outpacing the originations of conduit loans during 2015 as compared to 2014 where originations of conduit loans outpaced sales of conduit loans. 83 The cash inflow for investing activities for the year ended December 31, 2016 was substantially due to the disposal of discontinued operations for $43.0 million, proceeds from property dispositions of $317.4 million as well as loan repayments of $425.0 million outpacing new investments in loans of $154.2 million. The cash outflow for investing activities for the year ended December 31, 2015 is substantially due to new investments in loans of $598.1 million exceeding loan repayments of $291.2 million as well as acquisitions of real estate properties and capital expenditures on real estate assets of $189.6 million. These cash outflows were partially offset by proceeds from the disposition of real estate assets of $87.6 million. The cash outflow for investing activities for the year ended December 31, 2014 is substantially due to new investments in loans of $509.3 million which exceeded loan repayments of $156.3 million. We also had cash outflows of $367.3 million due to the acquisition of real estate properties and capital expenditures in our owned real estate assets. These cash outflows were partially offset by payoffs we received for our investment in securities totaling $49.0 million for the year ended December 31, 2014. The cash outflow from our financing activities during the year ended December 31, 2016 was primarily due to repayments and repurchases of indebtedness, net of issuances, of $1,103.1 million and distributions to shareholders and noncontrolling interests of $81.2 million exceeding proceeds from the issuance of indebtedness of $470.7 million. The cash inflow from our financing activities during the year ended December 31, 2015 is primarily due to proceeds from credit facilities and term loans of $488.7 million (primarily obtained through IRT’s acquisition of TSRE) and proceeds from our CDO notes and floating rate securitizations of $476.2 exceeding repayments on our credit facilities, loans on real estate, and CDO notes of $557.4 million and distributions to preferred and common shareholders of $84.7 million. The cash inflow from our financing activities during the year ended December 31, 2014 is primarily due to the issuance of our preferred shares and common shares for $134.9 million, the issuance of noncontrolling interests of $187.8 million, and proceeds from the issuance of indebtedness, net of repayments, of $411.9 million exceeding distributions to preferred and common shareholders and noncontrolling interests of $99.4 million. As a REIT, we evaluate our dividend coverage based on our cash flow from operating activities, excluding acquisition and integration expenses, the origination and sale of conduit loans, and changes in assets and liabilities. During the year ended December 31, 2016, we paid distributions to our preferred shareholders, common shareholders, and noncontrolling interests of $81.2 million and generated cash flows from operating activities, before acquisition expenses, origination and sale of conduit loans, and changes in assets and liabilities of $72.6 million. The $8.6 million of excess distributions was funded through cash flows from the disposition of real estate assets, which is included in cash flows from investing activities in the consolidated statements of cash flows and totaled $317.4 million during the year ended December 31, 2016. Capitalization A discussion of our capitalization is incorporated by reference to Note 5: Indebtedness, Note 11: Series D Preferred Shares and Note 12: Shareholders’ Equity of Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.” Critical Accounting Estimates and Policies We consider the accounting policies discussed below to be critical to an understanding of how we report our financial condition and results of operations because their application places the most significant demands on the judgment of our management. Our financial statements are prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The items that include significant estimates are fair value of financial instruments and allowance for loan losses. Actual results could differ from those estimates. 84 Revenue Recognition for Interest Income. We recognize interest income from investments in commercial mortgage loans, mezzanine loans, and preferred equity interests on a yield to maturity basis. Some of our commercial mortgage loans and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management will cease accruing interest on these loans when it determines that the interest income is not collectible based on the ultimate value of the underlying collateral using discounted cash flow models and market based assumptions. Recognition of Rental Income. We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease. Recognition of Fee and Other Income. We generate fee and other income through our various subsidiaries by (a) funding conduit loans for sale into unaffiliated CMBS securitizations, (b) providing or arranging to provide financing to our borrowers, (c) providing ongoing asset management services to investment portfolios under cancelable management agreements, and (d) providing property management services to third parties. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from securitizations while such securitizations are consolidated. Allowance for Loan Losses, Impaired Loans and Non-accrual Status. We maintain an allowance for loan losses on our investments in commercial mortgage loans and mezzanine loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for loan losses is increased by charges to operations and decreased by charge-offs (net of recoveries). We charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure. We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible. Investments in Real Estate. Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been evaluated to improve the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements—30 to 40 years; furniture, fixtures, and equipment—5 to 10 years; and tenant improvements—shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred. 85 Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Transaction costs and fees incurred related to acquisitions are expensed as incurred. Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term. The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period. Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Transfers of Financial Assets. We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings. Derivative Instruments. We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such 86 amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges are recognized in earnings. Fair Value of Financial Instruments. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows: • Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment. • Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs. • Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Generally, assets and liabilities carried at fair value and included in this category are TruPs and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist. The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of 87 prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3. Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value. Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions. For further discussion on fair value of our financial instruments, see Item 8- “Financial Statements and Supplementary Data. Note 7: Fair Value of Financial Instruments.” Off-Balance Sheet Arrangements and Commitments As of December 31, 2016 we did not have any off-balance sheet arrangements or commitments other than those disclosed in “Contractual Commitments” below. Contractual Commitments The table below summarizes our contractual obligations as of December 31, 2016 (dollars in thousands): Recourse indebtedness: Convertible senior notes (1) Senior notes Senior secured notes Junior subordinated notes CMBS facilities Total $ 126,969 128,018 62,000 43,771 26,421 Payment due by Period Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years $ — $ — $ — $ 126,969 57,287 — 43,771 — — 31,000 — — 70,731 31,000 — 26,421 — — — — Total recourse indebtedness 387,179 31,000 128,152 — 228,027 Non-recourse indebtedness CDO notes payable CMBS securitization Loans payable on real estate 542,316 647,921 186,237 — — 115,293 Total non-recourse indebtedness 1,376,474 115,293 Total indebtedness Interest payable (2) (3) Operating lease obligations Funding commitments to borrowers (4) 1,763,653 643,374 30,651 13,760 146,293 49,366 1,598 6,880 — — 2,702 2,702 130,854 84,456 3,482 6,880 — — 36,082 36,082 36,082 70,217 2,426 — 542,316 647,921 32,160 1,222,397 1,450,424 439,337 23,145 — Total $2,451,440 $204,137 $225,672 $108,725 $1,912,906 88 (1) Our 7.0% convertible senior notes are redeemable, at par at the option of the holder, in April 2021 and April 2026. Our 4.0% convertible senior notes are redeemable, at par at the option of the holder, in October 2018, October 2023, and October 2028. (2) All variable-rate indebtedness assumes a 30-day LIBOR rate of 0.77%, which was the 30-day LIBOR rate (3) at December 31, 2016. Interest payable is comprised of interest expense related to our indebtedness and the interest cost of the hedges associated with indebtedness. Interest payments related to recourse indebtedness are due by period as follows: $20.3 million-less than one year, $33.7 million-one to three years, $22.5 million-three to five years and $94.0 million-more than five years. Interest payments related to non-recourse indebtedness are due by period as follows: $29.1 million-less than one year, $50.8 million-one to three years, $47.8 million- three to five years and $345.3 million-more than five years. Interest payable on non-recourse, securitization related notes assumes no collateral repayments and that interest is paid on the amount outstanding as of December 31, 2016 through the respective maturity dates. (4) Amounts represent the commitments we have made to fund borrowers in our existing lending arrangements as of December 31, 2016. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk results primarily from changes in the credit risks of our portfolio and changes in interest rates. We are exposed to credit risk and interest rate risk related to our investments in commercial mortgage loans and mezzanine loans and debt instruments. Credit Risk Management Credit risk is the risk of loss arising from adverse changes in a borrower’s ability to meet its financial obligations under agreed-upon terms. The degree of credit risk varies based on many factors including the concentration of the asset or transaction relative to our entire portfolio, the credit characteristics of the borrower, the contractual terms of a borrower’s agreements and the availability and quality of collateral. Our senior management regularly evaluates and approves credit standards and oversees the credit risk management function related to our portfolio of investments. Our senior management’s responsibilities include ensuring the adequacy of our credit risk management infrastructure, overseeing credit risk management strategies and methodologies, monitoring conditions in real estate and other markets having an impact on our lending activities and evaluating and monitoring overall credit risk. Credit Summary and Concentrations of Credit Risk Our investment portfolio had the following key credit statistics as of December 31, 2016: Commercial real estate loans—We had seven loans on non-accrual status, most of which were originated prior to 2008, with a carrying value of $121.0 million, or 9.3% of our commercial real estate loan portfolio. Our allowance for losses for our commercial loan portfolio was $12.4 million, or 10% of our non-accrual loans and pertained to loans with an unpaid principal balance of $152.4 million. In our normal course of business, we engage in lending activities with borrowers throughout the United States. As of December 31, 2016, no single borrower or collateral issuer represented greater than 10% of our entire portfolio. The largest concentration by property type in our commercial mortgage loans and mezzanine loan portfolio was office property, which made up approximately 39% of our commercial mortgage loan and mezzanine loan portfolio. For further information on each of our portfolios, please refer to the portfolio summaries in Item 1—“Business”. We also seek to mitigate the risk of default by borrowers on our floating rate loans in the event of significant increases in the applicable interest rates by seeking to have these borrowers enter into interest rate swap agreements capping their exposure to such increases. 89 Interest Rate Risk Management Interest rates may be affected by economic, geo-political, monetary and fiscal policy, market supply and demand and other factors generally outside our control, and such factors may be highly volatile. Our interest rate risk sensitive assets and liabilities and derivatives will be typically held for long-term investment and not held for sale purposes. Historically, we have used securitizations to finance our investments to limit interest rate risk by matching the terms of our investment assets with the terms of our liabilities and, to the extent necessary, through the use of hedging instruments. We intend to reduce interest rate and funding risk, allowing us to focus on managing credit risk through our underwriting process and continual credit analysis. As expected, during 2016, interest rate swap agreements relating to RAIT I and RAIT II terminated in accordance with their terms. We make investments that are either floating rate or fixed rate. Our floating rate investments will generally be priced at a fixed spread over an index such as LIBOR that re-prices either quarterly or every 30 days. Given the frequency of future price changes in our floating rate investments, changes in interest rates are not expected to have a material effect on the value of these investments. Increases or decreases in LIBOR will have a corresponding increase or decrease in our interest income and the match-funded interest expense, thereby reducing the net earnings impact on our overall portfolio. Our interest income is also protected from decreases in interest rates due to interest rate floors on our investments in commercial mortgage loans and mezzanine loans. In the event that long-term interest rates increase, the value of our fixed-rate investments would be diminished. We may consider hedging this risk in the future if the benefit outweighs the cost of the hedging strategy. Such changes in interest rates would not have a material effect on the income from these investments. As of December 31, 2016, we use a limited number of interest rate-related derivatives to hedge fixed and variable cash flows associated with our loans. These derivatives have an aggregate notional value of $44.1 million and are used to swap the fixed cash flows associated with fixed rate loans into variable-rate payments or cap variable rate cash flows over the lives of the loans. As of December 31, 2016, the interest rate-related derivatives had an aggregate asset fair value of $0.2 million. These derivatives are not designated in hedging relationships. Changes in the fair value of these instruments that are not designated as hedges under FASB ASC Topic 815, “Derivatives and Hedging” are recorded in earnings. These derivatives have been excluded from the table below as their impact to our interest rate risk under the scenarios presented in the table is insignificant. The following table summarizes the interest income and interest expense for a 12-month period, and the change in the net fair value of our investments and indebtedness assuming an instantaneous increase or decrease of 100 basis points in the LIBOR interest rate curve, both adjusted for the effects of our interest rate hedging activities (dollars in thousands): Assets (Liabilities) Subject to Interest Rate Sensitivity (Par Amount) 100 Basis Point Increase 100 Basis Point Decrease (a) 200 Basis Point Increase 200 Basis Point Decrease (a) Interest income from variable-rate investments . . Interest expense from variable-rate indebtedness $ 1,274,693 (1,260,429) $ 12,747 (12,604) $(9,829) 9,719 $ 25,494 (25,209) $ (9,829) 9,719 Total interest income (expense) from variable-rate instruments Fair value of fixed-rate instruments Fair value of fixed-rate indebtedness $ $ 14,264 $ 143 $ (110) $ 285 $ (110) 20,181 (503,784) $ (1,090) 5,988 $ 1,183 (6,186) $ (2,095) $ 2,468 (12,579) 11,784 Net fair value of fixed-rate instruments $ (483,603) $ 4,897 $(5,003) $ 9,689 $(10,111) (a) Assumes the LIBOR interest rate will not decrease below zero. The 1 month LIBOR rate was 0.77% as of December 31, 2016. 90 Item 8. Financial Statements and Supplementary Data. RAIT FINANCIAL TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2016 and 2015 Consolidated Statements of Operations for the Three Years Ended December 31, 2016 Consolidated Statements of Comprehensive Income (Loss) for the Three Years Ended December 31, 2016 Consolidated Statements of Changes in Equity for the Three Years Ended December 31, 2016 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2016 Notes to Consolidated Financial Statements Supplemental Schedules: Schedule II: Valuation and Qualifying Accounts Schedule III: Real Estate and Accumulated Depreciation Schedule IV: Mortgage Loans on Real Estate and Mortgage Related Receivables 92 94 95 96 97 98 99 174 175 178 91 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders RAIT Financial Trust: We have audited the accompanying consolidated balance sheets of RAIT Financial Trust and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules II to IV. These consolidated financial statements and financial statement schedules are the responsibility of RAIT Financial Trust’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RAIT Financial Trust and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RAIT Financial Trust’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2017 expressed an unqualified opinion on the effectiveness of RAIT Financial Trust’s internal control over financial reporting. /s/ KPMG LLP Philadelphia, Pennsylvania March 13, 2017 92 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders RAIT Financial Trust: We have audited RAIT Financial Trust’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RAIT Financial Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on RAIT Financial Trust’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, RAIT Financial Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of RAIT Financial Trust and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated March 13, 2017 expressed an unqualified opinion on those consolidated financial statements. Philadelphia, Pennsylvania March 13, 2017 /s/ KPMG LLP 93 RAIT Financial Trust Consolidated Balance Sheets (Dollars in thousands, except share and per share information) Assets Investment in mortgages, loans and preferred equity interests, at amortized cost: Commercial mortgages, mezzanine loans and preferred equity interests Allowance for loan losses Total investment in mortgages, loans and preferred equity interests, net (including $1,184,588 and $1,428,961 held by consolidated VIEs, respectively) Investments in real estate, net of accumulated depreciation of $138,214 and $158,688, respectively (including $192,070 and $252,376 held by consolidated VIEs, respectively) Cash and cash equivalents Restricted cash Accrued interest receivable Other assets Intangible assets, net of accumulated amortization of $22,230 and $13,234, respectively Assets of discontinued operations (See Note 9) Total assets Liabilities and Equity Indebtedness, net of unamortized discounts, premiums and deferred financing costs of $36,892 and $53,092, respectively (including $1,288,258 and $1,762,672 held by consolidated VIEs, respectively) Accrued interest payable Accounts payable and accrued expenses Derivative liabilities Deferred taxes, borrowers’ escrows and other liabilities Liabilities of discontinued operations (See Note 9) Total liabilities Series D cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized, 3,536,000 and 4,000,000 shares issued and outstanding, respectively Equity Shareholders’ equity Preferred shares, $0.01 par value per share, 25,000,000 shares authorized; 7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 8,069,288 shares authorized, 5,344,353 and 5,306,084 shares issued and outstanding, respectively 8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,340,969 and 2,340,969 shares issued and outstanding, respectively 8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,640,425 and 1,640,425 shares issued and outstanding, respectively Series E cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized Common shares, $0.03 par value per share, 200,000,000 shares authorized, 92,295,478 and 91,586,767 issued and outstanding, respectively, including 1,079,194 and 742,764 unvested restricted common share awards, respectively Additional paid in capital Accumulated other comprehensive income (loss) Retained earnings (deficit) Total shareholders’ equity Noncontrolling interests—continuing operations Noncontrolling interests—discontinued operations Total noncontrolling interests Total equity Total liabilities and equity As of December 31 2016 2015 $ 1,292,639 (12,354) $ 1,623,583 (17,097) 1,280,285 1,606,486 716,432 110,531 190,179 36,271 53,878 19,267 — 986,942 87,581 207,599 47,343 67,566 28,864 1,383,547 $ 2,406,843 $ 4,415,928 $ 1,751,082 8,347 20,016 — 168,047 — $ 2,399,475 8,595 22,557 4,727 197,908 952,530 1,947,492 3,585,792 81,581 85,395 53 23 17 53 23 17 — — 2,769 2,093,257 — (1,723,735) 2,748 2,087,137 (4,699) (1,680,751) 372,384 5,386 — 5,386 377,770 404,528 3,948 336,265 340,213 744,741 $ 2,406,843 $ 4,415,928 The accompanying notes are an integral part of these consolidated financial statements. 94 RAIT Financial Trust Consolidated Statements of Operations (Dollars in thousands, except share and per share information) Revenue: Investment interest income Investment interest expense Net interest margin Property income Fee and other income Total revenue Expenses: Interest expense Real estate operating expense Property management expenses General and administrative expenses: Compensation expense Other general and administrative expenses Total general and administrative expenses Acquisition and integration expenses Provision for loan losses Depreciation and amortization expense IRT internalization and management transition expenses Total expenses Operating (Loss) Income Interest and other income (expense), net Gain (losses) on assets Gain (losses) on extinguishment of debt Asset impairment Gain (losses) on deconsolidation of VIEs Net gain on sale of collateral management contracts Change in fair value of financial instruments Income (loss) before taxes Income tax benefit (provision) Income (loss) from continuing operations Discontinued operations: Income (loss) from discontinued operations Gain (loss) on disposal of discontinued operations Net income (loss) (Income) loss allocated to preferred shares (Income) loss allocated to noncontrolling interests Net income (loss) allocable to common shares Amount attributable to common shares Net income (loss) available to common shares from continuing operations Net income (loss) available to common shares from discontinued operations Net income (loss) Earnings (loss) per share-Basic: Earnings (loss) per share from continuing operations Earnings (loss) per share from discontinued operations Earnings (loss) per share-Basic Weighted-average shares outstanding-Basic Earnings (loss) per share-Diluted: Earnings (loss) per share from continuing operations Earnings (loss) per share from discontinued operations Earnings (loss) per share-Diluted Weighted average shares outstanding-Diluted For the Years Ended December 31 2016 2015 2014 $ 89,203 (35,806) 53,397 112,836 7,374 173,607 55,049 56,894 9,479 18,437 13,273 31,710 624 8,050 51,304 6,271 219,381 (45,774) (427) 53,272 1,331 (37,785) — — (5,946) (35,329) (2,550) (37,879) 40,144 47,808 50,073 (35,160) (24,733) (9,820) $ 98,432 (29,250) 69,182 124,157 18,275 211,614 61,750 62,726 9,322 15,349 14,708 30,057 2,332 8,300 45,505 — 219,992 (8,378) (1,083) 37,393 — (8,179) — — 11,638 31,391 (2,798) 28,593 34,900 — 63,493 (32,830) (23,505) 7,158 $ 133,419 (30,310) 103,109 113,110 21,985 238,204 47,860 59,948 8,667 15,884 13,537 29,421 526 5,500 44,006 — 195,928 42,276 (21,415) (8,252) 2,421 — (215,804) 4,549 (98,752) (294,977) 2,147 (292,830) 2,855 — (289,975) (28,993) 464 $ (318,504) (69,604) $ 59,784 (9,820) $ (2,002) $ (319,708) 1,204 9,160 $ (318,504) 7,158 (0.77) $ 0.66 (0.11) $ (0.03) $ 0.11 0.08 $ (3.93) 0.01 (3.92) $ $ $ $ $ $ 91,153,861 85,524,073 81,328,129 $ $ (0.77) 0.66 (0.11) $ (0.03) 0.11 0.08 $ (3.93) 0.01 (3.92) 91,153,861 86,457,871 81,328,129 The accompanying notes are an integral part of these consolidated financial statements. 95 RAIT Financial Trust Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) Net income (loss) Other comprehensive income (loss): Change in fair value of interest rate hedges Realized (gains) losses on interest rate hedges reclassified to earnings Change in fair value of available-for-sale securities Total other comprehensive income (loss) from continuing operations Discontinued operations: For the Years Ended December 31 2016 2015 2014 $ 50,073 $ 63,493 $(289,975) (133) 4,824 — (293) 16,382 — 4,691 16,089 (835) 40,274 3,583 43,022 Other comprehensive income (loss) from discontinued operations (607) — — Total other comprehensive income (loss) Comprehensive income (loss) before allocation to noncontrolling interests Allocation to noncontrolling interests—net (income) loss Allocation to noncontrolling interests—other comprehensive (income) loss 4,084 16,089 43,022 54,157 (24,733) 79,582 (23,505) (246,953) 464 615 — — Comprehensive income (loss) allocable to common shares $ 30,039 $ 56,077 $(246,489) The accompanying notes are an integral part of these consolidated financial statements. 96 t s u r T i l a i c n a n F T I A R y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C ) n o i t a m r o f n i e r a h s t p e c x e , s d n a s u o h t n i s r a l l o D ( l a t o T y t i u q E g n i l l o r t n o c n o N ’ s r e d l o h e r a h S s t s e r e t n I y t i u q E l a t o T d e n i a t e R s g n i n r a E ) t i c i f e D ( d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( e m o c n I l a n o i t i d d A n I d i a P l a t i p a C e u l a V r a P n o m m o C s e r a h S n o m m o C s e r a h S e u l a V r a P d e r r e f e r P — s e r a h S C s e i r e S d e r r e f e r P — s e r a h S C s e i r e S e u l a V r a P d e r r e f e r P — s e r a h S B s e i r e S d e r r e f e r P — s e r a h S B s e i r e S e u l a V r a P d e r r e f e r P — s e r a h S A s e i r e S d e r r e f e r P — s e r a h S A s e i r e S 0 9 6 , 5 3 6 $ 7 2 1 , 4 3 $ 3 6 5 , 1 0 6 $ ) 6 0 3 , 7 5 2 , 1 ( $ ) 0 1 8 , 3 6 ( $ 5 5 4 , 0 2 9 , 1 $ 3 4 1 , 2 $ 7 3 4 , 4 4 4 , 1 7 7 1 $ 0 0 1 , 0 4 6 , 1 3 2 $ 5 6 4 , 8 8 2 , 2 1 4 $ 8 8 2 , 9 6 0 , 4 3 1 0 2 , 1 3 r e b m e c e D , e c n a l a B ) 3 9 9 , 8 2 ( ) 1 0 1 , 8 5 ( 2 2 0 , 3 4 ) 5 7 9 , 9 8 2 ( 0 4 9 ) 9 1 5 , 1 1 ( 3 5 1 , 2 9 1 1 6 3 , 6 1 ) 4 6 4 ( — — — — — ) 9 1 5 , 1 1 ( 3 5 1 , 2 9 1 ) 3 9 9 , 8 2 ( ) 1 0 1 , 8 5 ( 2 2 0 , 3 4 ) 1 1 5 , 9 8 2 ( 0 4 9 — — 1 6 3 , 6 1 — — — — — ) 3 9 9 , 8 2 ( ) 1 0 1 , 8 5 ( ) 1 1 5 , 9 8 2 ( — — — — — — — 2 2 0 , 3 4 — — — — 0 4 9 — — 4 5 3 , 6 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 7 — — — — — — — 1 8 2 , 6 0 7 4 6 9 9 4 , 8 8 2 8 1 , 1 ) 1 8 4 , 1 ( — — — — 4 6 9 9 4 , 8 8 2 8 1 , 1 ) 1 8 4 , 1 ( — — — — — — — — 3 5 0 8 1 , 8 8 2 8 1 , 1 ) 1 8 4 , 1 ( 1 1 9 1 3 — — — — 9 4 7 , 0 1 4 0 2 4 , 8 4 6 , 0 1 — — — — — — — — — — — — — — — — — — — — — — — — t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O d e r a l c e d s d n e d i v i d n o m m o C s t s e r e t n i g n i l l o r t n o c n o n o t s t s e r e t n i g n i l l o r t n o c n o n f o e c n a u s s I n o i t u b i r t s i D y t i u q e t e n , d e u s s i r o f d e u s s i s e r a h s d e r r e f e r P s e r a h s n o m m o C n o i t a s n e p m o c d e s a b - e r a h S d e d d e b m e l l a c d e p p a c s e t o n r o i n e s t e n , d e u s s i n o i t a s n e p m o c e l b i t r e v n o c % 0 . 4 s e r a h s n o m m o C s e t o n r o i n e s e l b i t r e v n o c % 0 . 4 n o i t p o n o i s r e v n o c s d n e d i v i d d e r r e f e r P ) s s o l ( e m o c n i t e N 2 4 8 , 7 8 5 7 9 2 , 4 1 2 5 4 5 , 3 7 3 ) 1 1 9 , 3 3 6 , 1 ( ) 8 8 7 , 0 2 ( 3 8 6 , 5 2 0 , 2 3 7 4 , 2 6 0 6 , 6 0 5 , 2 8 7 1 0 0 1 , 0 4 6 , 1 3 2 5 6 4 , 8 8 2 , 2 8 4 9 6 5 , 5 7 7 , 4 4 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 3 9 4 , 3 6 ) 5 5 5 , 6 ( ) 5 7 2 , 6 2 ( ) 8 9 9 , 3 5 ( 6 6 4 , 4 9 8 0 , 6 1 ) 3 6 1 , 3 2 ( 1 1 9 , 3 2 1 — — — — — 5 0 5 , 3 2 ) 3 6 1 , 2 2 ( 1 1 9 , 3 2 1 8 8 9 , 9 3 ) 5 5 5 , 6 ( ) 5 7 2 , 6 2 ( ) 8 9 9 , 3 5 ( 6 6 4 , 4 9 8 0 , 6 1 — ) 0 0 0 , 1 ( 8 8 9 , 9 3 ) 5 5 5 , 6 ( ) 5 7 2 , 6 2 ( ) 8 9 9 , 3 5 ( — — — — — — — — — — — 9 8 0 , 6 1 — — — — — — 6 6 4 , 4 ) 0 0 0 , 1 ( — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3 6 6 5 5 0 , 3 1 ) 2 8 9 ( 5 2 4 , 2 4 0 7 7 , 3 3 6 6 — — — — — 5 5 0 , 3 1 ) 2 8 9 ( 5 2 4 , 2 4 0 7 7 , 3 — — — — — — — — — — — 0 5 0 , 3 1 ) 6 9 9 ( 5 8 1 , 2 4 9 4 7 , 3 — — 4 1 0 4 2 1 2 — — 2 2 3 , 5 8 3 7 1 8 , 8 0 0 , 8 2 2 0 , 6 8 6 — — — — — 5 2 3 — — — — — — — — — — 4 0 5 , 2 5 — — — 5 — — — — — — — — 5 1 5 , 0 3 5 n o i t a z i t r o m a d e r a l c e d s d n e d i v i d n o m m o C t n u o c s i d D s e i r e S d e r r e f e r P t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O s t s e r e t n i g n i l l o r t n o c n o n o t s t s e r e t n i g n i l l o r t n o c n o n f o e c n a u s s I n o i t u b i r t s i D d e n w o e t a t s e l a e r f o n o i t a d i l o s n o c e D n o i t a s n e p m o c d e s a b - e r a h S y t i u q e t e n , d e u s s i r o f d e u s s i s e r a h s d e r r e f e r P s e r a h s n o m m o C y t r e p o r p d e d d e b m e s e t o n r o i n e s t e n , d e u s s i n o i t p o n o i s r e v n o c n o i t a s n e p m o c e l b i t r e v n o c % 0 . 7 s e r a h s n o m m o C s d n e d i v i d d e r r e f e r P ) s s o l ( e m o c n i t e N 1 4 7 , 4 4 7 $ 3 1 2 , 0 4 3 $ 8 2 5 , 4 0 4 $ ) 1 5 7 , 0 8 6 , 1 ( $ ) 9 9 6 , 4 ( $ 7 3 1 , 7 8 0 , 2 $ 8 4 7 , 2 $ 7 6 7 , 6 8 5 , 1 9 7 1 $ 5 2 4 , 0 4 6 , 1 3 2 $ 9 6 9 , 0 4 3 , 2 3 5 $ 4 8 0 , 6 0 3 , 5 5 1 0 2 , 1 3 r e b m e c e D , e c n a l a B 97 3 7 0 , 0 5 ) 6 8 7 , 7 ( ) 4 7 3 , 7 2 ( ) 4 6 1 , 3 3 ( 6 2 8 4 8 0 , 4 4 8 7 , 6 0 1 6 4 5 9 , 4 ) 8 6 2 , 3 2 ( ) 7 5 4 , 1 4 3 ( — — — ) 5 1 6 ( 6 2 8 — 3 3 7 , 4 2 — 4 5 9 , 4 ) 8 6 2 , 3 2 ( ) 7 5 4 , 1 4 3 ( ) 3 5 2 , 1 ( — — — 0 4 3 , 5 2 ) 6 8 7 , 7 ( ) 4 7 3 , 7 2 ( ) 4 6 1 , 3 3 ( 9 9 6 , 4 4 8 7 , 6 — — — 0 1 6 ) 3 5 2 , 1 ( — 0 4 3 , 5 2 ) 6 8 7 , 7 ( ) 4 7 3 , 7 2 ( ) 4 6 1 , 3 3 ( — — — — — — — — — — — — — — — — — — — 9 9 6 , 4 — — — — — — — — — — — — 0 1 6 5 4 7 , 6 — — — — — — — — — — 9 3 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 6 2 , 8 3 ) 5 3 2 , 1 ( — ) 8 1 ( — 3 4 2 , 9 8 6 4 , 9 9 6 — — — — — — — — — — — — n o i t a z i t r o m a d e r a l c e d s d n e d i v i d n o m m o C t n u o c s i d D s e i r e S d e r r e f e r P t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O n o i t a s n e p m o c d e s a b - e r a h S s t s e r e t n i g n i l l o r t n o c n o n f o n o i t i n g o c e r e D s t s e r e t n i g n i l l o r t n o c n o n o t s t s e r e t n i g n i l l o r t n o c n o n f o e c n a u s s I n o i t u b i r t s i D s n o i t a r e p o d e u n i t n o c s i d f o l a s o p s i D y t i u q e t e n , d e u s s i r o f d e u s s i s e r a h s d e r r e f e r P s e r a h s n o m m o C t e n , d e u s s i s e r a h s n o m m o C n o i t a s n e p m o c s d n e d i v i d d e r r e f e r P ) s s o l ( e m o c n i t e N 0 7 7 , 7 7 3 $ 6 8 3 , 5 $ 4 8 3 , 2 7 3 $ ) 5 3 7 , 3 2 7 , 1 ( $ $ 7 5 2 , 3 9 0 , 2 $ 9 6 7 , 2 $ 8 7 4 , 5 9 2 , 2 9 7 1 $ 5 2 4 , 0 4 6 , 1 3 2 $ 9 6 9 , 0 4 3 , 2 3 5 $ 3 5 3 , 4 4 3 , 5 6 1 0 2 , 1 3 r e b m e c e D , e c n a l a B . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T RAIT Financial Trust Consolidated Statements of Cash Flows (Dollars in thousands) Operating activities: Net income (loss) Adjustments to reconcile net income (loss) to cash flow from operating activities: Provision for loan losses Share-based compensation expense Depreciation and amortization Amortization of deferred financing costs and debt discounts Accretion of discounts on investments Amortization of above/below market leases (Gains) losses on assets (Gains) losses on extinguishment of debt (Gains) losses on deconsolidation of VIEs TSRE financing extinguishment expenses (Gains) on IRT merger with TSRE Asset impairment Gain on disposal of discontinued operations, exclusive of transaction costs Change in fair value of financial instruments Provision (benefit) for deferred taxes Changes in assets and liabilities: Decrease (increase) in accrued interest receivable Decrease (increase) in other assets Increase (decrease) in accrued interest payable Increase (decrease) in accounts payable and accrued expenses Increase (decrease) in borrowers’ escrows and other liabilities Origination of conduit loans Sales of conduit loans Cash flows provided by (used in) operating activities Investing activities: Proceeds from sales or repayments of other securities Purchase and origination of loans for investment Principal repayments on loans Investments in real estate IRT’s acquisition of TSRE, net of cash acquired Proceeds from the disposition of real estate Proceeds from sale of interest in IRT, net of cash deconsolidated Proceeds from sale of discontinued operations (Increase) decrease in restricted cash Cash flows provided by (used in) investing activities Financing activities: Repayments on secured credit facilities and loans payable on real estate Proceeds from secured credit facilities, term loans and loans payable on real estate Repayments and repurchase of CDO notes payable and floating rate securitizations Net proceeds from issuance of CDO notes and floating rate securitizations Proceeds from issuance of 4.0% convertible senior notes Proceeds from issuance of senior notes Repurchase of convertible notes and senior notes Repayments of senior secured notes Net proceeds (repayments) related to conduit loan repurchase agreements Net proceeds (repayments) related to floating rate loan repurchase agreements Proceeds from issuance of other indebtedness Distribution to noncontrolling interests Issuance of noncontrolling interests TSRE financing extinguishment expenses Payments for deferred costs and convertible senior note hedges Preferred share issuance, net of costs incurred Common share issuance, net of costs incurred Repurchase of Series D preferred shares Distributions paid to preferred shareholders Distributions paid to common shareholders Cash flows (used in) provided by financing activities Net change in cash and cash equivalents Net change in cash and cash equivalents from discontinued operations Net change in cash and cash equivalents from continuing operations Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period For the Years Ended December 31 2016 2015 2014 $ 50,073 $ 63,493 $(289,975) 8,050 7,720 78,804 20,796 (1,039) (1,780) (85,535) (379) — — (732) 37,785 (49,938) 5,946 2,212 5,145 116 3,065 5,280 2,266 (13,800) 35,177 109,232 — (154,212) 425,050 (30,358) — 317,444 31,572 43,000 (23,049) 609,447 (259,523) 206,680 (717,338) 239,236 — — (47,614) (8,000) (36,922) (33,724) 24,796 (23,266) 689 — (8,098) 610 (2,052) (11,600) (24,776) (33,132) (734,034) (15,355) (38,305) 22,950 87,581 $ 110,531 8,300 4,466 73,868 17,943 (2,045) (104) (43,805) — — 23,219 (64,604) 8,179 — (11,638) 2,484 (2,665) 4,339 2,558 (23,120) (8,922) (389,054) 424,979 87,871 31,241 (598,146) 291,228 (52,482) (137,096) 87,573 — (25,430) (403,112) (274,765) 488,725 (282,680) 476,191 — — — (8,000) (19,035) 31,050 — (22,083) — (23,219) (16,547) 13,055 41,443 — (24,166) (60,568) 319,401 4,160 23,542 (19,382) 106,963 $ 87,581 5,500 4,407 56,784 10,786 (6,449) 1,438 5,370 (2,421) 215,804 — — — — 98,752 (2,326) (10,242) (13,722) (22,474) 16,307 13,848 (441,745) 409,667 49,309 48,977 (509,340) 156,329 (367,269) — 3,821 — 32,380 (635,102) (36,622) 161,080 (244,815) 336,262 16,750 131,905 — — 28,307 18,996 — (21,132) 187,797 — (16,536) 49,917 85,004 — (23,522) (54,719) 618,672 32,879 11,429 21,450 85,513 $ 106,963 The accompanying notes are an integral part of these consolidated financial statements. 98 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 1: THE COMPANY RAIT Financial Trust invests in and manages a portfolio of real-estate related assets, including direct ownership of real estate properties, and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments. On December 20, 2016, the management internalization of one of our previously consolidated variable interest entities Independence Realty Trust, Inc., or IRT, was completed pursuant to the September 27, 2016 securities and asset purchase agreement, or the IRT internalization agreement. The IRT management internalization consisted of two parts: (i) the acquisition of Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and (ii) the acquisition of certain assets and the assumption of certain liabilities relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties. The purchase price paid by IRT for the IRT management internalization was $43,000, subject to certain pro rations at closing. As part of the same agreement, we sold all of the 7,269,719 shares of IRT’s common stock owned by certain of our subsidiaries on October 5, 2016. See Note 9: Discontinued Operations for further information regarding the IRT management internalization and its effects on our financial statements. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation The consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations, equity and cash flows are included. For the years ended December 31, 2016, 2015 and 2014, certain entities or distinguishable components of RAIT have been presented as discontinued operations. See Note 9: Discontinued Operations for further information. Also, during the year ended December 31, 2016, we began presenting property management expenses separately on the consolidated statements of operations. These expenses relate to employees that perform regional supervision, accounting, treasury, human resources and other corporate functions. We have retroactively adjusted historical periods to reclassify these expenses from compensation expense and general and administrative expenses to property management expenses. b. Principles of Consolidation The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation. 99 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidate the VIEs when we are the primary beneficiary. During the second quarter of 2016, we began presenting our floating rate securitizations as VIEs and corrected the prior period disclosure. In addition, we began presenting assets and liabilities of consolidated VIEs in a parenthetical disclosure on the consolidated balance sheets. See Note 8 for additional disclosures pertaining to VIEs. For entities that we do not consolidate, we account for our investment in them either under the equity method pursuant to ASC Topic 323, “Investments-Equity Method and Joint Ventures” or cost method pursuant to ASC Topic 325, “Investments—Other”. During the year ended December 31, 2016, we wrote off $864 of our retail property management subsidiary’s investment in an entity because it no longer held the investment. The charge was reported in asset impairment in the consolidated statements of operations. c. 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The items that include significant estimates are fair value of financial instruments and allowance for loan losses. Actual results could differ from those estimates. d. Cash and Cash Equivalents Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution. We mitigate credit risk by placing cash and cash equivalents with major financial institutions. To date, we have not experienced any losses on cash and cash equivalents. e. Restricted Cash Restricted cash consists primarily of tenant escrows and borrowers’ funds held by us to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans. As of December 31, 2016 and 2015, we had $121,395 and $160,453, respectively, of tenant escrows and borrowers’ funds. Restricted cash also includes proceeds from the issuance of CDO notes payable by securitizations that are restricted for the purpose of funding additional investments in securities subsequent to the balance sheet date. As 100 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) of December 31, 2016 and 2015, we had $68,784 and $47,146, respectively, of restricted cash held by securitizations. f. Investments in Mortgages, Loans and Preferred Equity Interests We invest in commercial mortgages, mezzanine loans, and preferred equity interests. We account for our investments in commercial mortgages, mezzanine loans, and preferred equity interests at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans. g. Allowance for Loan Losses, Impaired Loans and Non-accrual Status We maintain an allowance for loan losses on our investments in commercial mortgages, mezzanine loans and preferred equity interests. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. The credit quality of our loans is monitored via quantitative and qualitative metrics. Quantitatively we evaluate items such as the current debt service coverage ratio and annual net operating income of the underlying property. Qualitatively we evaluate items such as recent operating performance of the underlying property and history of the borrower’s ability to provide financial support. These items together are considered in developing our view of each loan’s risk rating which are categorized as either impaired or satisfactory. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days unless it is well secured and in the process of collection, or if the collection of principal and interest in full is not probable. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non- accrual status. Loans are generally removed from non-accrual status when they are making current interest payments. The allowance for loan losses is increased by the provision for loan losses and decreased by charge- offs (net of recoveries). We charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure. We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible. h. Investments in Real Estate Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been determined to improve the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements— 30 to 40 years; furniture, fixtures, and equipment—5 to 10 years; and tenant improvements—shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market 101 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) conditions and inputs at the time the asset is acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities associated with the real estate acquired. Transaction costs and fees incurred related to acquisitions are expensed as incurred. Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term. The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period. Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. i. Investments in Securities We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held- to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for- sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). When we elect to record certain available-for-sale securities under the fair value option, in accordance with FASB ASC Topic 825, “Financial Instruments,” they are recorded at fair value with changes in fair value reported as a component of earnings. See “m. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period. 102 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) We use our judgment to determine whether an investment in securities has sustained an other-than- temporary decline in value. If management determines that an available-for-sale security has sustained an other- than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment. j. Transfers of Financial Assets We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale. Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings or security- related receivables. k. Revenue Recognition 1) Interest income—We recognize interest income from investments in commercial mortgage loans, mezzanine loans, and preferred equity interests, and other securities on a yield to maturity basis. Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans, the majority of which were originated prior to 2011, at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management will cease accruing interest on these loans when it determines that the interest income is not collectible based on the value of the underlying collateral using discounted cash flow models and market based assumptions. The accrued interest receivable associated with these loans as of December 31, 2016, 2015, and 2014 was $29,845, $34,132, and $41,347, respectively. These loans are considered to be impaired when the total amount owed exceeds the estimated value of the underlying collateral. One of these loans, with an unpaid principal balance of $12,869 was considered to be impaired as of December 31, 2016. None of these loans were considered to be impaired as of December 31, 2015 and 2014. For investments that we do not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.” For investments that we elect to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred. 103 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) 2) Property income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multifamily real estate properties, property income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, property income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. For retail and office real estate properties, leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease. 3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) funding conduit loans for sale into unaffiliated commercial mortgage-backed securities, or CMBS securitizations, (b) providing or arranging to provide financing to our borrowers, (c) providing ongoing asset management services to investment portfolios under cancelable management agreements, and (d) providing property management services to third parties. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from securitizations while such securitizations are consolidated. During the years ended December 31, 2016, 2015 and 2014, we received $1,420, $1,892 and $4,191, respectively, of earned asset management fees. We eliminated $1,420, $1,644 and $3,200, respectively, of these earned asset management fees as it was associated with consolidated securitizations. Also, during the years ended December 31, 2016, 2015 and 2014 we earned $7,092, $4,984, and $1,582 of asset management fees, respectively, and $350, $629 and $154 of incentive fees, respectively, related to our Advisory Agreement with IRT. During the years ended December 31, 2016, 2015 and 2014 we also earned $4,769, $3,675, and $1,759, respectively, of property management and leasing fees related to our property management agreements with IRT’s properties. As we consolidated IRT through October 5, 2016, all of these fees earned for the years ended December 31, 2015 and 2014 were eliminated in consolidation. For the year ended December 31, 2016, $5,234 of asset management fees, $350 of incentive fees and $3,776 of property management fees were eliminated in consolidation. l. Derivative Instruments We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges, if any, are recognized in earnings. 104 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) m. Fair Value of Financial Instruments In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows: • Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment. • Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based on observable market inputs. • Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Generally, assets and liabilities carried at fair value and included in this category were TruPs and subordinated debentures, trust preferred obligations and CDO notes payable where observable market inputs do not exist. The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement 105 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3. Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value. Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions. n. Income Taxes RAIT, Taberna Realty Finance Trust, or TRFT, and IRT have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our dividends to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for dividends to our shareholders. Management believes that all of the criteria to maintain RAIT’s, TRFT’s, and IRT’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations. 106 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Our TRS entities generate taxable revenue primarily from (i) advisory fees for services provided to IRT, (ii) property management fees for services provided to RAIT properties, IRT properties and third-party properties, and (iii) fees and other income from our CMBS lending business. In consolidation, the advisory fees and property management fees related to IRT were eliminated through October 5, 2016 and property management fees related to RAIT properties were eliminated in their entirety. Nonetheless, all income taxes are expensed and are paid by the TRSs in the year in which the revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation. The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and, as new information becomes available, the balances are adjusted as appropriate. o. Share-Based Compensation We account for our share-based compensation in accordance with FASB ASC Topic 718, “Compensation- Stock Compensation.” We measure the cost of employee and trustee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and record compensation expense for the entire award on a straight line basis, over the related vesting period, for the entire award. p. Deferred Financing Costs Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, in a manner that approximates the effective interest method. q. Intangible Assets Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” The gross carrying amount for our customer relationships was $12,276 and $19,149 as of December 31, 2016 and December 31, 2015, respectively. The gross carrying amount for our customer relationships has decreased as $6,873 of these assets became fully amortized during the year ended December 31, 2016, $5,273 of which was due to the acceleration of amortization as a result of the cancellation of five customer relationships. The gross carrying amount for our in- place leases and above-market leases, was $26,122 and $23,047 as of December 31, 2016 and December 31, 2015, respectively. The gross carrying amount for Urban Retail’s trade name was $1,500 as of December 31, 2016 and December 31, 2015. The accumulated amortization for our intangible assets was $22,230 and $13,234 as of December 31, 2016 and December 31, 2015, respectively. We recorded amortization expense of $14,934, $14,283 and $11,924 for the years ended December 31, 2016, 2015 and 2014, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible assets of $5,155 for 2017, $3,388 for 2018, $2,776 for 2019, $2,134 for 2020, $1,811 for 2021 and $4,004 thereafter. As of December 31, 2016, 2015 and 2014, we have determined that no impairment exists on our intangible assets. 107 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) q. Goodwill Goodwill on our consolidated balance sheet represented the amounts paid in excess of the fair value of the net assets acquired from business acquisitions accounted for under FASB ASC Topic 805, “Business Combinations.” Pursuant to FASB ASC Topic 350, “Intangibles-Goodwill and Other”, goodwill is not amortized to expense but rather is analyzed for impairment. We evaluate goodwill for impairment on an annual basis and as events and circumstances change, in accordance with FASB ASC Topic 350. As of December 31, 2016 and 2015, we have $8,342 and $8,854, respectively, of goodwill that is included in Other Assets in the accompanying consolidated balance sheets. During the year ended December 31, 2016 we derecognized $512 of goodwill related to the disposal of discontinued operations. During the year ended December 31, 2015, we recorded an adjustment to correct the deferred tax liability balance with an offset to goodwill for $2,160 related to our acquisition of Urban Retail. During the year ended December 31, 2014 we revised the initial purchase price allocation related to Urban Retail and recorded a net increase in goodwill of $3,052 related to a deferred tax liability associated with definite-lived intangible assets and an adjustment to a liability based on its fair value. As of December 31, 2016, 2015 and 2014, we have determined that no impairment exists on our goodwill. r. Recent Accounting Pronouncements Adopted within these Financial Statements In February 2015, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. This accounting standard amends the consolidation analysis required under GAAP and requires management to reevaluate all previous consolidation conclusions. This standard considers limited partnerships to be VIEs, unless the limited partners have either substantive kick-out or participating rights. The presumption that a general partner should consolidate a limited partnership has also been eliminated. The standard amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis, as well as amends how variable interests held by a reporting entity’s related parties affect the consolidation conclusion. This standard also clarifies how to determine whether equity holders as a group have power over an entity. This standard was effective for interim and annual reporting periods beginning on or after December 15, 2015, with early adoption permitted. The adoption of this accounting standard did not have an impact on our previous conclusions with respect to the entities consolidated in our consolidated financial statements. In April 2015, the FASB issued an accounting standard classified under FASB ASC Topic 835, “Interest”. This accounting standard amends existing guidance to change reporting requirements for debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability. This standard was effective for interim and annual reporting periods beginning on or after December 15, 2015, with early adoption permitted. Retrospective application to prior periods is required. The adoption of this accounting standard resulted in the reclassification of $31,368 of deferred costs, net of $33,769 of accumulated amortization, as of December 31, 2015 to total indebtedness on our consolidated balance sheet. Certain of these amounts have been presented within liabilities of discontinued operations. In September 2015, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations”. This accounting standard amends existing guidance related to measurement period adjustments by requiring the adjustments to be recognized prospectively with disclosure of the impact of the adjustments had they been applied previously. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. As this standard only applies to measurement period adjustments that occur after the effective date, this standard did not have a material impact on our consolidated financial statements. 108 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Not Yet Adopted Within These Financial Statements In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all contracts with customers, except those that are within the scope of other Topics in the FASB ASC. During 2016 and 2017, the FASB issued multiple amendments to this accounting standard which provide further clarification to this accounting standard. These standards amending FASB ASC Topic 606 are currently effective for annual reporting periods beginning after December 15, 2017. Management is currently evaluating the impact that these standards may have on our consolidated financial statements. In January 2016, the FASB issued an accounting standard classified under FASB ASC Topic 825, “Financial Instruments”. This accounting standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, the amendment (i) eliminates certain disclosure requirements for financial instruments measured at amortized cost; (ii) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation, in other comprehensive income, of the change in fair value of a liability, when the fair value option has been elected, resulting from a change in the instrument-specific credit risk; and (iv) requires separate presentation of financial instruments by measurement category and form. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the separate presentation of changes in fair value due to changes in instrument-specific credit risk. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”. This accounting standard amends existing guidance related to leases, primarily by requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the current accounting guidance. This standard is effective for interim and annual reporting beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In March of 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management does not expect this standard to have a significant impact on our consolidated financial statements. In March of 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This accounting standard clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. 109 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management does not expect this standard to have a significant impact on our consolidated financial statements. In March of 2016, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation—Stock Compensation”. This accounting standard simplifies several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences; (2) classification of awards as either equity or liabilities; and (iii) classification on the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In June 2016, the FASB issued an accounting standard classified under FASB ASC Topic 326, “Financial Instruments-Credit Losses”. The amendments in this standard provide an approach based on expected losses to estimate credit losses on certain types of financial instruments. The amendments also modify the impairment model for available for sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendments in this standard expand the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that this standard will have on our consolidated financial statements. In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”. This accounting standard provides guidance on eight specific cash flow issues: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies; including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements and consolidated statement of cash flows. In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 740, “Income Taxes”. The amendments in this accounting standard provide that the current and deferred income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized when the transfer occurs rather than when the asset has been sold to an outside party. Two common examples of assets included in the scope of this accounting standard are intellectual property and property, plant, and equipment. The amendments in this standard are effective for annual reporting periods beginning after December 15, 2017, 110 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. The amendments in this accounting standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. The amendments in this accounting standard provide guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this accounting standard do not change the characteristics of a primary beneficiary in current GAAP. A primary beneficiary of a VIE has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a VIE), the amendments in this accounting standard require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a VIE and, on a proportionate basis, its indirect variable interest in a VIE held through related parties, including related parties that are under common control with the reporting entity. If after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that the reporting entity evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In November 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”. The amendments in this accounting standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements. In January 2017, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations’. The amendments in this accounting standard clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2017, including interim periods with those fiscal years. Early adoption is permitted for transactions not yet reflected in the financial statements. Management is currently evaluating the impact this standard will have on our consolidated financial statements. 111 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 3: INVESTMENTS IN COMMERCIAL MORTGAGE LOANS, MEZZANINE LOANS AND PREFERRED EQUITY INTERESTS The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2016: Unpaid Principal Balance Unamortized (Discounts) Premiums Carrying Amount Number of Loans Weighted- Average Coupon (1) Range of Maturity Dates Commercial Real Estate (CRE) Commercial mortgage loans (2) Mezzanine loans Preferred equity interests $1,162,233 89,811 42,830 $(852) 45 (1) $1,161,381 89,856 42,829 94 23 17 5.8% Jan. 2017 to Dec. 2025 9.9% Feb. 2017 to Jun. 2027 8.2% Jan. 2017 to Jan. 2029 Total CRE Deferred fees, net Total 1,294,874 (808) (1,427) — 1,294,066 (1,427) 134 6.1% $1,293,447 $(808) $1,292,639 (1) Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount. (2) Commercial mortgage loans include two conduit loans with unpaid principal balances and carrying amounts totaling $20,181, a weighted-average coupon of 4.8%, and maturity dates ranging from June 2025 through December 2025. These commercial mortgage loans are accounted for as loans held for sale. The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2015: Unpaid Principal Balance Unamortized (Discounts) Premiums Carrying Amount Number of Loans Weighted- Average Coupon (1) Range of Maturity Dates (2) Commercial Real Estate (CRE) Commercial mortgage loans (3) Mezzanine loans Preferred equity interests $1,427,328 169,556 30,237 $(1,049) $1,426,279 169,338 30,236 (218) (1) Total CRE Deferred fees, net Total 1,627,121 (2,270) (1,268) — 1,625,853 (2,270) $1,624,851 $(1,268) $1,623,583 124 57 7 188 5.2% Mar. 2016 to Jan. 2029 10.0% Jan. 2016 to May 2025 6.9% Feb. 2016 to Aug. 2025 6.1% (1) Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount. (2) Does not include the maturity dates of three mezzanine loans that were 90 days or more past due which had contractual maturity dates prior to December 31, 2015. (3) Commercial mortgage loans include six conduit loans with unpaid principal balances and carrying amounts totaling $49,239, a weighted-average coupon of 4.8%, and maturity dates ranging from December 2020 through January 2026. These commercial mortgage loans are accounted for as loans held for sale. 112 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) A loan is placed on non-accrual status if it is delinquent for 90 days or more or if there is uncertainty over full collection of principal and interest, which generally includes our impaired loans that have reserves. The following table summarizes the delinquency statistics of our commercial real estate loans as of December 31, 2016 and 2015: As of December 31, 2016 Current 30 to 59 days 60 to 89 days 90 days or more In foreclosure or bankruptcy proceedings Delinquency Status Commercial mortgage loans Mezzanine loans Preferred equity interests $1,111,898 $50,335 $— $ — 1,379 — — — — — 88,432 42,830 Total $1,243,160 $50,335 $— $1,379 Total Non-accrual (1) $1,162,233 89,811 42,830 $113,509 1,379 6,150 $1,294,874 $121,038 — — $— (1) Includes five loans that are current and one loan that is 30 to 59 days past due in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest. As of December 31, 2015 Current 30 to 59 days 60 to 89 days 90 days or more In foreclosure or bankruptcy proceedings (1) Total Non-accrual (2) Delinquency Status Commercial mortgage loans Mezzanine loans Preferred equity interests $1,427,328 $— $— $ — 1,163 — 167,145 — 30,237 — — — Total $1,624,710 $— $— $1,163 $ — 1,248 — $1,248 $1,427,328 169,556 30,237 $15,645 12,346 7,946 $1,627,121 $35,937 (1) These loans were on non-accrual due to uncertainty over whether we will fully collect principal and interest. Includes six loans that were current in accordance with their terms, but are on non-accrual due to uncertainty (2) over whether we will fully collect principal and interest. As of December 31, 2016 and December 31, 2015, all of our commercial mortgages, mezzanine loans and preferred equity interests that were 90 days or more past due, or in foreclosure, were on non-accrual status. As of December 31, 2016 and December 31, 2015, $121,038 and $35,937, respectively, of our commercial real estate loans were on non-accrual status and had weighted-average interest rates of 5.8% and 4.6%, respectively. Also, as of December 31, 2016 and 2015, four and two loans, respectively, with unpaid principal balances of $28,930 and $13,002, respectively, and weighted average interest rates of 12.6% and 11.6%, respectively, were recognizing interest on the cash basis. One of these loans, with an unpaid principal balance of $12,869 was considered to be impaired as of December 31, 2016. None of these loans were considered to be impaired as of December 31, 2015. Additionally, as of December 31, 2016 and 2015, one loan, with an unpaid principal balance of $18,500, which had previously been restructured in a troubled debt restructuring, or TDR, did not accrue interest in accordance with its restructured terms as it has the option to be prepaid at par. 113 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The following table sets forth the maturities of our investments in commercial mortgages, mezzanine loans and preferred equity interests by year: 2017 2018 2019 2020 2021 Thereafter Total Commercial Mezzanine Preferred equity Total $ 406,811 430,518 233,223 46,274 2,225 43,182 $43,590 5,742 — 8,832 — 31,647 $1,162,233 $89,811 $ 8,084 3,650 — 7,948 — 23,148 $42,830 $ 458,485 439,910 233,223 63,054 2,225 97,977 $1,294,874 Allowance for Loan Losses And Impaired Loans We closely monitor our loans which require evaluation for loan loss in two categories: satisfactory and impaired. Loans classified as impaired are generally loans which have credit weaknesses or which the credit quality of the collateral has deteriorated. This is determined by evaluating quantitative factors including debt service coverage ratios, net operating income of the underlying collateral and qualitative factors such as current performance of the underlying collateral. We have classified our investment in loans by credit risk category as of December 31, 2016 and December 31, 2015 as follows: Credit Status Satisfactory Impaired Total Credit Status Satisfactory Impaired Total As of December 31, 2016 Commercial Mortgage Loans $1,048,724 113,509 Mezzanine Loans $57,063 32,748 Preferred Equity $36,680 6,150 Total $1,142,467 152,407 $1,162,233 $89,811 $42,830 $1,294,874 As of December 31, 2015 Commercial Mortgage Loans $1,336,883 90,445 Mezzanine Loans $135,710 33,846 Preferred Equity $22,291 7,946 Total $1,494,884 132,237 $1,427,328 $169,556 $30,237 $1,627,121 114 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The following tables provide a roll-forward of our allowance for loan losses for our commercial mortgage loans, mezzanine loans and preferred equity interests for the years ended December 31, 2016, 2015 and 2014: Beginning balance Provision (benefit) for loan losses Charge-offs, net of recoveries Other (a) Ending balance $ 3,154 6,467 — 1,019 $10,640 (1) Represents capitalization of past due interest on modified loans. For the Year Ended December 31, 2016 Commercial Mortgages Mezzanine Loans Preferred Equity $ 12,139 (227) (11,912) — $ 1,804 1,810 (1,900) — Total $ 17,097 8,050 (13,812) 1,019 $ — $ 1,714 $ 12,354 Beginning balance Provision for loan losses Charge-offs, net of recoveries Ending balance Beginning balance Provision for loan losses Charge-offs, net of recoveries Ending balance For the Year Ended December 31, 2015 Mezzanine Loans Preferred Equity $ 7,892 4,668 (421) $12,139 $1,326 478 — $1,804 For the Year Ended December 31, 2014 Total $ 9,218 8,300 (421) $17,097 Mezzanine Loans Preferred Equity $ 21,636 4,894 (18,638) $1,319 246 (239) Total $ 22,955 5,500 (19,237) $ 7,892 $1,326 $ 9,218 Commercial Mortgage Loans $ — 3,154 — $3,154 Commercial Mortgage Loans $ — 360 (360) $ — Information on those loans considered to be impaired as of December 31, 2016 and December 31, 2015 was as follows: Impaired Loans Impaired loans expecting full recovery Impaired loans with reserves Total Impaired Loans (1) Allowance for losses As of December 31, 2016 Commercial Mortgages Mezzanine Loans Preferred Equity $ — 113,509 $32,748 — $113,509 $32,748 $ — 6,150 $6,150 Total $ 32,748 119,659 $152,407 $ 10,640 $ — $1,714 $ 12,354 115 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) (1) As of December 31, 2016, there was no unpaid principal relating to previously identified TDRs that are on accrual status. Impaired Loans Impaired loans expecting full recovery Impaired loans with reserves Total Impaired Loans (1) Allowance for losses Commercial Mortgage Loans $74,800 15,645 $90,445 As of December 31, 2015 Mezzanine Loans Preferred Equity $ 3,000 30,846 $33,846 $ — 7,946 $7,946 Total $ 77,800 54,437 $132,237 $ 3,154 $12,139 $1,804 $ 17,097 (1) As of December 31, 2015, there was no unpaid principal relating to previously identified TDRs that are on accrual status. The average unpaid principal balance and recorded investment of total impaired loans was $134,721, $90,280 and $66,182 during the years ended December 31, 2016, 2015, and 2014, respectively. We recorded interest income from impaired loans of $3,488, $4,419 and $991 for the years ended December 31, 2016, 2015, and 2014, respectively. We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring (TDR) under FASB ASC Topic 310, “Receivables”. During the year ended December 31, 2016, there were three restructurings that were considered TDRs. We restructured two commercial mortgage loans with unpaid principal balances totaling $61,584 in TDRs as their interest payment rates were decreased, although contractual interest will continue to accrue at their original contractual rate, subject to management’s determination that the interest is collectible, and will be owed upon maturity. Also, we restructured one commercial mortgage loan with an unpaid principal balance of $74,800 in a TDR. This restructuring involved legally separating the loan into seven separate, cross-collateralized loans, capitalizing past due interest and advances, extending the maturity date and reducing the interest payment rate. Subsequent to this restructuring, in December of 2016, one of the properties collateralizing this loan was converted to real estate. See “Loan-to-Real Estate Conversion” section below for further. As of December 31, 2016, all three of the troubled debt restructurings that occurred during the year ended December 31, 2016 were on non-accrual status. During the year ended December 31, 2015, there were no restructurings that constituted a TDR. As of December 31, 2016 and December 31, 2015, there were no TDRs that subsequently defaulted for restructurings that had been entered into within the previous twelve months. Loan-to-Real Estate Conversions In April of 2016, we completed the conversion of one mezzanine loan with a carrying value of $332 to real estate owned property. The conversion resulted in approximately $18,380 of real estate-related assets and $17,696 of debt being reflected on our consolidated balance sheets. We recognized a charge-off of $1,203 upon conversion. In December of 2016, we completed the conversion of a portion of a commercial mortgage loan portfolio with a carrying value of $31,860 to real estate owned property. The conversion resulted in $31,860 of real estate- related assets on our consolidated balance sheets. 116 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) In October of 2015, we completed the conversion of one mezzanine loan with a carrying value of $11,000 to real estate owned property. The conversion has resulted in approximately $96,200 of real estate-related assets and $82,423 of debt being reflected on our consolidated balance sheets. We recognized a charge-off of $3 upon the conversion. In December of 2015, we completed the conversion of one commercial mortgage loan with an unpaid principal balance of $66,819 and a carrying value of $53,479 to real estate owned property. The conversion resulted in approximately $63,014 of real estate-related assets being reflected on our consolidated balance sheets. We recognized interest income of $265 upon the conversion, as the converted loan was recognizing interest income on the cash basis and the fair value of the net assets acquired exceeded the amount of the converted loan plus previously accrued interest. NOTE 4: INVESTMENTS IN REAL ESTATE The table below summarizes our investments in real estate: Multifamily real estate properties Office real estate properties Industrial real estate properties Retail real estate properties Parcels of land Subtotal Less: Accumulated depreciation and amortization Investments in real estate (1) Book Value as of December 31 2016 2015 $ 147,201 397,769 93,423 164,019 52,234 $ 470,689 395,224 94,938 134,331 50,448 854,646 (138,214) 1,145,630 (158,688) $ 716,432 $ 986,942 (1) As of December 31, 2016, three of our multifamily properties, with a carrying amount of $62,428, and two of our parcels of land, with a carrying amount of $14,233, were considered held-for-sale. As of December 31, 2016 and 2015, our investments in real estate were comprised of land of $169,133 and $225,122, respectively, and buildings and improvements of $685,513 and $920,520, respectively. As of December 31, 2016, our investments in real estate of $854,646 were financed through $186,237 of mortgage loans or other debt held by third parties and $642,824 of mortgage loans held by our RAIT I and RAIT II CDO securitizations. As of December 31, 2015, our investments in real estate of $1,145,630 were financed through $269,790 of mortgage loans held by third parties and $851,711 of mortgage loans held by our RAIT I and RAIT II CDO securitizations. Together, along with commercial real estate loans held by RAIT I and RAIT II, these mortgages serve as collateral for the CDO notes payable issued by the RAIT I and RAIT II CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation. 117 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) For our investments in real estate, the leases for our multifamily properties are generally one-year or less and leases for our office and retail properties are operating leases. The following table represents the minimum future rentals under expiring leases for our office and retail properties as of December 31, 2016. 2017 2018 2019 2020 2021 2022 and thereafter Total $10,490 4,922 3,237 6,752 4,824 21,688 $51,913 Acquisitions: As discussed in Note 3, we completed the conversion of one mezzanine loan with a carrying value of $11,000 to real estate owned property in October 2015. The conversion had resulted in approximately $96,200 of industrial real estate assets and $82,423 of debt being reflected on our consolidated balance sheets as of December 31, 2015. We performed fair value analyses for the assets acquired and liabilities assumed. During the first quarter of 2016, we received additional information regarding estimates we had made for certain assets including cash related to tenant security deposits related to this October 2015 acquisition of 10 industrial properties. This information led to an increase in fair value of the net assets acquired of $437, which we recognized within interest income, as the converted loan was on non-accrual and the fair value of the net assets acquired exceeded the amount of the converted loan plus previously accrued interest. During the fourth quarter of 2016, we finalized our purchase accounting process related to this acquisition. As discussed in Note 3, we completed the conversion of one commercial mortgage loan with an unpaid principal balance of $66,819 and a carrying value of $53,479 to real estate owned property, known as Erieview Tower & Parking in December 2015. The conversion had resulted in approximately $63,014 of real estate assets being reflected on our consolidated balance sheets as of December 31, 2015. We performed fair value analyses for the assets acquired. During the first quarter of 2016, we received additional information regarding estimates we had made as part of the purchase price allocation related to this December 2015 acquisition. This information, which related to an allocation of the estimated costs required to stabilize this property and an adjacent property to which we have rights to as collateral secured by a first mortgage, led to an increase in fair value of the net assets acquired of $1,499. This was offset by a decrease of $1,499 to the previously discussed collateral which is reported within investment in mortgage loans, mezzanine loans and preferred equity interests on our consolidated balance sheets. The $1,499 increase in the net assets acquired was related to an increase in investments in real estate of $3,351, a decrease in intangible assets of $57 and an increase in intangible liabilities of $1,795. The cumulative catch up effect of the allocation (based on the different useful lives) was an increase to net income of $11. During the fourth quarter of 2016, we finalized our purchase accounting process related to this acquisition. As discussed in Note 3, we completed the conversion of one mezzanine loan with a carrying value of $332 to real estate owned property in April 2016. The conversion resulted in approximately $18,380 of real estate assets, referred to as the Indiana Portfolio, and $17,696 of debt being reflected on our consolidated balance sheets. We have performed fair value analyses for the assets acquired and liabilities assumed. We expect to 118 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) complete the purchase accounting process as soon as practicable, but no later than one year from the date of acquisition. As discussed in Note 3, we completed the conversion of a portion of a commercial mortgage loan portfolio with a carrying value of $31,860 to real estate owned in December 2016. The conversion resulted in approximately $31,860 of real estate assets, referred to as Raritan SC, being reflected on our consolidated balance sheets. We have performed fair value analyses for the assets acquired and liabilities assumed. We expect to complete the purchase accounting process as soon as practicable, but no later than one year from the date of acquisition. The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the properties acquired during the year ended December 31, 2016, on the date of acquisition, for the real estate accounted for under FASB ASC Topic 805. Description Assets acquired: Investments in real estate Cash and cash equivalents Restricted cash Accounts receivable and other assets Intangible assets Total assets acquired Liabilities assumed: Indebtedness, net Accounts payable and accrued expenses Other liabilities Total liabilities assumed Estimated fair value of net assets acquired Fair Value of Assets Acquired During the Year Ended December 31, 2016 $47,942 382 221 5 3,185 51,735 17,696 852 1,072 19,620 $32,115 The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective acquisition date: Description Fair value of consideration transferred: Investments in loans, accrued interest receivable and other assets (net of allowance for loan losses of $1,213) Total Total Estimated Fair Value $32,192 $32,192 119 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The table below presents the revenue and net income (loss) attributable to the properties acquired during the year ended December 31, 2016 as reported in our consolidated financial statements. Property Indiana Portfolio Raritan SC Total For the Year Ended December 31, 2016 Total Revenue $1,911 — $1,911 Net income (loss) allocable to common shares $(800) — $(800) The table below presents the revenue, net income and earnings per share effect of the acquired properties on a pro forma basis as if the acquisitions occurred on January 1, 2015. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods. Description Pro forma total revenue (unaudited) Pro forma net income (loss) allocable to common For The Year Ended December 31, 2016 For The Year Ended December 31, 2015 $176,202 $217,478 shares (unaudited) (9,193) 7,461 Earnings (loss) per share attributable to common shareholders Basic—as pro forma (unaudited) Diluted—as pro forma (unaudited) (0.10) (0.10) 0.09 0.09 Dispositions: During the year ended December 31, 2016, we disposed of sixteen multifamily real estate properties, one office property, and one parcel of land (combined in the below table). We also recognized $5 of loss on sales related to properties sold in the prior year as we settled remaining amounts with the buyers. The below table 120 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) summarizes these dispositions and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale: Property Name Mineral/Lincoln Ventura Saxony Desert Wind (1) Las Vistas (1) Penny Lane (1) Sandal Ridge (1) Silversmith Coles Crossing (2) Eagle Ridge and Grand Terrace Augusta Ellington Regency Meadows River Park West Ashford Tierra Bella Mandalay Bay Property Type Office Multifamily Land Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Multifamily Date of Sale Sale Price 03/25/2016 03/30/2016 04/06/2016 05/18/2016 05/18/2016 05/18/2016 05/18/2016 06/03/2016 09/20/2016 09/21/2016 09/28/2016 11/03/2016 11/08/2016 11/17/2016 12/09/2016 12/14/2016 12/21/2016 $ 7,949 8,750 1,500 8,750 10,500 10,000 12,250 6,200 43,750 44,650 37,500 36,200 7,200 30,150 24,050 12,468 36,000 For the Year Ended December 31, 2016 Net income (loss) allocable to common shares $ — 45 (4) 52 122 121 162 95 90 534 871 1,000 (502) 279 157 330 (698) Gain (loss) on sale $ (374) 115 (12) (2,032) (61) 3,248 3,482 1,227 (3,965) 11,757 10,431 8,646 (68) 1,886 2,430 3,271 13,296 Total $337,867 $53,277 $2,654 (1) These properties were disposed of as a group of assets in a portfolio sale on May 18, 2016. (2) The loss on sale related to this property primarily results from a defeasance premium of $1,318 and the writeoff of the noncontrolling interest of $2,518. During the year ended December 31, 2015, we disposed of six multifamily real estate properties, one office property, and two parcels of land (combined in the below table). The below table summarizes these dispositions 121 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale: Property Name English Aire/Lafayette Preserve at Colony Lakes Del Aire/Cardinal Regency Manor Vista Lago Balcones Long Beach Total For the Year Ended December 31, 2015 Net income (loss) allocable to common shares Gain (loss) on sale Date of Sale Sale Price 05/15/2015 06/23/2015 07/06/2015 09/10/2015 12/22/2015 12/31/2015 12/30/2015 $ 18,786 49,250 3,000 17,500 17,675 30,000 5,200 $ — $ 265 733 17,913 (15) 901 403 6,435 685 7,844 284 2,938 122 1,068 $141,411 $37,099 $2,477 Property Type Multifamily Multifamily Land Multifamily Multifamily Multifamily Office We deferred a gain on the sale for English Aire / Lafayette of $3,124 which was classified within other liabilities and will be recognized under the installment method as the buyer’s initial investment was insufficient. We deconsolidated one multifamily real estate property in June 2015 and one office property in November 2015 with a total carrying value of $23,897 and $21,753, respectively, as we agreed to amend our rights in the properties’ related limited partnership agreements. We recorded a gain of $0 and $294, respectively, upon deconsolidation of these properties. In January of 2017, we sold one multifamily real estate property for $36,650. In March of 2017, we sold one office real estate property and one multifamily real estate property for a sales price of $12,175 and $23,750, respectively. We expect to recognize gains on the sales of these assets. The majority of the proceeds will be used to repay related indebtedness of the properties, some of which is held by our RAIT I and RAIT II CDO securitizations. In February and March of 2017, the senior lender foreclosed on the mortgage liens encumbering five of our industrial properties that had an aggregate carrying value of $43,351. As a result, the senior lender or its assignee/designee now owns these five properties, subject to any redemption rights that we have under applicable state law, if any. These five properties along with five of our other industrial properties serve as collateral for a mortgage loan with an unpaid principal balance of $81,943. As of December 31, 2016, our assets approximated our liabilities on our consolidated balance sheet as it relates to these ten industrial properties. Impairment: During the year ended December 31, 2016, we recognized impairment of $32,782 as it was more likely than not we would dispose of certain assets before the end of their previously estimated useful lives, and a portion of our recorded investment in these assets was determined to not be recoverable. During the year ended December 31, 2016, we expensed tenant improvements and straight-line rent receivables aggregating $1,703 122 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) associated with tenants who vacated our properties early. We also recognized a loss on our retail property management subsidiary’s investment in an unconsolidated entity of $864. We also derecognized the noncontrolling interest of $2,436 related to ten of our industrial properties as they were impaired. During the year ended December 31, 2015, we recognized an impairment of three real estate assets of $8,179 as it was more likely than not we would dispose of these assets before the end of their previously estimated useful life, and a portion of our recorded investment in these assets was determined to not be recoverable. NOTE 5: INDEBTEDNESS We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2016: Description Recourse indebtedness: 7.0% convertible senior notes (1) 4.0% convertible senior notes (2) 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at fair value (3) Junior subordinated notes, at amortized cost CMBS facilities Total recourse indebtedness Non-recourse indebtedness: CDO notes payable, at amortized cost (4) (5) CMBS securitizations (6) Loans payable on real estate (7) Unpaid Principal Balance Unamortized Discount and Deferred Finance Costs Carrying Amount Weighted- Average Interest Rate Contractual Maturity $ 871 126,098 57,287 70,731 62,000 $ (40) (5,827) (1,719) (1,543) (3,767) $ 831 120,271 55,568 69,188 58,233 7.0% 4.0% 7.6% 7.1% 7.0% Apr. 2017 to Apr. 2019 Apr. 2031 Oct. 2033 Apr. 2024 Aug. 2019 18,671 (6,849) 11,822 4.8% Mar. 2035 25,100 26,421 — (1,513) 25,100 24,908 3.4% 3.1% Nov. 2017 to Jul. 2018 Apr. 2037 387,179 (21,258) 365,921 5.5% 542,316 647,921 186,237 (7,815) (6,844) (569) 534,501 641,077 185,668 1.7% Jun. 2045 to Nov. 2046 3.1% Jan. 2031 to Dec. 2031 5.7% Jun. 2016 to Dec. 2021 Total non-recourse indebtedness 1,376,474 (15,228) 1,361,246 2.9% Other indebtedness (8) Total indebtedness 24,321 (406) 23,915 — — $1,787,974 $(36,892) $1,751,082 3.5% (1) Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2021, and April 2026. (2) Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028. 123 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) (3) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825. (4) Excludes CDO notes payable purchased by us which are eliminated in consolidation. (5) Collateralized by $950,554 principal amount of commercial mortgage loans, mezzanine loans and preferred equity interests, $535,041 of which eliminates in consolidation. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors. (6) Collateralized by $789,421 principal amount of commercial mortgage loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors. (7) One loan payable on real estate had a maturity date of June 2016. This loan is currently in default and is in the process of foreclosure. (8) Represents a 40% interest issued to an unaffiliated third party in a venture to which we contributed the junior notes and equity of a floating rate securitization. We retained a 60% interest in this venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $24,796 of proceeds as a result of issuing this 40% interest, which has an unpaid principal balance of $24,321. This 40% interest has no stated maturity date and does not provide for its mandatory redemption or any required return or interest payment. The venture interests allocate the distributions on such junior notes and equity when made between the parties to the venture. The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2015: Description Recourse indebtedness: 7.0% convertible senior notes (1) 4.0% convertible senior notes (2) 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at fair value (3) Junior subordinated notes, at amortized cost CMBS facilities Total recourse indebtedness Non-recourse indebtedness: CDO notes payable, at amortized cost (4) (5) CMBS securitizations (6) Loans payable on real estate Unpaid Principal Balance Unamortized Discount and Deferred Finance Costs Carrying Amount Weighted- Average Interest Rate Contractual Maturity $ 30,048 141,750 60,000 71,905 70,000 $ (1,180) (8,711) (2,048) (2,156) (6,955) $ 28,868 133,039 57,952 69,749 63,045 7.0% 4.0% 7.6% 7.1% 7.0% Apr. 2017 to Apr. 2019 Apr. 2031 Oct. 2033 Apr. 2024 Aug. 2019 18,671 (8,167) 10,504 4.3% Mar. 2035 25,100 97,067 (216) (344) 24,884 96,723 2.7% 2.4% Jul. 2016 to Jan. 2018 Apr. 2037 514,541 (29,777) 484,764 5.1% 950,981 717,255 269,790 (13,412) (8,745) (1,158) 937,569 708,510 268,632 0.9% Jun. 2045 to Nov. 2046 2.4% May 2031 to Dec. 2031 5.6% Apr. 2016 to Apr. 2026 Total non-recourse indebtedness 1,938,026 (23,315) 1,914,711 Total indebtedness $2,452,567 $(53,092) $2,399,475 2.1% 2.7% 124 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) (1) Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2016, April 2021, and April 2026. (2) Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028. (3) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825. (4) Excludes CDO notes payable purchased by us which are eliminated in consolidation. (5) Collateralized by $1,388,194 principal amount of commercial mortgage loans, mezzanine loans and preferred equity interests, $815,745 of which eliminates in consolidation. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors. (6) Collateralized by $885,055 principal amount of commercial mortgage loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by us. Non-recourse indebtedness consists of indebtedness of consolidated securitizations and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated securitization have no recourse to our general credit. The current status or activity in our financing arrangements occurring as of or during the year ended December 31, 2016 is as follows: Recourse Indebtedness 7.0% convertible senior notes. On March 21, 2011, we issued and sold in a public offering $115,000 aggregate principal amount of our 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes. After deducting the underwriting discount and the estimated offering costs, we received approximately $109,000 of net proceeds. Interest on the 7.0% convertible senior notes is paid semi-annually and the 7.0% convertible senior notes mature on April 1, 2031. Prior to April 5, 2016, the 7.0% convertible senior notes were not redeemable at our option, except to preserve RAIT’s status as a REIT. On or after April 5, 2016, we may redeem all or a portion of the 7.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 7.0% convertible senior notes may require us to repurchase all or a portion of the 7.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on April 1, 2016, April 1, 2021, and April 1, 2026, or upon the occurrence of certain defined fundamental changes. The 7.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 195.0060 common shares per $1 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $5.13 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares, or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in diluted earnings per share using the if-converted method if the conversion value in excess of the par amount is considered in the money during the respective periods. According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 7.0% convertible senior notes of $8,228. This discount reflects the fair value of the embedded conversion option within 125 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) the 7.0% convertible senior notes and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the 7.0% convertible senior notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the 7.0% convertible senior notes were issued. The discount was fully amortized to interest expense through April 1, 2016, the date at which holders of our 7.0% convertible senior notes could require repayment. On October 2, 2015 and October 5, 2015, holders of $2,010 of the 7.0% convertible notes exercised their option to convert their notes. At that time, the conversion rate was 167.8233 common shares per $1 principal amount. We elected to settle the conversion by issuing 337,324 common shares (plus cash in lieu of fractional shares). On November 10, 2015 and November 12, 2015, holders of $2,008 of the 7.0% convertible notes exercised their option to convert their notes. At that time, the conversion rate was 173.6550 common shares per $1 principal amount. We elected to settle the conversion by issuing 348,698 common shares (plus cash in lieu of fractional shares). During the year ended December 31, 2016, a total of $29,177 in aggregate principal amount of the 7.0% convertible senior notes were put back to us and we repurchased the notes for total consideration of $29,177. 4.0% convertible senior notes. On December 10, 2013, we issued and sold in a public offering $125,000 aggregate principal amount of our 4.0% Convertible Senior Notes due 2033, or the 4.0% convertible senior notes. After deducting the underwriting discount and offering costs, we received approximately $121,250 of net proceeds. In January 2014, the underwriters exercised the overallotment option with respect to an additional $16,750 aggregate principal amount of the 4.0% convertible senior notes and we received total net proceeds of $16,300 after deducting underwriting fees and adjusting for accrued interim interest. In the aggregate, we issued $141,750 aggregate principal amount of the 4.0% convertible senior notes in the offering and raised total net proceeds of approximately $137,238 after deducting underwriting fees and offering expenses. Interest on the 4.0% convertible senior notes is paid semi-annually and the 4.0% convertible senior notes mature on October 1, 2033. Prior to October 1, 2018, the 4.0% convertible senior notes are not redeemable at our option, except to preserve RAIT’s status as a REIT. On or after October 1, 2018, we may redeem all or a portion of the 4.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 4.0% convertible senior notes may require us to repurchase all or a portion of the 4.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on October 1, 2018, October 1, 2023, and October 1, 2028, or upon the occurrence of certain defined fundamental changes. The 4.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 108.5803 common shares per $1 principal amount of 4.0% convertible senior notes (equivalent to a current conversion price of $9.21 per common share). Upon conversion of 4.0% convertible senior notes by a holder, the holder will receive cash, our common shares, or a combination of cash and our common shares, at our election. We include the 4.0% convertible senior notes in earnings per share using the if-converted method if the conversion value in excess of the par amount is considered in the money during the respective periods. According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 4.0% convertible senior notes of $8,817. This discount reflects the fair value of the embedded conversion option within 126 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) the 4.0% convertible senior notes and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the 4.0% convertible senior notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the 4.0% convertible senior notes were issued. The discount will be amortized to interest expense through October 1, 2018, the date at which holders of our 4.0% convertible senior notes could require repayment. Concurrent with the offering of the 4.0% convertible senior notes, we used approximately $8,838 of the proceeds and entered into a capped call transaction with an affiliate of the underwriter. The capped call transaction has a cap price of $11.91, which is subject to certain adjustments, and an initial strike price of $9.57, which is subject to certain adjustments and is equivalent to the conversion price of the 4.0% convertible senior notes. The capped calls expire on various dates ranging from June 2018 to October 2018 and are expected to reduce the potential dilution to holders of our common stock upon the potential conversion of the 4.0% convertible senior notes. The capped call transaction is a separate transaction and is not part of the terms of the 4.0% convertible senior notes and will not affect the holders’ rights under the 4.0% convertible senior notes. The capped call transaction meets the criteria for equity classification and was recorded as a reduction to additional paid in capital. The capped call transaction is excluded from the dilutive EPS calculation as their effect would be anti-dilutive. During the year ended December 31, 2016, we repurchased a total of $15,652 in aggregate principal amount of 4.0% convertible senior notes for a total consideration of $14,075. 7.625% senior notes. On April 14, 2014, we issued and sold in a public offering $60,000 aggregate principal amount of our 7.625% Senior Notes due 2024, or the 7.625% senior notes. After deducting the underwriting discount and the offering costs, we received approximately $57,500 of net proceeds. Interest on the 7.625% senior notes is paid quarterly with a maturity date of April 15, 2024. The 7.625% senior notes are subject to redemption at our option, in whole or in part, at any time on or after April 15, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are not convertible into equity securities of RAIT. They contain financial covenants that are consistent with our other debt agreements. During the year ended December 31, 2016, we repurchased a total of $2,713 in aggregate principal amount of 7.625% senior notes for a total consideration of $2,172. 7.125% senior notes. In August 2014, we issued and sold in a public offering $71,905 aggregate principal amount of our 7.125% Senior Notes due 2019, or the 7.125% senior notes. After deducting the underwriting discount and the offering costs, we received approximately $69,209 of net proceeds. Interest on the 7.125% senior notes is paid quarterly with a maturity date of August 30, 2019. The 7.125% senior notes are subject to redemption at our option, in whole or in part, at any time on or after August 30, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are 127 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) not convertible into equity securities of RAIT. They contain financial covenants that are consistent with our other debt agreements. During the year ended December 31, 2016, we repurchased a total of $1,174 in aggregate principal amount of 7.125% senior notes for a total consideration of $1,081. Senior secured notes. On October 5, 2011, we entered into an exchange agreement with T8 pursuant to which we issued four senior secured notes, or the senior secured notes, with an aggregate principal amount equal to $100,000 to T8 in exchange for a portfolio of real estate related debt securities, or the exchanged securities, held by T8. The senior secured notes and the exchanged securities were determined to have approximately equivalent fair market value at the time of the exchange. The senior secured notes were issued pursuant to an indenture agreement dated October 5, 2011 which contains customary events of default, including those relating to nonpayment of principal or interest when due and defaults based upon events of bankruptcy and insolvency. The senior secured notes are each $25,000 principal amount with a weighted average interest rate of 7.0% and have maturity dates ranging from April 2017 to April 2019. Interest is paid quarterly on October 30, January 30, April 30 and July 30 of each year. The senior secured notes are secured and are not convertible into equity securities of RAIT. During the year ended December 31, 2016, we repaid $8,000 of the senior secured notes. In January 2017, we redeemed $15,500 in principal amount of the 6.75% senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Junior subordinated notes, at fair value. On October 16, 2008, we issued two junior subordinated notes with an aggregate principal amount of $38,052 to a third party and received $15,459 of net cash proceeds. One junior subordinated note, which we refer to as the first $18,671 junior subordinated note, has a principal amount of $18,671, a fixed interest rate of 8.65% through March 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter and a maturity date of March 30, 2035. The second junior subordinated note, which we refer to as the $19,381 junior subordinated note, had a principal amount of $19,381, a fixed interest rate of 9.64% and a maturity date of October 30, 2015. At issuance, we elected to record these junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. On October 25, 2010, pursuant to a securities exchange agreement, we exchanged and cancelled the first $18,671 junior subordinated note for another junior subordinated note, which we refer to as the second $18,671 junior subordinated note, in aggregate principal amount of $18,671 with a reduced interest rate and provided $5,000 of our 6.875% convertible senior notes as collateral for the second $18,671 junior subordinated note. The second $18,671 junior subordinated note had a fixed rate of interest of 0.5% through March 30, 2015, and thereafter a floating rate of three-month LIBOR plus 400 basis points, with such floating rate not to exceed 7.0%. The maturity date remains the same at March 30, 2035. At issuance, we elected to record the second $18,671 junior subordinated note at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. The fair value, or carrying amount, of this indebtedness was $12,028 as of December 31, 2016. Junior subordinated notes, at amortized cost. On February 12, 2007, we formed Taberna Funding Capital Trust I which issued $25,000 of trust preferred securities to investors and $100 of common securities to us. The combined proceeds were used by Taberna Funding Capital Trust I to purchase $25,100 of junior subordinated 128 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) notes issued by us. The junior subordinated notes are the sole assets of Taberna Funding Capital Trust I and mature on April 30, 2037, but are callable, at our option, on or after April 30, 2012. Interest on the junior subordinated notes is payable quarterly at a fixed rate of 7.69% through April 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.50%. CMBS facilities. On October 27, 2011, we entered into a two year CMBS facility pursuant to which we may sell, and later repurchase, performing whole mortgage loans or senior interests in whole mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in CMBS transactions. The purchase price paid for any asset purchased will be equal to 75% of the lesser of the market value (determined by the purchaser in its sole discretion, exercised in good faith) or par amount of such asset on the purchase date. On July 28, 2014, we entered into an amended and restated master repurchase agreement, or the Amended MRA. The Amended MRA added defined floating-rate whole loans and senior interests in whole loans as eligible purchased assets which we could sell to the investment bank and later repurchase. All eligible purchased assets must be acceptable to the investment bank in its sole discretion. The Amended MRA increased the aggregate principal amount available under the facility to $200,000 from $100,000 provided that the aggregate outstanding purchase price under the Amended MRA at any time for all floating rate loans cannot exceed $100,000. Fixed rate loans and floating rate loans incur interest at LIBOR plus 250 basis points. The Amended MRA contains standard margin call provisions and financial covenants. On July 28, 2016, this facility was amended decreasing the capacity to $150,000 and extending the maturity date to July 28, 2018. As of December 31, 2016, we had $22,371 of outstanding borrowings under the Amended MRA. As of December 31, 2016, we were in compliance with all financial covenants contained in the Amended MRA. On November 23, 2011, we entered into a one year CMBS facility, or the $150,000 CMBS facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in CMBS transactions. Effective November 17, 2015, we extended the maturity of the $150,000 CMBS facility to the earlier of November 16, 2016 or the day on which an event of default occurs. The aggregate principal amount available under the $150,000 CMBS facility is $150,000 and incurs interest at LIBOR plus 250 basis points. The purchase price paid for any asset purchased is up to 75% of the lesser of the unpaid principal balance and the market value (determined by the purchaser in its sole discretion, exercised in good faith) of such purchased asset on the purchase date. The $150,000 CMBS facility contains standard margin call provisions and financial covenants. On November 16, 2016, this facility was amended decreasing the capacity to $100,000 and extending the maturity date to November 16, 2017. As of December 31, 2016, we had $0 of outstanding borrowings under the $100,000 CMBS facility. As of December 31, 2016, we were in compliance with all financial covenants contained in the $100,000 CMBS facility. On January 27, 2014, we entered into a two year $75,000 commercial mortgage facility, or the $75,000 commercial mortgage facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans and other assets meeting defined eligibility criteria which are approved by the purchaser in its sole discretion. Effective September 28, 2015, we extended the maturity of the $75,000 commercial mortgage facility to January 22, 2018 or such date as determined by the Buyer in its good faith discretion pursuant to its rights and remedies under the Agreement. The $75,000 commercial mortgage facility incurs interest at LIBOR plus 200 basis points. The $75,000 commercial mortgage facility contains standard margin call provisions and financial covenants. As of December 31, 2016, we had $4,050 of outstanding borrowings under the $75,000 commercial mortgage facility. As of December 31, 2016, we were in compliance with all financial covenants contained in the $75,000 commercial mortgage facility. 129 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) On December 23, 2014, we entered into a $150,000 commercial mortgage facility, or the $150,000 commercial mortgage facility, pursuant to which we may sell, and later repurchase, commercial mortgage loans and other assets meeting defined eligibility criteria which are approved by the purchaser in its reasonable discretion. The $150,000 commercial mortgage facility incurs interest at LIBOR plus 200 basis points. The purchase price paid for any asset purchased is based on a defined percentage of the lesser of its unpaid principal balance or its defined market value. On December 20, 2016, we extended the maturity of the $150,000 commercial facility to December 19, 2017 or the day on which an event of default occurs. The $150,000 commercial mortgage facility contains standard margin call provisions and financial covenants. As of December 31, 2016, we had $0 of outstanding borrowings under the $150,000 commercial mortgage facility. As of December 31, 2016, we were in compliance with all financial covenants contained in the $150,000 commercial mortgage facility. Non-Recourse Indebtedness CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO securitizations which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgage loans and mezzanine loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both RAIT I and RAIT II are meeting all of their overcollateralization, or OC, and interest coverage, or IC, trigger tests as of December 31, 2016 and 2015. During the year ended December 31, 2016, we repurchased $5,880 in aggregate principal amount of CDO notes payable. The aggregate purchase price was $4,988 and we recorded a gain on extinguishment of debt of $682. During the year ended December 31, 2015, we partially sold, a total of $42,483 in aggregate principal amount of CDO notes payable issued by our RAIT I securitization. The aggregate sales price was $31,367 and we recorded a discount on sale of debt of $11,131. CMBS securitizations. On July 31, 2013, we closed a CMBS securitization transaction we refer to as RAIT FL1 collateralized by $135,000 of floating rate commercial mortgage loans and participation interests that we originated and was non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2013-FL1 Trust, or the FL1 issuer, issued classes of investment grade senior notes with an aggregate principal balance of approximately $101,250 to investors, representing an advance rate of approximately 75%. The RAIT FL1 senior notes bore interest at a weighted average rate equal to LIBOR plus 1.85%. The stated maturity of the RAIT FL1 notes was January 2029, unless redeemed or repaid prior thereto. We retained the unrated classes of junior notes including a class with an aggregate principal balance of $33,750, and the equity, or the retained interests, of RAIT FL1. Subject to certain conditions, beginning in August 2015 or upon defined tax events, the RAIT FL1 senior notes were able to be redeemed in whole but not in part, at the direction of defined holders of RAIT FL1 junior notes, which we held. RAIT FL1 does not have OC triggers or IC triggers. During the third quarter of 2015, RAIT exercised its right to unwind RAIT-FL1, thereby repaying all of the outstanding notes. On April 17, 2014, we closed a CMBS securitization transaction we refer to as RAIT FL2 that was collateralized by $196,052 of floating rate commercial mortgage loans and participation interests that we 130 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) originated and was non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2014-FL2 Trust, or the FL2 issuer, issued classes of investment grade senior notes, or the FL2 senior notes, with an aggregate principal balance of approximately $155,861 to investors, representing an advance rate of approximately 79.5%. The FL2 senior notes bore interest at a weighted average rate equal to LIBOR plus 1.65%. The stated maturity of the FL2 notes was May 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL2, we retained the unrated classes of junior notes, or the FL2 junior notes, including a class with an aggregate principal balance of $40,191, and the equity, or the retained interests, of the FL2 issuer. Subject to certain conditions, beginning in April 2016 or upon defined tax events, the RAIT FL2 senior notes were able to be redeemed, in whole but not in part, at the direction of holders of FL2 junior notes, which we held. During the third quarter of 2016, RAIT exercised its right to unwind RAIT FL2, thereby repaying all of the outstanding notes. As a result, as of December 31, 2016, RAIT FL2 has $0 of total collateral at par value. RAIT FL2 did not have OC triggers or IC triggers. On October 29, 2014, we closed a CMBS securitization transaction we refer to as RAIT FL3 that was collateralized by $219,378 of floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2014-FL3 Trust, or the FL3 issuer, issued classes of investment grade senior notes, or the FL3 senior notes, with an aggregate principal balance of approximately $181,261 to investors, representing an advance rate of approximately 82.6%. The FL3 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.86%. The stated maturity of the FL3 notes is December 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL3, we retained the unrated classes of junior notes, or the FL3 junior notes, including a class with an aggregate principal balance of $38,117, and the equity, or the retained interests, of the FL3 issuer. As of December 31, 2016, RAIT FL3 had $95,328 of total collateral at par value, none of which is defaulted. RAIT FL3 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $57,941 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $37,387, and the equity of RAIT FL3. Subject to certain conditions, beginning in October 2016 or upon defined tax events, the FL3 issuer may redeem the FL3 senior notes, in whole but not in part, at the direction of holders of FL3 junior notes, which we hold. RAIT FL3 does not have OC triggers or IC triggers. On May 22, 2015, we closed a CMBS securitization transaction we refer to as RAIT FL4 collateralized by $223,034 of floating rate commercial mortgage loans that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2015- FL4 Trust, or the FL4 issuer, issued classes of investment grade senior notes, or the FL4 senior notes with an aggregate principal balance of approximately $181,215 to investors, representing an advance rate of approximately 81.2%. The FL4 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.84%. The stated maturity of the FL4 notes is December 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL4, we retained the unrated classes of junior notes, or the FL4 junior notes, including a class with an aggregate principal balance of $41,819, and the equity, or the retained interests, of the FL4 issuer. As of December 31, 2016, RAIT FL4 had $149,388 of total collateral at par value, none of which is defaulted. RAIT FL4 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $107,998 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $41,390, and the equity of RAIT FL4. Subject to certain conditions, beginning 131 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) in May 2017, or upon defined tax events, the FL4 issuer may redeem the FL4 senior notes, in whole but not in part, at the direction of holders of FL4 junior notes, which we hold. RAIT FL4 does not have OC triggers or IC triggers. On December 23, 2015, we closed a CMBS securitization transaction we refer to as RAIT FL5 collateralized by $347,446 of floating rate commercial mortgage loans and participation interests that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2015-FL5 Trust, or the FL5 issuer, issued classes of investment grade senior notes, or the FL5 senior notes, with an aggregate principal balance of approximately $263,624 to investors, representing an advance rate of approximately 75.8%. The FL5 senior notes bear interest at a weighted average rate equal to LIBOR plus 2.62%. The stated maturity of the FL5 notes is January 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL5, we retained $23,019 of investment grade notes and all $60,803 of the unrated classes of junior notes, or the FL5 junior notes, and equity of the FL5 issuer. In February 2016, we contributed the $60,803 of junior notes and equity of RAIT FL5 to a venture. We retained a 60% interest in the venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $24,796 of proceeds as a result of this contribution. In April 2016, we sold $23,019 of investment grade notes that we had retained upon closing. As of December 31, 2016, RAIT FL5 had $326,108 of total collateral at par value, none of which is defaulted and had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $265,304 to investors. Subject to certain conditions, beginning in December 2017 or upon defined tax events, the FL5 issuer may redeem the FL5 senior notes, in whole but not in part, at the direction of holders of FL5 junior notes, which are held by the aforementioned venture. RAIT FL5 does not have OC triggers or IC triggers. On November 30, 2016, we closed a CMBS securitization transaction we refer to as RAIT FL6 collateralized by $257,949 of floating rate commercial mortgage loans and participation interests that we originated and is non-recourse to us, except for certain repurchase and other obligations related to customary representations, warranties and covenants concerning the collateral that we had made. In this CMBS securitization transaction, our subsidiary, RAIT 2016-FL6 Trust, or the FL6 issuer, issued classes of investment grade senior notes, or the FL6 senior notes, with an aggregate principal balance of approximately $216,677 to investors, representing an advance rate of approximately 84.0%. The FL6 senior notes bear interest at a weighted average rate equal to LIBOR plus 2.03%. The stated maturity of the FL6 notes is November 2031, unless redeemed or repaid prior thereto. At the closing of RAIT FL6, we retained the unrated classes of junior notes, or the FL6 junior notes, aggregating to a principal balance of $41,272 and the equity, or the retained interests, of the FL6 issuer. As of December 31, 2016, RAIT FL6 had $257,949 of total collateral at par value, none of which is defaulted and had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $216,677 to investors. Subject to certain conditions, beginning in December 2018 or upon defined tax events, the FL6 issuer may redeem the FL6 senior notes, in whole but not in part, at the direction of holders of FL6 junior notes, which we held as of December 31, 2016. In January 2017, we contributed our junior notes and equity of RAIT FL6 to a venture. We retained a 60% interest in the venture, and, as a result of our controlling financial interest, we consolidated the venture. We received approximately $16,893 of proceeds as a result of this contribution. Loans payable on real estate. As of December 31, 2016 and 2015, we had $186,237 and $269,790, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheets. 132 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) During the year ended December 31, 2016, we repaid $90,209 of mortgage indebtedness as part of ten property dispositions. During the year ended December 31, 2016, we assumed a first mortgage on our investments in real estate related to the acquisition of the Indiana portfolio that had a fair value and a total principal balance of $17,987. During the year ended December 31, 2016, we repaid $8,314 of mortgage indebtedness related to four collateralized properties. During the year ended December 31, 2016, we refinanced an $8,162 mortgage with a $7,200 mortgage on our Cherry Hill Mews property. In January 2017, we repaid $9,143 of mortgage indebtedness as part of one property disposition. During the year ended December 31, 2015, we assumed a first mortgage on our investments in real estate related to the acquisition of ten properties that had a fair value and a principal balance of $82,423. Maturity of Indebtedness Generally, the majority of our indebtedness is payable in full upon the maturity or termination date of the underlying indebtedness. The following table displays the aggregate contractual maturities of our indebtedness by year: 2017 (1) 2018 2019 2020 2021 Thereafter (2) Total Recourse indebtedness Non-recourse indebtedness $ 31,000 41,921 86,231 — — 228,027 $ 115,293 1,315 1,387 10,102 25,980 1,222,397 $387,179 $1,376,474 (1) Non-recourse indebtedness includes $81,943 of indebtedness that had a maturity date of June 2016. This indebtedness was collateralized by ten industrial properties as of December 31, 2016. In February and March of 2017, the senior lender foreclosed on the mortgage liens encumbering five of these properties that had an aggregate carrying value of $43,351 and is in the process of foreclosing on several of the remaining properties. Includes $871 of our 7.0% convertible senior notes which are redeemable, at par at the option of the holder in April 2021 and April 2026. Includes $126,098 of our 4.0% convertible senior notes which are redeemable, at par at the option of the holder in October 2018, October 2023, and October 2028. (2) NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated 133 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) with our operating and financial structure as well as to hedge specific anticipated transactions. While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations. Interest Rate Derivatives We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of December 31, 2015, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements. As of December 31, 2016, all of our cash flow hedge interest rate swaps had reached maturity. The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of December 31, 2016 and December 31, 2015: Cash flow hedges: Interest rate swaps Interest rate caps Other interest rate swaps Net fair value As of December 31, 2016 As of December 31, 2015 Notional Fair Value of Assets Fair Value of Liabilities Notional Fair Value of Assets Fair Value of Liabilities $ — 28,960 15,175 $44,135 $— 135 71 $206 $— — — $— $243,816 — 37,325 $281,141 $— — 182 $182 $(4,672) — (55) $(4,727) Effective interest rate hedges are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or derivative liabilities. For interest rate swaps that are considered effective hedges, we reclassified realized losses of $4,824, $16,382 and $40,274 to earnings, within investment interest expense, for the years ended December 31, 2016, 2015 and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014 we had no unrealized gains to reclassify to earnings for interest rate swaps that were considered ineffective. Changes in fair value on our other interest rate derivatives are reported in change in fair value of financial instruments in the Consolidated Statements of Operations. 134 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value of Financial Instruments FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages, loans, preferred equity interests, CDO notes payable, convertible senior notes, junior subordinated notes, warrants and investor share appreciations rights, or SARs, and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, CMBS facilities, and other indebtedness approximates their carrying amount or unpaid principal balance due to the nature of these instruments. The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2016: Financial Instrument Assets Carrying Amount Estimated Fair Value Total investment in mortgages and loans, net Cash and cash equivalents Restricted cash Derivative assets $1,280,285 110,531 190,179 206 $1,256,342 110,531 190,179 206 Liabilities Recourse indebtedness: 7.0% convertible senior notes 4.0% convertible senior notes 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at fair value Junior subordinated notes, at amortized cost CMBS facilities Non-recourse indebtedness: CDO notes payable, at amortized cost CMBS securitizations Loans payable on real estate Other indebtedness Derivative liabilities Warrants and investor SARs 831 120,271 55,568 69,188 58,233 11,822 25,100 24,908 534,501 641,077 185,668 23,915 — 30,400 890 116,861 53,231 69,118 62,620 11,822 13,099 26,421 477,032 646,642 188,525 24,321 — 30,400 135 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2015: Financial Instrument Assets Carrying Amount Estimated Fair Value Total investment in mortgages and loans, net Cash and cash equivalents Restricted cash Derivative assets $1,606,486 87,581 207,599 182 $1,537,086 87,581 207,599 182 Liabilities Recourse indebtedness: 7.0% convertible senior notes 4.0% convertible senior notes 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at fair value Junior subordinated notes, at amortized cost CMBS facilities Non-recourse indebtedness: CDO notes payable, at amortized cost CMBS securitizations Loans payable on real estate Derivative liabilities Warrants and investor SARs 28,868 133,039 57,952 69,749 63,045 10,504 24,884 96,723 937,569 708,510 268,632 4,727 26,200 27,795 104,184 46,560 62,471 66,725 10,504 11,221 97,067 801,289 709,001 281,840 4,727 26,200 Fair Value Measurements The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value: Assets: Derivative assets Total assets Quoted Prices in Active Markets for Identical Assets (Level 1) (a) Significant Other Observable Inputs (Level 2) (a) Significant Unobservable Inputs (Level 3) (a) Balance of December 31, 2016 — $— 206 $206 — $— 206 $206 136 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Liabilities: Junior subordinated notes, at fair value Warrants and investor SARs Total liabilities Quoted Prices in Active Markets for Identical Assets (Level 1) (a) Significant Other Observable Inputs (Level 2) (a) Significant Unobservable Inputs (Level 3) (a) Balance of December 31, 2016 $— — $— $— — $— $11,822 $11,822 30,400 $42,222 30,400 $42,222 (a) During the year ended December 31, 2016, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3. The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2015, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value: Assets: Derivative assets Total assets Liabilities: Junior subordinated notes, at fair value Derivative liabilities Warrants and investor SARs Total liabilities Quoted Prices in Active Markets for Identical Assets (Level 1) (a) Significant Other Observable Inputs (Level 2) (a) Significant Unobservable Inputs (Level 3) (a) Balance of December 31, 2015 $— $— $182 $182 $— $— $182 $182 Quoted Prices in Active Markets for Identical Assets (Level 1) (a) Significant Other Observable Inputs (Level 2) (a) Significant Unobservable Inputs (Level 3) (a) Balance of December 31, 2015 $— — — $— $ — 4,727 — $4,727 $10,504 — 26,200 $36,704 $10,504 4,727 26,200 $41,431 (a) During the year ended December 31, 2015, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3. When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value. For the fair value of our junior subordinated notes, at fair value, and warrant and 137 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) investor SARs classified as Level 3 liabilities, we estimate the fair value of these financial instruments using significant unobservable inputs. For the junior subordinated notes, at fair value, we use a discounted cash flow model as the valuation technique and the significant unobservable inputs as of December 31, 2015 include discount rates ranging from 12.9% to 13.3% and as of December 31, 2016 include discount rates ranging from 11.5% to 11.8%. For the warrants and investor SARs, we utilized a third party valuation firm who used a binomial model as the valuation technique and the significant unobservable inputs as of December 31, 2016 and 2015 include 51.0% and 61.0%, respectively, for the annual volatility of our common shares of beneficial interest over the term of the warrants and investor SARs, 10.0% and 12.0%, respectively, for the credit adjusted discount rate on our unsecured debt issued that may be issued in satisfaction of the warrants and investor SARs, and 10.0% and 10.6%, respectively, for the dividend rate and future dividend rate on our common shares of beneficial interest. The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the year ended December 31, 2016: Liabilities Balance, as of December 31, 2015 Change in fair value of financial instruments Purchases Sales Principal repayments Balance, as of December 31, 2016 Warrants and investor SARs Junior Subordinated Notes, at Fair Value $26,200 4,200 — — — $30,400 $10,504 1,318 — — — $11,822 Total Level 3 Liabilities $36,704 5,518 — — — $42,222 The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the year ended December 31, 2015: Liabilities Balance, as of December 31, 2014 Change in fair value of financial instruments Purchases Principal repayments Balance, as of December 31, 2015 Warrants and investor SARs $35,384 (9,184) — — $26,200 Junior Subordinated Notes, at Fair Value $13,102 (2,598) — — Total Level 3 Liabilities $ 48,486 (11,782) — — $10,504 $ 36,704 Non-Recurring Fair Value Measurements As of December 31, 2016, we measured three of our real estate assets at a fair value of $28,250 in our consolidated balance sheets as they were impaired. The fair values were based on an executed purchase and sale agreement to sell the real estate asset and was classified within Level 2 of the fair value hierarchy. The significant input was the purchase price derived by the potential buyer. 138 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) As of December 31, 2016, we measured three of our real estate assets at a fair value of $65,100 in our consolidated balance sheets as they were impaired. The fair values were based on an executed letter of intent to sell the real estate asset and was classified within Level 2 of the fair value hierarchy. The significant input was the purchase price derived by the potential buyer. As of December 31, 2015, we measured two real estate assets at a fair value of $9,335 in our consolidated balance sheets as they were impaired. The fair values were based on purchase and sale agreements and were classified within Level 2 of the fair value hierarchy. The significant inputs to the valuations were the purchase prices derived by the potential buyer. Our other non-recurring fair value measurements relate primarily to our commercial real estate loans that are considered impaired and for which we maintain an allowance for loan losses. In determining the allowance for loan losses, we estimate the fair value of the underlying collateral of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the underlying collateral of the commercial real estate loan, management uses discounted cash flow analyses and/or direct capitalization valuation analyses. The significant inputs to these valuations are capitalization rates and discount rates and are based on market information and comparable sales of similar properties. As of December 31, 2016, we measured the underlying collateral of six of our loans at a fair value of $107,865 in our consolidated balance sheets as they were impaired. Fair Value of Financial Instruments The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not recorded at fair value in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and commercial mortgage facilities and other indebtedness approximates cost due to the nature of these instruments and are not included in the tables below. Total investment in mortgages and loans, net 7.0% convertible senior notes 4.0% convertible senior notes 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at amortized cost CDO notes payable, at amortized cost CMBS securitizations Loans payable on real estate Other indebtedness Carrying Amount as of December 31, 2016 Estimated Fair Value as of December 31, 2016 Valuation Technique Level in Fair Value Hierarchy $1,280,285 831 120,271 55,568 69,188 58,233 $1,256,342 890 116,861 53,231 69,118 62,620 Discounted cash flows Trading price Trading price Trading price Trading price Discounted cash flows Three One One One One Three 25,100 13,099 Discounted cash flows Three 534,501 641,077 185,668 23,915 477,032 646,642 188,525 24,321 Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Three Three Three Three 139 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Total investment in mortgages and loans, net 7.0% convertible senior notes 4.0% convertible senior notes 7.625% senior notes 7.125% senior notes Senior secured notes Junior subordinated notes, at amortized cost CDO notes payable, at amortized cost CMBS securitization Loans payable on real estate Carrying Amount as of December 31, 2015 Estimated Fair Value as of December 31, 2015 Valuation Technique Level in Fair Value Hierarchy $1,606,486 28,868 133,039 57,952 69,749 63,045 $1,537,086 27,795 104,184 46,560 62,471 66,725 Discounted cash flows Trading price Trading price Trading price Trading price Discounted cash flows Three One One One One Three 24,884 11,221 Discounted cash flows Three 937,569 708,510 268,632 801,289 709,001 281,840 Discounted cash flows Discounted cash flows Discounted cash flows Three Three Three Change in Fair Value of Financial Instruments The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option within FASB ASC Topic 825, “Financial Instruments” as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations: Description Change in fair value of trading securities and For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 For the Year Ended December 31, 2014 security-related receivables $ — $ (172) $ 10,682 Change in fair value of junior subordinated notes Change in fair value of CDO notes payable Change in fair value of derivatives Change in fair value of warrants and investor SARs Change in fair value of financial instruments (1,524) — (222) (4,200) $(5,946) 2,598 — 28 9,184 (1,191) (100,484) (16,352) 8,593 $11,638 $ (98,752) The changes in the fair value for the trading securities and security-related receivables, CDO notes payable, and junior subordinated notes for which the fair value option was elected for the years ended December 31, 2016, 2015 and 2014 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was due to repayments at par because of OC failures when the CDO notes have a fair value of less than par. The changes in the fair value of derivatives for which the fair value option was elected for the years ended December 31, 2016, 2015 and 2014 were mainly due to changes in interest rates. The changes in fair value of the warrants and investor SARs for the years ended December 31, 2016, 2015 and 2014 were due to changes in reference stock price and volatility. 140 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 8: VARIABLE INTEREST ENTITIES The determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We evaluated our investments and determined that, as of December 31, 2016, our consolidated VIEs were: RAIT I, RAIT II, our floating rate securitizations, RAIT VIE Properties (Willow Grove, Cherry Hill, South Terrace, McDowell, and our ten industrial properties) and the venture described in Note 5: Indebtedness (RAIT Venture VIE). As of December 31, 2015, our consolidated VIEs were: RAIT I, RAIT II, our floating rate securitizations, IRT, and RAIT VIE Properties (Willow Grove, Cherry Hill, South Terrace, Cole’s Crossing, McDowell, and our ten industrial properties). Previously, we had not disclosed our floating rate securitizations as VIEs and have corrected the prior period disclosure. As of October 5, 2016, we deconsolidated IRT as further discussed in Note 9: Discontinued Operations. We consolidate the securitizations that we sponsor as we have retained interests in these entities and control the significant decisions regarding the collateral in these entities, such as the approval of loan workouts. As of December 31, 2016, we consolidate the VIE properties as we own a majority of these entities and control the significant capital and operating decisions regarding the properties. As of December 31, 2016, we consolidate RAIT Venture VIE (which consolidates a floating rate securitization) as we own a majority of this entity and control a majority of the significant decisions regarding the collateral in this entity, such as the approval of loan workouts. 141 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. Certain amounts included in the tables below are eliminated upon consolidation with our other subsidiaries that maintain investments in the debt or equity securities issued by these entities. As of December 31, 2016 RAIT Securitizations RAIT VIE Properties RAIT Venture VIE Total Assets Investments in mortgages and loans, at amortized cost: Commercial mortgages, mezzanine loans, other loans and preferred equity interests Allowance for losses $1,409,758 — $ — — $324,709 — $1,734,467 — Total investments in mortgages and loans 1,409,758 — 324,709 1,734,467 Investments in real estate Investments in real estate Accumulated depreciation Total investments in real estate Cash and cash equivalents Restricted cash Accrued interest receivable Other assets Intangible assets Intangible assets Accumulated amortization Total intangible assets Assets of discontinued operations Total assets Liabilities and Equity Indebtedness, net Accrued interest payable Accounts payable and accrued expenses Derivative liabilities Deferred taxes, borrowers’ escrows and other liabilities Liabilities of discontinued operations Total liabilities Equity: Shareholders’ equity: Accumulated other comprehensive income (loss) RAIT investment Retained earnings (deficit) Total shareholders’ equity Noncontroling Interests Total liabilities and equity 142 — — — — 6,986 56,974 480 — — — — 223,722 (31,652) 192,070 2,145 1,167 — 9,591 5,616 (3,740) 1,876 — — — — 1 723 1,513 — — — — — 223,722 (31,652) 192,070 2,146 8,876 58,487 10,071 5,616 (3,740) 1,876 — $1,474,198 $206,849 $326,946 $2,007,993 $1,244,507 1,903 19 — — — $230,510 14,306 5,443 — 2,051 — $323,485 854 1 — 920 — $1,798,502 17,063 5,463 — 2,971 — 1,246,429 252,310 325,260 1,823,999 — 41,790 185,979 227,769 — — 40,962 (88,282) (47,320) 1,859 — 2,885 (1,199) 1,686 — — 85,637 96,498 182,135 1,859 $1,474,198 $206,849 $326,946 $2,007,993 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) As of December 31, 2015 RAIT Securitizations IRT RAIT VIE Properties Total Assets Investments in mortgages and loans, at amortized cost: Commercial mortgages, mezzanine loans, other loans and preferred equity interests Allowance for losses Total investments in mortgages and loans $2,242,416 — 2,242,416 Investments in real estate Investments in real estate Accumulated depreciation Total investments in real estate Cash and cash equivalents Restricted cash Accrued interest receivable Other assets Intangible assets Intangible assets Accumulated amortization Total intangible assets Assets of discontinued operations Total assets Liabilities and Equity Indebtedness, net Accrued interest payable Accounts payable and accrued expenses Derivative liabilities Deferred taxes, borrowers’ escrows and other liabilities Liabilities of discontinued operations Total liabilities Equity: Shareholders’ equity: $ — $ — $2,242,416 — — — — — — — — — — — — — — — 2,242,416 278,774 (26,398) 252,376 1,589 2,859 — 13,740 5,245 (1,446) 3,799 278,774 (26,398) 252,376 1,589 17,803 77,130 14,219 5,245 (1,446) 3,799 1,383,188 — 1,383,188 — — — — 14,944 77,130 479 — — — — $2,334,969 $1,383,188 $274,363 $3,992,520 $2,058,739 2,207 8 4,672 176 — $ — $273,766 13,997 — 6,000 — — — 3,842 — — 952,406 $2,332,505 16,204 6,008 4,672 4,018 952,406 2,065,802 952,406 297,605 3,315,813 Accumulated other comprehensive income (loss) RAIT investment Retained earnings (deficit) Total shareholders’ equity Noncontroling Interests Total liabilities and equity (4,691) 118,174 155,684 269,167 — — 54,389 — 54,389 376,393 — 35,792 (59,454) (23,662) 420 (4,691) 208,355 96,230 299,894 376,813 $2,334,969 $1,383,188 $274,363 $3,992,520 The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. The amounts that eliminate in consolidation include $549,879 of total investments in mortgage loans 143 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) and $510,244 of indebtedness as of December 31, 2016 and $813,455 of total investments in mortgage loans, $569,833 of indebtedness and $38,075 of liabilities of discontinued operations as of December 31, 2015. We do not have any contractual obligation to provide the VIEs listed above with any financial support. We have not and do not intend to provide financial support to these VIEs that we were not previously contractually required to provide. NOTE 9: DISCONTINUED OPERATIONS As discussed in Note 1: The Company, on December 20, 2016, the management internalization of one of our previously consolidated variable interest entities Independence Realty Trust, Inc., or IRT, was completed pursuant to the September 27, 2016 securities and asset purchase agreement, or the IRT internalization agreement. The IRT management internalization consisted of two parts: (i) the sale of Independence Realty Advisors, LLC, or the IRT advisor, which was our subsidiary and IRT’s external advisor, and (ii) the sale of certain assets and the assumption of certain liabilities relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties. The purchase price paid by IRT for the IRT management internalization was $43,000, subject to certain pro rations at closing. As part of the same agreement, we sold all of the 7,269,719 shares of IRT’s common stock owned by certain of our subsidiaries on October 5, 2016. As the IRT internalization agreement resulted in our probable disposal of our investment in IRT, our advisory agreement with IRT and our multifamily property management business as well as a strategic shift in our operations and financial results, we concluded that these entities or distinguishable components of RAIT should be reported as discontinued operations as of September 30, 2016. As discussed in Note 19: Segment Reporting, IRT was part of our IRT segment. The IRT advisor and our multifamily property management business were part of our real estate lending, owning and managing segment. The table below presents the total assets and the total liabilities of these entities or distinguishable components of RAIT that were considered discontinued operations as of December 31, 2016 and 2015. Assets Investments in real estate, net Cash and cash equivalents Restricted cash Other assets Intangible assets, net Total assets of discontinued operations Liabilities Indebtedness, net Accrued interest payable Accounts payable and accrued expenses Derivative liabilities Deferred taxes, borrowers’ escrows and other liabilities Total liabilities of discontinued operations 144 As of December 31, 2016 As of December 31, 2015 $— — — — — $— $— — — — — $— $1,332,377 38,305 5,413 3,641 3,811 $1,383,547 $ 928,607 1,239 17,115 — 5,569 $ 952,530 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) As our discontinued operations were disposed of during the year ended December 31, 2016, there are no assets nor liabilities of discontinued operations on our consolidated balance sheets as of December 31, 2016. See “Disposal of Discontinued Operations” section below. The table below presents the statements of operations of these entities or distinguishable components of RAIT that were considered discontinued operations for the year ended December 31, 2016, 2015 and 2014: Revenue: Property income Fee and other income: Property reimbursement revenue Fee and other income Total fee and other income Total revenue Expenses: Interest expense Real estate operating expense Compensation expense General and administrative expense Acquisition expense Depreciation and amortization expense Total expenses Operating (Loss) Income Interest and other income (expense), net Gains (losses) on assets Gain (loss) on IRT merger with TSRE TSRE financing extinguishment and employee separation expenses Gains (losses) on extinguishments of debt For the Year Ended December 31, 2016 2015 2014 $117,306 — 4,689 4,792 $109,574 — 975 1,818 $49,171 — 1,404 891 9,481 2,793 2,295 126,787 112,367 51,466 27,937 48,352 10,490 3,916 489 27,500 22,588 46,275 6,248 3,381 14,195 28,363 118,684 121,050 8,103 (3) 32,264 732 (8,683) 75 6,412 64,604 7,531 21,636 6,082 1,651 1,832 12,778 51,510 (44) 17 2,882 — — (952) (27,508) — — — Net income (loss) from discontinued operations $ 40,144 $ 34,900 $ 2,855 As RAIT did not own 100% of IRT, a portion of the net income (loss) from discontinued operations above was not attributable to RAIT. For the years ended December 31, 2016, 2015, and 2014, $11,977, $9,161 and $1,204 of the net income (loss) from discontinued operations was attributable to RAIT. 145 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The table below summarizes the cash flows provided by operating, financing and investing activities of these entities or distinguishable components of RAIT that are discontinued operations for the years ended December 31, 2016, 2015 and 2014. Cash flow from operating activities from discontinued operations Cash flow from investing activities from discontinued operations Cash flow from financing activities from discontinued operations Net change in cash and cash equivalents from discontinued operations Cash and cash equivalents at beginning of period— For the Year Ended December 31, 2016 2015 2014 $ 34,175 $ 18,729 $ 15,724 (1,060) (153,466) (307,337) (71,420) 158,279 303,042 (38,305) 23,542 11,429 discontinued operations 38,305 14,763 3,334 Cash and cash equivalents at end of period— discontinued operations $ — $ 38,305 $ 14,763 Disposal of Discontinued Operations The two transactions contemplated by the IRT internalization agreement led to gains on the disposal of discontinued operations as follows: i) the deconsolidation of IRT on October 5, 2016 resulted in a gain of $7,961 and ii) the closing of IRT’s management internalization on December 20, 2016 resulted in a gain of $39,847. Deconsolidation of IRT On October 5, 2016, we sold 7,269,719 shares of IRT’s common stock to IRT at a price of $8.55 per share. This price was equal to the price to the public in IRT’s October 2016 public offering of its common stock less underwriting discounts or commissions. These shares represented all of the IRT common stock we owned. We received $62,156 of proceeds from the IRT stock repurchase and deconsolidated net assets of $54,195. We used approximately $43,703 of the proceeds we received from selling our IRT common stock to repay seven mezzanine loans. Participation interests in these mezzanine loans were held as collateral for our consolidated securitization, RAIT II, and certain other legacy securitizations that we no longer consolidate. As a result of the IRT stock repurchase on October 5, 2016, we no longer held any variable interests in IRT. We concluded that we were not the primary beneficiary of IRT and deconsolidated IRT from our consolidated financial statements as of October 5, 2016. The following table summarizes the effect of the deconsolidation of IRT on the balance sheet and statement of operations as of the date of the deconsolidation on October 5, 2016 and for the years ended December 31, 2016, 2015 and 2014. The operating results for IRT were included in our consolidated statement of operations 146 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) through October 5, 2016 whereas the assets and liabilities have been removed from our consolidated balance sheet as of October 5, 2016. Assets Investments in real estate, net Cash and cash equivalents Restricted cash Accrued interest receivable Other assets Intangible assets, net Total assets Liabilities Indebtedness, net Accrued interest payable Accounts payable and accrued expenses Derivative liabilities Deferred taxes, borrowers’ escrows and other liabilities Total liabilities Equity: Stockholders’ equity: Accumulated other comprehensive income—discontinued operations Noncontrolling interests—discontinued operations Total equity Total liabilities and equity RAIT investment in IRT Proceeds received from sale of IRT investment Gain on deconsolidation of IRT As of October 5, 2016 $1,263,479 30,582 8,028 — 5,785 — $1,307,874 $ 880,975 1,312 23,094 696 6,257 912,334 (112) 341,457 341,345 $1,253,679 $ $ $ 54,195 62,156 7,961 IRT Management Internalization On December 20, 2016, RAIT sold the IRT advisor and certain assets relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties, to IRT for $43,000. RAIT incurred expenses of $2,522 related to this transaction. These expenses included advisory fees and legal fees. RAIT derecognized $631 of assets upon the closing of this transaction, which primarily included other assets. RAIT recognized a gain of $39,847 on the sale as RAIT had a limited amount of net assets recognized related to these businesses and the IRT advisory agreement and multifamily property management contracts were effectively terminated as a result of the transaction. 147 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 10: DECONSOLIDATION OF TABERNA VIE’S On December 19, 2014, our subsidiary, TCM, completed the assignment, or the T8 Assignment, and delegation, or the T9 Delegation, of TCM’s rights and responsibilities as collateral manager under the collateral management agreements for T8 and T9, respectively, to an unaffiliated party. As a result of the T8 Assignment and T9 Delegation, we recorded a gain of $4,549, net of $1,821 severance and other costs in our accompanying consolidated statements of operations. T8 and T9 are two securitizations previously consolidated by us. In addition as a result of the T8 Assignment and the T9 Delegation, we determined that T8 and T9 no longer satisfied the requirements to remain variable interest entities consolidated by us, and we deconsolidated T8 and T9. All assets deconsolidated and related liabilities were removed from our consolidated balance sheet on the date of deconsolidation and we recorded a loss on deconsolidation of $215,804 in our accompanying consolidated statements of operations. The following tables summarize the balance sheet and statement of operations effects of the deconsolidated VIEs as of the date of the deconsolidation on December 19, 2014 and for the year ended December 31, 2014. The statements of operations components for the respective VIEs were included in our consolidated statement of operations through December 19, 2014 whereas the assets and liabilities have been removed from our consolidated balance sheet as of December 19, 2014. Revenue: Investment interest income Investment interest expense Net interest margin Fee and other income Total revenue Expenses: Compensation expense General and administrative expense Depreciation and amortization expense Total expenses Operating income Other income (expense) Gains (losses) on assets Gains (losses) on deconsolidation of VIEs Net gain on sale of collateral management contracts Change in fair value of financial instruments Income (loss) before taxes Income tax benefit (provision) For the Years Ended December 31, 2014 $ 39,551 (16,765) 22,786 980 23,766 1,736 1,440 136 3,312 20,454 (21,500) (7,712) (215,804) 4,549 (106,593) (326,606) (496) Net income (loss) allocable to common shares $(327,102) 148 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 11: SERIES D PREFERRED SHARES On October 1, 2012, we entered into a Securities Purchase Agreement, or the purchase agreement, with ARS VI Investor I, LLC, or the investor, an affiliate of Almanac Realty Investors, LLC, or Almanac. During the period from the effective date of the purchase agreement through March 2014, we sold to the investor on a private placement basis in four separate sales between October 2012 and March 2014 for an aggregate purchase price of $100,000, or the total commitment, the following securities: (i) 4,000,000 of our Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, or the Series D preferred shares, (ii) common share purchase warrants, or the warrants, initially exercisable for 9,931,000 of our common shares, or the common shares, and (iii) common share appreciation rights, or the investor SARs, with respect to 6,735,667 common shares. We are not obligated to issue any common shares upon exercise of the warrants if the issuance of such common shares would exceed that number of common shares which we may issue upon exercise of the warrants without requiring shareholder approval under the NYSE listing requirements. We will pay cash or issue a 180 day unsecured promissory note, or a combination of the foregoing, equal to the market value of any common shares we cannot issue as a result of this prohibition. The investor SARs are settled only in cash and not in common shares. These securities are issuable on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the purchase agreement. We used the proceeds received under the purchase agreement to fund our loan origination and investment activities, including CMBS and bridge lending. We are subject to covenants under the purchase agreement when the investor and its permitted transferees hold specified amounts of the securities issuable under the purchase agreement. These covenants include defined leverage limits on defined financing assets. In addition, commencing on the first draw down and for so long as the investor and its affiliates which are permitted transferees continue to own at least 10% of the outstanding Series D preferred shares or warrants and common shares issued upon exercise of the warrants representing at least 5% of the aggregate amount of common shares issuable upon exercise of the warrants actually issued, the board will include one person designated by the investor. This right is held only by the investor and is not transferable by it. The investor designated Andrew M. Silberstein to serve on our board. The covenants also include our agreement not to declare any extraordinary dividend except as otherwise required for us to continue to satisfy the requirements for qualification and taxation as a REIT. An extraordinary dividend is defined as any dividend or other distribution (a) on common shares other than regular quarterly dividends on the common shares or (b) on our preferred shares other than in respect of dividends accrued in accordance with the terms expressly applicable to the preferred shares. On December 7, 2016, we entered into a securities repurchase agreement whereby we agreed to repurchase and cancel 464,000 Series D preferred shares at par for a purchase price of $11,600 which resulted in a decrease from 4,000,000 Series D preferred shares issued to 3,536,000 Series D preferred shares issued and outstanding. As of December 31, 2016, the following RAIT securities are outstanding pursuant to the purchase agreement, in the aggregate: (i) 3,536,000 Series D preferred shares; (ii) warrants exercisable for 9,931,000 common shares (which have subsequently adjusted to 11,035,875 shares as of the date of the filing of this report); and (iii) investor SARs exercisable with respect to 6,735,667 common shares (which have subsequently adjusted to 7,485,045 shares as of the date of the filing of this report). The number of common shares underlying the warrants and investor SARs and relevant exercise price are subject to further adjustment in defined circumstances. 149 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The Series D preferred shares initially bore a cash coupon rate of 7.5%, which increased to 8.5% on October 1, 2015 and will increase again on October 1, 2018 and each anniversary thereafter by 50 basis points. They rank on parity with our existing outstanding preferred shares. Their liquidation preference is equal to $26.25 per share to October 1, 2017 and $25.00 per share thereafter. In defined circumstances, the Series D preferred shares are exchangeable for Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, or the Series E preferred shares. The rights and preferences of the Series E preferred shares will be similar to those of the Series D preferred shares except, among other differences, the Series E preferred shares will be mandatorily redeemable upon a change of control, will have no put right, will not have the right to designate one trustee to the board except in the event of a payment default under the Series E preferred shares and have defined registration rights. We have the right in limited circumstances to redeem the Series D preferred shares prior to the October 1, 2017 at a redemption price of $26.25 per share. After October 1, 2017, we may redeem all or a portion of the Series D preferred shares at any time at a redemption price of $25.00 per share. We may satisfy all or a portion of the redemption price for an optional redemption with an unsecured promissory note, or a preferred note, with a maturity date of 180 days from the applicable redemption date. From and after the occurrence of a defined mandatory redemption triggering event, each holder of Series D preferred shares may elect to have all or a portion of such holder’s Series D preferred shares redeemed by us at a redemption price of $26.25 per share prior to October 1, 2017 and $25.00 per share on or after October 1, 2017. We may satisfy all or a portion of the redemption price for certain of the mandatory redemption triggering events with a preferred note. We must redeem the Series D preferred shares with up to $44,200 of net proceeds received from the loans and other investments made with proceeds of the sales under the investor purchase agreement from and after October 1, 2017, in the case of net proceeds from loans and investments other than CMBS loans, and from and after October 1, 2019, in the case of net proceeds from CMBS loans. Each case is at a redemption price of $25.00 per share. All amounts paid in connection with liquidation or for all redemptions of the Series D preferred shares must also include all accumulated and unpaid dividends to, but excluding, the redemption date. In September 2015, we amended the purchase agreement with Almanac related to the Series D preferred shares. This amendment changed two of the covenants therein. As consideration for this amendment, we paid Almanac $450. We accounted for this amendment as a modification of the Series D preferred shares. The warrants had an initial strike price of $6.00 per common share, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.39. The warrants are exercisable until October 1, 2027. From and after the earlier of (i) October 1, 2017 or (ii) the occurrence of a defined mandatory redemption triggering event on the Series D preferred shares, the holders of warrants may put their warrants to us for a put redemption price equal to $1.23 per common share until October 1, 2018 and increasing to set amounts at set intervals thereafter. We may settle the exercise of the put in cash or, in the event of certain defined mandatory redemption triggering events, by way of a three year unsecured promissory note, or a combination of the foregoing. The investor’s rights to put the warrants to us as described above are at a price of $1.23 per warrant prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter. The investor SARs had an initial strike price of $6.00, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.39. The investor SARs are exercisable until October 1, 2027. From and after the earlier of (i) October 1, 2017 or (ii) the occurrence of a defined mandatory redemption triggering event on the Series D preferred shares, the holders of investor SARs may put their investor SARs to us for a put redemption price equal to $1.23 per common share prior to October 1, 2018 and increasing to set amounts at set intervals 150 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) thereafter. We may settle the exercise of the put in cash or, in the event of certain defined mandatory redemption triggering events, by way of a three year unsecured promissory note, or a combination of the foregoing. The investor’s rights to put the SARs to us as described above are at a price of $1.23 per investor SAR prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter. The investor SARs are callable at our option beginning on October 1, 2014 at a price of $5.00 per investor SAR, increasing to set amounts at set intervals thereafter. We may settle the call in cash or by way of a one year unsecured promissory note, or with a combination of the foregoing. Accounting Treatment The accounting treatment for the Series D preferred shares differs from the accounting treatment of our other preferred share instruments. Based on accounting standards, the Series D preferred shares were determined not to be classified as equity as they contain redemption features that are not solely in our control. In addition, the Series D preferred shares were considered not to be classified as a liability because they are not mandatorily redeemable. As a result, the Series D preferred shares are presented in the mezzanine section of the balance sheet, between liabilities and equity. Any costs and the initial value of the warrants and investor SARs are recorded as a discount on the Series D Preferred Shares and that discount will be amortized to earnings over the respective term. The warrants and investor SARs were both determined to be classified as liabilities and had a combined fair value of $30,400, as of December 31, 2016. The warrants contain a put feature which can only be settled by paying cash or issuing a note (i.e. transferring assets). This put feature is a distinguishing characteristic for liability classification. The investor SARs, according to their terms, can only be settled in cash or the issuance of a note payable to the investor. This requirement for cash settlement is also a distinguishing characteristic for liability classification. As a result, the initial fair value of the warrants and investor SARs are recorded as a liability and re-measured at each reporting period until the warrants and investor SARs are settled. Changes in fair value will be recorded in earnings as a component of the change in fair value of financial instruments in the consolidated statement of operations. The following table summarizes the sales activity of the Series D preferred shares from the effective date of the agreement through December 31, 2016: Aggregate purchase price Redemption Initial value of warrants and investor SARs issued to-date Costs incurred (21,805) (6,834) Total discount Discount amortization to-date Carrying amount of Series D Preferred Shares $100,000 $ (11,600) (28,639) 21,820 $ 81,581 NOTE 12: SHAREHOLDERS’ EQUITY Preferred Shares In 2004, we issued 2,760,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series A Preferred Shares. The Series A Preferred Shares accrue cumulative cash 151 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) dividends at a rate of 7.75% per year of the $25.00 liquidation preference, equivalent to $1.9375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series A Preferred Shares have no maturity date, and we are not required to redeem the Series A Preferred Shares at any time. On or after March 19, 2009, we may, at our option, redeem the Series A Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. In 2004, we issued 2,258,300 shares of our 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, or Series B Preferred Shares. The Series B Preferred Shares accrue cumulative cash dividends at a rate of 8.375% per year of the $25.00 liquidation preference, equivalent to $2.09375 per year per share. Dividends are payable quarterly in arrears at the end of each March, June, September and December. The Series B Preferred Shares have no maturity date, and we are not required to redeem the Series B Preferred Shares at any time. On or after October 5, 2009, we may, at our option, redeem the Series B Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. On July 5, 2007, we issued 1,600,000 shares of our 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, or the Series C Preferred Shares, in a public offering at an offering price of $25.00 per share. The Series C Preferred Shares accrue cumulative cash dividends at a rate of 8.875% per year of the $25.00 liquidation preference and are paid on a quarterly basis. The Series C Preferred Shares have no maturity date, and we are not required to redeem the Series C Preferred Shares at any time. We may not redeem the Series C Preferred Shares before July 5, 2012, except for the special optional redemption to preserve our tax qualification as a REIT. On or after July 5, 2012, we may, at our option, redeem the Series C Preferred Shares, in whole or part, at any time and from time to time, for cash at $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. At Market Issuance Sales Agreements (ATM) On June 13, 2014, we entered into an At Market Issuance Sales Agreement, or the 2014 Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the 2014 Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to $150,000 aggregate amount of preferred shares. With respect to each series of preferred shares, the maximum amount issuable is as follows: 4,000,000 Series A Preferred Shares, 1,000,000 Series B Preferred Shares, and 1,000,000 Series C Preferred Shares. Unless the 2014 Preferred ATM agreement is earlier terminated by MLV or us, the 2014 Preferred ATM agreement automatically terminates upon the issuance and sale of all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares subject to the 2014 Preferred ATM agreement. During the period from the effective date of the 2014 Preferred ATM agreement through December 31, 2016, pursuant to the 2014 Preferred ATM agreement, we issued a total of 1,275,065 Series A Preferred Shares at a weighted-average price of $23.50 per share and received $29,109 of net proceeds. We also issued a total of 52,504 Series B Preferred Shares at a weighted-average price of $23.65 per share and received $1,203 of net proceeds and 325 Series C Preferred Shares at a weighted-average price of $22.90 and received $7 of net proceeds. As of December 31, 2016, 2,724,935, 947,496, and 999,675 Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the 2014 Preferred ATM agreement. On June 13, 2014, we amended our declaration of trust to reclassify and designate an additional 3,309,288 of our unclassified preferred shares of beneficial interest, par value $0.01 per share, as 3,309,288 Series A 152 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Preferred Shares. This reclassification increased the number of shares classified as Series A Preferred Shares from 4,760,000 shares to 8,069,288 shares. This reclassification decreased the number of unclassified preferred shares from 4,340,000 shares to 1,030,712 shares. We engaged in this reclassification in order to authorize additional Series A Preferred Shares issuable under the 2014 Preferred ATM Agreement. On May 21, 2012, we entered into an At Market Issuance Sales Agreement, or the 2012 Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the 2012 Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to 2,000,000 Series A Preferred Shares, up to 2,000,000 Series B Preferred Shares, and up to 2,000,000 Series C Preferred Shares. On January 10, 2014, we agreed with MLV to terminate the 2012 Preferred ATM agreement. We did not incur any termination penalties as a result of the termination of the 2012 Preferred ATM agreement. As of the termination date, pursuant to the 2012 Preferred ATM agreement, we had sold 1,309,288 Series A Preferred Shares, and 690,712 Series A Preferred Shares remained unsold, we had sold 30,165 Series B Preferred Shares, and 1,969,835 Series B Preferred Shares remained unsold, and we had sold 40,100 Series C Preferred Shares, and 1,959,900 Series C Preferred Shares remained unsold. Common Shares Share Issuances: Dividend reinvestment and share purchase plan (DRSPP). We have a dividend reinvestment and share purchase plan, or DRSPP, under which we registered and reserved for issuance, in the aggregate, 10,500,000 common shares. During the year ended December 31, 2016, we issued a total of 9,243 common shares pursuant to the DRSPP at a weighted-average price of $2.96 per share and received $27 of net proceeds. As of December 31, 2016, 7,752,479 common shares, in the aggregate, remain available for issuance under the DRSPP. Capital on Demand™ Sales Agreement (COD). On November 21, 2012, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 10,000,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. Unless the COD sales agreement is earlier terminated by JonesTrading or us, the COD sales agreement automatically terminates upon the issuance and sale of all of the common shares subject to the COD sales agreement. During the period from the effective date of the COD sales agreement through December 31, 2016, we issued a total of 2,081,081 common shares pursuant to this agreement at a weighted-average price of $7.96 per share and received $16,139 of net proceeds. As of December 31, 2016, 7,918,919 common shares, in the aggregate, remain available for issuance under the COD sales agreement. Common share public offerings. In August 2015, we issued 8,000,000 common shares in an underwritten public offering. The public offering price was $5.40 per share, and we received $42,440 of proceeds. In January 2014, we issued 10,000,000 common shares in an underwritten public offering. The public offering price was $8.52 per share and, after transaction costs, we received $82,570 of proceeds. 153 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Dividends The following tables summarize the dividends we declared or paid during the years ended December 31, 2016, 2015 and 2014: Series A Preferred Shares Date declared Record date Date paid Total dividend amount Series B Preferred Shares Date declared Record date Date paid Total dividend amount Series C Preferred Shares Date declared Record date Date paid Total dividend amount Series D Preferred Shares Date declared Record date Date paid Total dividend amount Common shares Date declared Record date Date paid Dividend per share Total dividend declared March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 For the Year Ended December 31, 2016 2/16/2016 3/1/2016 3/31/2016 2,570 $ 5/19/2016 6/1/2016 6/30/2016 2,570 $ 2/16/2016 3/1/2016 3/31/2016 1,225 $ 5/19/2016 6/1/2016 6/30/2016 1,225 $ 2/16/2016 3/1/2016 3/31/2016 910 $ 5/19/2016 6/1/2016 6/30/2016 910 $ 2/16/2016 3/1/2016 3/31/2016 2,125 $ 5/19/2016 6/1/2016 6/30/2016 2,125 $ 7/27/2016 9/1/2016 9/30/2016 2,589 7/27/2016 9/1/2016 9/30/2016 1,225 7/27/2016 9/1/2016 9/30/2016 910 7/27/2016 9/1/2016 9/30/2016 2,125 $ $ $ $ 11/2/2016 12/1/2016 1/3/2017 2,589 11/2/2016 12/1/2016 1/3/2017 1,225 11/2/2016 12/1/2016 1/3/2017 910 11/2/2016 12/1/2016 1/3/2017 2,125 $ $ $ $ 3/14/2016 4/8/2016 4/29/2016 0.09 8,200 $ $ 6/15/2016 7/8/2016 7/29/2016 0.09 8,202 $ $ 9/19/2016 10/7/2016 10/31/2016 0.09 8,202 $ $ 12/16/2016 1/10/2017 1/31/2017 0.09 8,202 $ $ $10,318 $ 4,900 $ 3,640 $ 8,500 0.36 $ $32,806 154 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Series A Preferred Shares Date declared Record date Date paid Total dividend amount Series B Preferred Shares Date declared Record date Date paid Total dividend amount Series C Preferred Shares Date declared Record date Date paid Total dividend amount Series D Preferred Shares Date declared Record date Date paid Total dividend amount Common shares Date declared Record date Date paid Dividend per share Total dividend declared March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015 For the Year Ended December 31, 2015 2/10/15 3/2/15 3/31/15 $ 2,313 5/20/15 6/1/15 6/30/15 $ 2,569 2/10/15 3/2/15 3/31/15 $ 1,198 5/20/15 6/1/15 6/30/15 $ 1,215 2/10/15 3/2/15 3/31/15 910 $ 5/20/15 6/1/15 6/30/15 910 $ 2/10/15 3/2/15 3/31/15 $ 1,875 5/20/15 6/1/15 6/30/15 $ 1,875 7/28/15 9/1/15 9/30/15 2,570 7/28/15 9/1/15 9/30/15 1,225 7/28/15 9/1/15 9/30/15 910 7/28/15 9/1/15 9/30/15 1,875 $ $ $ $ 3/16/15 4/10/15 4/30/15 0.18 $ $ 14,777 6/22/15 7/10/15 7/31/15 0.18 $ $ 14,775 9/17/15 10/9/15 10/30/15 0.18 $ $ 16,276 11/4/15 12/1/15 12/31/15 2,570 $ 11/4/15 12/1/15 12/31/15 1,225 $ 11/4/15 12/1/15 12/31/15 910 $ 11/4/15 12/1/15 12/31/15 2,125 $ 12/7/15 1/8/16 1/29/16 0.09 8,170 $ $ $10,022 $ 4,863 $ 3,640 $ 7,750 0.63 $ $53,998 155 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Series A Preferred Shares Date declared Record date Date paid Total dividend amount Series B Preferred Shares Date declared Record date Date paid Total dividend amount Series C Preferred Shares Date declared Record date Date paid Total dividend amount Series D Preferred Shares Date declared Record date Date paid Total dividend amount Common shares Date declared Record date Date paid Dividend per share Total dividend declared March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 For the Year Ended December 31, 2014 1/29/14 3/3/14 3/31/14 $ 1,971 5/13/14 6/2/14 6/30/14 $ 1,971 1/29/14 3/3/14 3/31/14 $ 1,198 5/13/14 6/2/14 6/30/14 $ 1,198 1/29/14 3/3/14 3/31/14 910 $ 5/13/14 6/2/14 6/30/14 910 $ 1/29/14 3/3/14 3/31/14 $ 1,255 5/13/14 6/2/14 6/30/14 $ 1,875 7/29/14 9/2/14 9/30/14 1,971 7/29/14 9/2/14 9/30/14 1,198 7/29/14 9/2/14 9/30/14 910 7/29/14 9/2/14 9/30/14 1,875 $ $ $ $ 3/18/14 4/4/14 4/30/14 0.17 $ $ 13,882 6/12/14 7/11/14 7/31/14 0.18 $ $ 14,738 9/15/14 10/7/14 10/31/14 0.18 $ $ 14,741 10/28/14 12/1/14 12/31/14 2,313 $ 10/28/14 12/1/14 12/31/14 1,198 $ 10/28/14 12/1/14 12/31/14 910 $ 10/28/14 12/1/14 12/31/14 1,875 $ 12/18/14 1/9/15 1/30/15 0.18 $ $ 14,740 $ 8,226 $ 4,792 $ 3,640 $ 6,880 0.71 $ $58,101 On December 7, 2016, we entered into a securities repurchase agreement whereby we agreed to repurchase and cancel 464,000 Series D preferred shares. The Series D Preferred Shares $2,125 total dividend declared on November 2, 2016 with a record date of December 1, 2016 included a $246 payment on December 7, 2016 and $1,879 payment on January 3, 2017. On February 15, 2017, our board of trustees declared a first quarter 2017 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares, and $0.5312500 per share on our Series D Preferred Shares. The dividends will be paid on March 31, 2017 to holders of record on March 1, 2017. 156 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Accumulated Other Comprehensive Income (Loss) The following table summarizes the changes in accumulated other comprehensive loss by component for the years ended December 31, 2014, 2015 and 2016: Interest Rate Hedges Available- For-Sale Securities Foreign Currency Translation Adjustments Total Balance as of December 31, 2013 $(59,684) $(3,583) $(543) $(63,810) Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (1,378) 3,583 40,274 38,896 — 3,583 543 — 543 2,748 40,274 43,022 Balance as of December 31, 2014 $(20,788) $ — $ — $(20,788) Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (293) 16,382 16,089 — — — — — — (293) 16,382 16,089 Balance as of December 31, 2015 $ (4,699) $ — $ — $ (4,699) Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income (852) 5,551 4,699 — — — — — — (852) 5,551 4,699 Balance as of December 31, 2016 $ — $ — $ — $ — During the year ended December 31, 2016, we recognized a $719 loss from discontinued operations and $112 gain from the disposal of discontinued operations, which are included in the net current period effect of other comprehensive income (loss). See Note 9: Discontinued Operations for further information regarding the impact of this transaction. As of December 31, 2015, $8 loss from discontinued operations is included in accumulated other comprehensive loss. As of December 31, 2014, $0 from discontinued operations is included in accumulated other comprehensive loss. Noncontrolling Interests During the year ended December 31, 2016, we derecognized the noncontrolling interest of $2,518 related to Cole’s Crossing as the property was sold. We also derecognized the noncontrolling interest of $2,436 related to ten of our industrial properties as they were impaired. See Note 4: Investments in Real Estate for further discussion regarding impairment on our real estate assets. 157 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) On January 29, 2014, IRT completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $8.30 per share raising net proceeds of $62,718. We purchased 1,204,819 shares of common stock in the offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On July 21, 2014, IRT completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $9.50 per share raising net proceeds of $72,002. We purchased 300,000 shares of common stock in the offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On November 25, 2014, IRT completed an underwritten public offering selling 6,000,000 shares of IRT common stock for $9.60 per share raising estimated net proceeds of $54,648. As of December 31, 2015, we held 7,269,719 shares of IRT common stock representing 15.5% of the outstanding shares of IRT common stock. On September 17, 2015, IRT also issued 1,925,419 IROP units in connection with the TSRE acquisition. As of December 31, 2015, we consolidated IRT, as it was a VIE and we were the primary beneficiary, in our financial results. See Note 8 for additional disclosures pertaining to VIEs. On October 5, 2016, IRT repurchased all 7,269,719 shares of IRT common stock that were owned by us at a purchase price of $8.55 per share and, as a result, we deconsolidated IRT. See Note 9: Discontinued Operations for further information regarding the impact of this transaction. NOTE 13: SHARE-BASED COMPENSATION AND EMPLOYEE BENEFITS We maintain the RAIT Financial Trust 2012 Incentive Award Plan, or the 2012 IAP, that provides for the grants of awards to employees, non-employee trustees, and consultants of RAIT. The maximum aggregate number of common shares that may be issued pursuant to the 2012 IAP is 4,000,000. On March 31, 2015, the compensation committee adopted a 2015 Annual Incentive Compensation Plan, or the annual cash bonus plan, and made awards to three of our executive officers, or the eligible officers, setting forth the basis on which target cash bonus awards are earned. In addition, on March 31, 2015, the compensation committee adopted a 2015 Long Term Incentive Plan, or the 2015 LTIP, setting forth the basis on which the eligible officers could earn equity compensation that was directly linked to long-term performance. Pursuant to the 2015 LTIP, equity awards to eligible officers will consist of performance share unit (PSU) awards issued at the conclusion of a three year performance period based on RAIT’s performance relative to three long-term performance metrics established by the compensation committee. The 2015 LTIP was adopted pursuant to our 2012 IAP. The total compensation awarded under the cash bonus plan is at-risk and tied to pre-determined criteria. For 2016, 70% of the target cash bonus awards is payable based on the following objectives and weightings: i) cash available for distribution of 25%; ii) property sales of 20%; and iii) recourse debt reductions of 25%. The amounts are earned based on our annual performance relative to threshold, target and maximum performance goals for these objective measures, with 50% of target incentive opportunity payable based on threshold performance achieved, 100% based on target performance achieved and 150% based on maximum performance achieved. The remaining 30% of the target cash bonus award is based on the achievement of various individual performance criteria that may be earned based on individual performance factors deemed relevant by the compensation committee. 158 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The LTIP is an equity program whereby long-term performance awards are granted each year and earned based on our performance over a three year period. Compensation awarded under the LTIP is based on predefined performance for 75% of the Award. Performance measures and weighting for the performance component of the 2016-2018 awards are based on the following objective performance measures relating to the total shareholder return (stock price appreciation plus aggregate dividends or TSR) TSR as compared to a peer group of public companies over the same period at 40%, TSR as compared to the TSR for the NAREIT Mortgage Index at 30%, and the company’s absolute TSR at 30%. The remaining 25% of the compensation award is time- based vesting over three years. As of December 31, 2016, 1,028,734 common shares are available for issuance under the 2012 IAP. A summary of the SARs activity of the 2012 IAP is presented below. Outstanding, January 1, Granted Expired Exercised Forfeited Outstanding, December 31, 2016 2015 2014 Weighted Average Exercise Price $7.01 2.38 7.14 — 5.55 $6.06 Weighted Average Exercise Price $6.92 7.23 6.17 6.30 7.53 $7.01 Weighted Average Exercise Price $6.18 8.29 — 5.74 7.67 $6.92 SARs 2,689,458 895,100 — (711,750) (92,566) 2,780,242 SARs 2,780,242 1,177,500 (106,500) (61,667) (168,875) 3,620,700 SARs 3,620,700 895,000 (126,499) — (338,217) 4,050,984 SARs exercisable at December 31, 2,373,462 6.82 1,649,643 6.52 647,958 6.30 As of December 31, 2016, our closing common stock price was $3.36, which was less than the exercise prices of all exercisable SARs. Therefore, the total intrinsic value of SARs outstanding and exercisable at December 31, 2016 was $0. As of December 31, 2016, the unrecognized compensation cost relating to unvested SARs was $404. The weighted average grant date fair values of the SARs and the assumptions used in computing those fair values at the dates of their respective awards, using the Black-Scholes Option Pricing Model, were as follows: Weighted average grant date fair value Stock Price Strike Price Risk-free interest rate Dividend yield Volatility Expected term For the Years Ended December 31 2016 2015 2014 $ $ 0.23 2.38 2.38 1.0% 15.1% 38% $ 0.96 7.23 7.23 1.2% 10.0% 32% 1.32 8.29 8.29 1.5% 7.7% 31% 3.5 years 3.5 years 5.0 years The stock price used was based on the closing price on the date of the award. The strike price used is the strike price in the respective SAR awards, which was based on the closing price on the date of the award. The 159 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) risk free rate represents the U.S. Treasury rate for the 5 year term of the SARs. The dividend yield was the dividend yield at the time of the SAR awards. In estimating volatility, management used recent historical volatility as a proxy for expected future volatility. The following table summarizes information about the SARs outstanding and exercisable as of December 31, 2016: Range of Exercise Prices $2.38—8.29 SARs Outstanding SARs Exercisable Weighted Average Remaining Contractual Life Weighted Average Remaining Contractual Life Number Exercisable Number Outstanding 4,050,984 2.2 years 2,373,462 1.2 years A summary of the restricted common share awards of the 2012 IAP and 2015 LTIP as of December 31, 2016, 2015, and 2014 is presented below. 2016 Weighted Average Grant Date Fair Value Per Share $7.41 2.84 5.29 4.03 $ — 2015 Weighted Average Grant Date Fair Value Per Share $7.67 7.23 7.46 7.54 $7.41 2014 Weighted Average Grant Date Fair Value Per Share $6.89 8.29 7.25 7.60 $7.67 Number of Shares 365,667 335,917 (165,634) (80,033) 455,917 Number of Shares 455,917 386,905 (234,197) (49,042) 559,583 Number of Shares 559,583 1,356,999 (507,407) (329,982) 1,079,193 Balance, January 1, Granted Vested Forfeited Balance, December 31, As of December 31, 2016, the unrecognized compensation cost relating to unvested restricted common share awards was $1,830. The estimated fair value of restricted common share awards vested during 2016, 2015, and 2014 was $1,248, $1,688 and $1,201, respectively. The following table summarizes the PSUs granted for the years ended December 31, 2016 and 2015: Grant Date Type of PSUs Granted March 31, 2015 3-Year TSR vs Peer Group March 31, 2015 3-Year TSR vs NAREIT Mortgage Index March 31, 2015 Absolute 3-Year TSR March 31, 2015 Strategic Objectives April 22, 2016 3-Year TSR vs Peer Group April 22, 2016 3-Year TSR vs NAREIT Number of PSUs Granted Performance Period Commencement Date Performance Period End Date Grant Date Fair Value Number of PSUs Outstanding as of December 31, 2016 136,115 January 1, 2015 December 31, 2017 $3.35 136,115 68,057 January 1, 2015 December 31, 2017 $3.26 68,057 January 1, 2015 December 31, 2017 $2.17 68,057 January 1, 2015 December 31, 2017 $6.86 325,348 January 1, 2016 December 31, 2018 $1.55 68,057 68,057 68,057 325,348 Mortgage Index April 22, 2016 Absolute 3-Year TSR 244,011 January 1, 2016 December 31, 2018 $1.44 244,011 January 1, 2016 December 31, 2018 $1.07 244,011 244,011 160 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Our assumptions used in computing the fair value of the PSUs at the dates of their respective awards, using the Monte Carlo method, were as follows: Dividend yield Volatility Expected term For the Years Ended December 31 2016 2015 10.6% (a) 53.0% (b) 8.0% (c) 39.0% (d) 2.7 years 2.8 years (a) This represents the dividend yield assumption used for RAIT. The dividend yield assumptions used for our peer group and the NAREIT Mortgage Index ranged from 0% to 17.9%. (b) This represents the volatility assumption used for RAIT. The volatility assumptions used for our peer group and the NAREIT Mortgage Index ranged from 17% to 48%. (c) This represents the dividend yield assumption used for RAIT. The dividend yield assumptions used for our peer group and the NAREIT Mortgage Index ranged from 0% to 17.9%. (d) This represents the volatility assumption used for RAIT. The volatility assumptions used for our peer group and the NAREIT Mortgage Index ranged from 17% to 50%. The Company estimates future expenses associated with PSUs outstanding at December 31, 2016 to be $624, which will be recognized over a weighted-average period of 2.2 years. During the year ended December 31, 2016, we recorded $6,752 associated with our share based compensation of which $3,355 was recorded within IRT internalization and management transition expenses. This included $784 of share based compensation expense recorded related to the December 20, 2016 modification of SARs, restricted awards, and PSUs previously granted to two executive officers and $2,571 of share based compensation recorded related to restricted stock awards with no service condition that were issued in conjunction with the closing of the IRT internalization transaction. Share based compensation expense for the modified awards was based on the fair value of the awards on the modification date. Share based compensation expense for the awards with no service condition was based on the fair value of the awards on the grant date. During the years ended December 31, 2015 and 2014, we recorded share based compensation expense of $4,466 and $4,407, respectively. On January 9, 2017, the compensation committee awarded 344,042 unvested restricted common share awards to one of our executive officers in order to satisfy the remaining portion of the 600,000 awards to be granted to the executive officer under a Binding Memorandum of Understanding dated September 26, 2016, or the MOU, contingent on the closing of the IRT internalization transaction. While a portion of the awards issued with respect to the MOU were granted on December 23, 2016 and this final portion on January 9, 2017, stock compensation expense of $2,068 related to all 600,000 awards was recorded in 2016 since the awards were authorized as of the December 20, 2016 IRT internalization transaction and no future service would be required after the grant date. On February 14, 2017, the compensation committee awarded 332,500 unvested restricted common share awards, valued at $1,257 using our closing price of $3.78, to our non-executive officer employees. These awards vest over a three-year period. 161 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) On February 14, 2017, the compensation committee awarded 832,500 SARs, valued at $574 based on a Black-Scholes option pricing model at the date of grant, to our non-executive officer employees. The SARs vest over a three-year period and may be exercised between the date of vesting and February 14, 2022, the expiration date of the SARs. Employee Benefits 401(k) Profit Sharing Plan We maintain a 401(k) profit sharing plan, or the RAIT 401(k) Plan, for the benefit of our eligible employees. The RAIT 401(k) Plan offers eligible employees the opportunity to make long-term investments on a regular basis through salary contributions, which are supplemented by our matching cash contributions and potential profit sharing payments. We provide a cash match of the employee contributions up to 4% of employee compensation, which is capped at limits set by the Internal Revenue Service, or IRS, and may pay an additional 2% of eligible compensation as discretionary cash profit sharing payments. During the years ended December 31, 2016, 2015 and 2014, we recorded $749, $548 and $551 of contributions which is included in compensation expense on the accompanying consolidated statements of operations. During the years ended December 31, 2016, 2015 and 2014, we did not make any discretionary cash profit sharing contributions. 162 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 14: EARNINGS (LOSS) PER SHARE The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three years ended December 31, 2016: Income (loss) from continuing operations (Income) loss allocated to preferred shares (Income) loss allocated to noncontrolling For the Years Ended December 31 2016 2015 2014 $ (37,879) $ (35,160) 28,593 $ (292,830) (28,993) (32,830) interests 3,435 2,235 2,115 Income (loss) from continuing operations allocable to common shares Total income (loss) from discontinued operations (Income) loss from discontinued operations (69,604) 87,952 (2,002) (319,708) 34,900 2,855 allocated to noncontrolling interests (28,168) (25,740) (1,651) Income (loss) from discontinued operations allocable to common shares 59,784 9,160 1,204 Net income (loss) allocable to common shares $ (9,820) $ 7,158 $ (318,504) Weighted-average shares outstanding—Basic Dilutive securities under the treasury stock method 91,153,861 — 85,524,073 933,798 81,328,129 — Weighted-average shares outstanding—Diluted 91,153,861 86,457,871 81,328,129 Earnings (loss) per share—Basic: Continuing operations Discontinued operations Earnings (loss) per share—Basic Earnings (loss) per share—Diluted: Continuing operations Discontinued operations Earnings (loss) per share—Diluted $ $ $ $ (0.77) $ 0.66 (0.11) $ (0.77) $ 0.66 (0.11) $ (0.03) $ 0.11 0.08 $ (0.03) $ 0.11 0.08 $ (3.93) 0.01 (3.92) (3.93) 0.01 (3.92) For the years ended December 31, 2016, 2015 and 2014, securities convertible into 26,457,897, 21,807,918 and 31,816,146 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. NOTE 15: INCOME TAXES RAIT, Taberna and IRT have elected to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code. Note that as of October 5, 2016, IRT was no longer consolidated by RAIT. Refer to Note 9: Discontinued Operations for further discussion. In February 2016, in conjunction with the venture described in Note 5: Indebtedness and Note 8: Variable Interest Entities, we created a new entity that elected to be taxed as a REIT. This entity holds the FL-5 junior notes for the aforementioned venture. To maintain qualification as a 163 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to shareholders. We generally will not be subject to U.S. federal income tax on taxable income that is distributed to our shareholders. If our REIT entities fail to qualify as REITs in any taxable year, we will then be subject to U.S. federal income taxes on our taxable income at regular corporate rates, and we will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants relief under certain statutory provisions. Such an event could materially adversely affect our net income and cash available for dividends to shareholders. However, we believe that each of our REIT entities will be organized and operated in such a manner as to qualify for treatment as a REIT, and intend to operate in the foreseeable future in a manner so that each will qualify as a REIT. We may be subject to certain state and local taxes. For the year ended December 31, 2016, 47% of dividends were characterized as ordinary income and 53% were characterized as total capital gain distribution. For the year ended December 31, 2015, 21% of dividends were characterized as ordinary income, 53% as total capital gain distribution and 26% were characterized as return of capital. The components of the provision for income taxes as it relates to our taxable income from domestic TRSs during the years ended December 31, 2016, 2015 and 2014 includes the effects of our performance of a portion of TRS services in a foreign jurisdiction that does not incur income taxes. Certain TRS entities are domiciled in the Cayman Islands and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our income on a current basis as SubPart F income, whether or not distributed. Upon distribution of any previously included SubPart F income by these entities, no incremental U.S. federal, state, or local income taxes would be payable by us. Accordingly, no provision for income taxes has been recorded for these foreign TRS entities for the years ended December 31, 2016, 2015 and 2014. The components of the income tax benefit (provision) as it relates to our taxable income (loss) from domestic and foreign TRSs during the years ended December 31, 2016, 2015 and 2014 were as follows: Current benefit (provision) Deferred benefit (provision) Income tax benefit (provision) Current benefit (provision) Deferred benefit (provision) Income tax benefit (provision) For the Year Ended December 31, 2016 Federal $ (9) (2,127) $(2,136) State and Local $(329) (85) $(414) Foreign Total $— — $— $ (338) (2,212) $(2,550) For the Year Ended December 31, 2015 Federal $ (268) (2,110) $(2,378) State and Local $ (46) (374) $(420) Foreign Total $— — $— $ (314) (2,484) $(2,798) 164 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Current benefit (provision) Deferred benefit (provision) Income tax benefit (provision) For the Year Ended December 31, 2014 Federal $ (110) 2,438 $2,328 State and Local $ (69) (112) $(181) Foreign Total $— — $— $ (179) 2,326 $2,147 A reconciliation of the income tax benefit (provision) based upon the statutory tax rates to the effective rates of our taxable REIT subsidiaries is as follows for the years ended December 31, 2016, 2015 and 2014: Federal statutory rate State statutory, net of federal benefit Change in federal valuation allowance Permanent items Penalties associated with SEC settlement Provision to return adjustments Other Income tax benefit (provision) For the Years Ended December 31 2016 2015 2014 $(8,530) (299) 5,670 (54) — 207 456 $(1,718) (404) (55) (41) — (580) — $ 3,171 (157) 986 (82) (1,750) (21) — $(2,550) $(2,798) $ 2,147 Significant components of our deferred tax assets (liabilities), at our TRSs, are as follows as of December 31, 2016 and 2015: Deferred tax assets (liabilities): Net operating losses, at TRSs Capital losses Unrealized losses Other Total deferred tax assets Valuation allowance Net deferred tax assets Identified intangibles Advances Accrued interest Other Deferred tax (liabilities) As of December 31, 2016 As of December 31, 2015 $ 13,899 8,498 — 595 22,992 (22,683) $ 14,432 18,604 — 1,056 34,092 (27,431) $ 309 $ 6,661 (276) — — (156) (432) (3,838) (517) — (217) (4,572) Net deferred tax assets (liabilities) $ (123) $ 2,089 165 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) As of December 31, 2016, we had $29,786 of federal net operating losses, $64,782 of state net operating losses, $0 foreign net operating losses and $18,611 of capital losses. The federal net operating losses will begin to expire in 2028, the state net operating losses will begin to expire in 2017. We have concluded that it is not more likely than not that $29,786 of federal net operating losses and $64,782 of state net operating losses, and $17,934 of capital losses will be utilized during their respective carry forward periods and, as such, we have established a valuation allowance against these deferred tax assets. The accounting guidance for income taxes clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides rules on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no uncertain tax positions for the years ending December 31, 2016, 2015, 2014, and 2013. Income tax returns are filed in multiple jurisdictions and are subject to examination by taxing authorities. We have open tax years from 2013 through 2015 with various jurisdictions. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations. NOTE 16: RELATED PARTY TRANSACTIONS In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with the related entities described below. All of these relationships and transactions were approved or ratified by our audit committee as being on terms comparable to those available from an unaffiliated third party or otherwise not creating a conflict of interest. Almanac Andrew M. Silberstein serves as a trustee on our board of trustees, as designated pursuant to the purchase agreement. Mr. Silberstein is an equity owner of Almanac and an officer of the investor and holds indirect equity interests in the investor. The transactions pursuant to the purchase agreement are described above in Note 11: Series D Preferred Shares. IRT As described in Note 9: Discontinued Operations, we deconsolidated IRT as of October 5, 2016. While IRT was consolidated by RAIT, IRT was not considered a related party. Subsequent to deconsolidation, IRT became a related party. RAIT’s relationships with IRT are discussed below. Fees and Expenses Received as IRT’s External Advisor On December 20, 2016, in connection with our management internalization, we sold IRT’s Advisor and, therefore, fees and expenses are no longer earned. On September 25, 2015, we entered into the Second Amendment to the Second Amended and Restated Advisory Agreement. The Second Amendment amended the advisory agreement to extend its term to October 1, 2020, and to provide for compensation to us for periods subsequent to October 1, 2015, as follows: • Quarterly base management fee of 0.375% of IRT’s cumulative equity raised; and • Quarterly incentive fee equal to 20% of IRT’s core funds from operations, or Core FFO, as defined in the advisory agreement, in excess of $0.20 per share. 166 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) Prior to the Second Amendment, the Second Amended and Restated Advisory Agreement, which was effective as of May 7, 2013 through September 30, 2015, provided that we were compensated as follows: • Quarterly base management fee of 0.1875% of IRT’s average gross real estate assets as of the last day of such quarter. Average gross real estate assets means the average of the aggregate book value of IRT’s real estate assets before reserves for depreciation or other similar noncash reserves and excluding the book values attributable to the eight properties that IRT acquired prior to August 16, 2013. Average gross real estate assets is computed by taking the average of these book values at the end of each month during the quarter for which the fee is calculated. • An incentive fee based on IRT’s pre-incentive fee Core FFO. The incentive fee was computed at the end of each fiscal quarter as follows: • • no incentive fee in any fiscal quarter in which IRT’s pre-incentive fee Core FFO does not exceed the hurdle rate of 1.75% (7% annualized) of the cumulative gross amount of equity capital IRT has obtained; and 20% of the amount of IRT’s pre-incentive fee Core FFO that exceeded 1.75% (7% annualized) of the cumulative gross proceeds from IRT’s issuance of equity securities. For the years ended December 31, 2016, 2015 and 2014, we earned $7,092, $4,984, and $1,582 of asset management fees, respectively. It is noted that the quarterly asset management fee for the period ended December 31, 2016 was calculated by adjusting for the effect of the repurchase of IRT’s shares held by RAIT as well as the purchase price for IRT’s management internalization as described in Note 9: Discontinued Operations. For the years ended December 31, 2016, 2015, and 2014, we earned $350, $629, and $154 of incentive fees, respectively. For the years ended December 31, 2015 and 2014, all of these fees earned were eliminated in consolidation. For the year ended December 31, 2016, $5,584 of these fees earned were eliminated in consolidation. These fees are included within fees and other income in our consolidated statements of operations. As of December 31, 2016 and 2015, we had receivables from IRT for asset management fees and incentive fees of $0 and $1,854, respectively. The receivable as of December 31, 2015 eliminated in consolidation. Property Management Fees Paid to Our Property Manager On December 20, 2016, in connection with our management internalization, we sold our multifamily property management business to IRT, which included all of the property management agreements for IRT’s properties. We had entered into property management agreements with IRT with respect to each of IRT’s properties. Pursuant to these property management agreements, IRT paid our multifamily property manager property management and construction management fees on a monthly basis up to 4.0% of the gross revenues from a property for each month. For the years ended December 31, 2016, 2015 and 2014, we earned $4,769, $3,675, and $1,759, respectively, of property management and construction management fees. For the years ended December 31, 2015 and 2014, all of these fees earned were eliminated in consolidation. For the year ended December 31, 2016, $3,776 of these fees earned were eliminated in consolidation. These fees are included within fees and other income in our consolidated statements of operations. 167 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) As of December 31, 2016 and 2015, we had receivables from IRT for property management and leasing fees of $0 and $440, respectively. The receivable as of December 31, 2015 eliminated in consolidation. Dividends Paid to Affiliates of Our External Advisor On October 5, 2016, we sold all 7,269,719 shares of IRT’s common stock that we owned to IRT. As of December 31, 2016 and 2015, RAIT owned 0.0% and 15.5% of the outstanding shares of IRT’s common stock, respectively. For the years ended December 31, 2016, 2015 and 2014, we earned and subsequently received dividends of $3,926, $5,234 and $5,126, respectively, related to shares of common stock owned by RAIT. All of these dividends were eliminated in consolidation. Indebtedness During the year ended December 31, 2016, IRT repaid $38,075 of mortgage indebtedness held by us with proceeds from two property dispositions. For the years ended December 31, 2016, we received $486 in exit fees pursuant to the contractual terms of the mortgage indebtedness. Also for the years ended December 31, 2016, 2015, and 2014, we received $361, $965, and $966 respectively, of interest from IRT. All of the debt, fees and interest eliminated in consolidation. There was no accrued interest receivable outstanding as of December 31, 2016. Other Transactions with RAIT Subsequent to our Management Internalization (December 20, 2016 to December 31, 2016) IRT paid RAIT $50 pursuant to a shared services agreement for the period ended December 31, 2016. RAIT paid IRT $23 of property management fees. IRT reimbursed RAIT $253 for compensation expense that RAIT paid to IRT employees. Other On December 20, 2016, Scott F. Schaeffer resigned from his position as Chief Executive Officer of RAIT and became the full-time Chief Executive Officer of IRT. On the same date, Scott F. Schaeffer entered into a one year consulting agreement with RAIT for which he will receive compensation of $375. In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of his resignation, RAIT granted to Scott F. Schaeffer 150,000 unvested shares of common stock on December 23, 2016, and made a $500 cash payment in January 2017. The shares vest 50% on the six month anniversary and 50% on the one year anniversary of the grant date. NOTE 17: SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS The consolidated statements of cash flows and supplemental disclosure includes the entities or distinguishable components of RAIT that were considered discontinued operations for the years ended December 31, 2016, 2015 and 2014. See Note 9: Discontinued Operations for additional information. 168 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) The following are supplemental disclosures to the consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014: Cash paid for interest Cash paid (refunds received) for taxes Non-cash increase (decrease) in investments in real estate, intangible assets and other liabilities from conversion of loans Non-cash increase in noncontrolling interests from property acquisition Non-cash increase (decrease) in indebtedness from conversion to shares or debt extinguishments Non-cash increase (decrease) in indebtedness from the assumption of debt from property acquisitions Non-cash (decrease) in assets from discontinued operations Non-cash decrease in liabilities and equity from discontinued operations Non-cash increase in other assets from business combination Non-cash decrease in investment in mortgages and loans from deconsolidation of VIEs Non-cash decrease in investment in securities and security- related receivables from deconsolidation of VIEs Non-cash decrease in restricted cash from deconsolidation of VIEs Non-cash decrease in accrued interest receivable from deconsolidation of VIEs Non-cash decrease in other assets from deconsolidation of VIEs Non-cash decrease in indebtedness from deconsolidation of VIEs Non-cash decrease in accrued interest payable from deconsolidation of VIEs Non-cash decrease in accounts payable and accrued expenses from deconsolidation of VIEs Non-cash decrease in derivative liabilities from deconsolidation of VIEs Non-cash decrease in shareholders’ equity from deconsolidation of VIEs 2016 2015 2014 $ 98,154 268 $ 80,748 500 $ 67,960 262 33,271 159,214 74,530 — 123,855 11,961 (6,263) (4,018) (2,421) — (1,277,292) 204,308 — 289,292 — 1,245,720 — — — — — — — — — — — — — — — — — — — — — — — — 3,052 (43,312) (496,587) (4,109) (5,296) (1,160) 274,787 23,273 74 52,624 199,706 Also, during the year ended December 31, 2015, we deconsolidated two real estate properties which resulted in a non-cash decrease of $45,650 to investments in real estate, a non-cash increase of $4,791 to investment in commercial mortgage loans, mezzanine loans and preferred equity interests, and a non-cash decrease of $47,888 to indebtedness. Also, during the year ended December 31, 2015, we sold one real estate property whose purchase price was financed by an existing RAIT loan on the property that was assumed by the buyer. This resulted in a non-cash decrease of $15,848 to investments in real estate and a non-cash increase of $18,000 to investment in commercial mortgage loans, mezzanine loans and preferred equity interests 169 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 18: QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes our quarterly financial data which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations: 2016 Total revenue Change in fair value of financial instruments Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Net income (loss) available to common shares from continuing operations Net income (loss) available to common shares from discontinued operations Net income (loss) allocable to common shares Earnings (loss) per share from continuing operations—Basic (a) Earnings (loss) per share from discontinued operations—Basic (a) Total earnings (loss) per share—Basic (a) Earnings (loss) per share from continuing operations—Diluted (a) Earnings (loss) per share from discontinued operations—Diluted (a) Total earnings (loss) per share—Diluted (a) 2015: Total revenue Change in fair value of financial instruments Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Net income (loss) available to common shares from continuing operations Net income (loss) available to common shares from discontinued operations Net income (loss) allocable to common shares Earnings (loss) per share from continuing operations—Basic (a) Earnings (loss) per share from discontinued operations—Basic (a) Total earnings (loss) per share—Basic (a) Earnings (loss) per share from continuing operations—Diluted (a) Earnings (loss) per share from discontinued operations—Diluted (a) Total earnings (loss) per share—Diluted (a) For the Three-Month Periods Ended March 31 June 30 September 30 December 31 $ 48,651 (4,088) (11,988) 1,485 (10,503) $ 45,974 (1,592) (6,471) 32,876 26,405 $ 43,237 (1,375) 5,328 4,112 9,440 $ 35,745 1,109 (24,748) 1,671 24,731 (19,363) (14,115) (2,048) (34,078) 1,519 (17,844) 6,535 (7,580) (0.22) (0.15) 0.02 (0.20) 0.07 (0.08) 2,044 (4) (0.02) 0.02 — 49,686 15,608 (0.37) 0.54 0.17 (0.22) (0.15) (0.02) (0.37) 0.02 (0.20) 0.07 (0.08) 0.02 — $ 53,056 4,490 (306) 572 266 $ 56,459 8,356 25,186 1,255 26,441 $ 48,952 620 (2,178) 27,004 24,826 0.54 0.17 $ 53,147 (1,828) 5,891 6,069 11,960 (7,605) 17,409 (10,009) (1,797) 508 (7,097) 1,547 18,956 3,477 (6,532) (0.09) 0.01 (0.08) (0.09) 0.01 (0.08) 0.21 0.02 0.23 0.20 0.02 0.22 (0.11) 0.04 (0.07) (0.11) 0.04 (0.07) 3,628 1,831 (0.02) 0.04 0.02 (0.02) 0.04 0.02 (a) The summation of quarterly per share amounts may not equal the full year amounts. 170 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 19: SEGMENT REPORTING As a group, our executive officers act as the Chief Operating Decision Maker, or CODM. The CODM reviews operating results of our reportable segments to make decisions about investments and resources and to assess performance for each of these reportable segments. Historically, we have conducted our business through the following reportable segments: • Our real estate lending, owning and managing segment concentrates on lending, owning and managing commercial real estate assets throughout the United States. The form of our investment may range from first mortgage loans to equity ownership of a commercial real estate property. We manage our investments internally through our asset management and property management professionals. • Our IRT segment concentrated on the ownership of apartment properties in opportunistic markets throughout the United States. As discussed in Note 9: Discontinued Operations, IRT became a discontinued operation during the year ended December 31, 2016. • Our Taberna Securitization segment included the ownership and management of three real estate trust preferred securitizations, two of which we consolidated. Through December 19, 2014, we managed these securitizations and received fees for services provided. On December 19, 2014, we sold these remaining collateral management contracts and deconsolidated the securitizations from our financial statements. As a result, we only have one reportable segment for the years ended December 31, 2016 and 2015 that relates to our continuing operations. As such, the table below only presents our segment reporting for year ended December 31, 2014: Year Ended December 31, 2014: Net interest margin Property income Fee and other income Provision for loan losses Depreciation and amortization expense Operating income Change in fair value of financial instruments Income tax benefit (provision) Net income (loss) Reportable Segments Real Estate Lending Owning and Management Taberna IRT (a) Eliminations (b) Consolidated $100,197 113,110 32,166 (5,500) (44,128) 22,745 7,841 2,643 40,396 $ 22,786 — 980 — (136) 20,454 (106,593) (496) (327,102) $ — $(19,874) 49,171 — — (12,520) 45 — — 2,944 — (8,866) — — (1,012) — — (6,213) $ 103,109 162,281 24,280 (5,500) (56,784) 42,232 (98,752) 2,147 (289,975) (a) As discussed above, IRT became a discontinued operations during the year ended December 31, 2016 and, as such, is no longer a reportable segment. (b) Certain transactions occurred between the reportable segments and between the reportable segments and IRT. These transactions included advisory and property management services as well as commercial real estate loans on owned real estate. 171 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) We have no single customer that accounts for 10% or more of revenue. NOTE 20: OTHER DISCLOSURES Commitments and Contingencies Unfunded Loan Commitments Certain of our commercial mortgage loans contain provisions whereby we are required to advance additional funds to our borrowers for capital improvements. As of December 31, 2016, our incremental loan commitments were $13,760, which will be funded from either cash or restricted cash held on deposit. Employment Agreements We are party to employment agreements with certain executives that provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances. Litigation We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Lease Obligations We lease office space in Philadelphia and other locations. The annual minimum rent due pursuant to the leases for each of the next five years and thereafter is estimated to be as follows as of December 31, 2016: 2017 2018 2019 2020 2021 Thereafter Total $ 1,598 1,992 1,490 1,332 1,094 23,145 $30,651 Rent expense was $2,130, $2,817 and $2,439 for the years ended December 31, 2016, 2015, and 2014, respectively, and has been included in general and administrative expense or property operating expenses in the accompanying consolidated statements of operations. 172 RAIT Financial Trust Notes to Consolidated Financial Statements As of December 31, 2016 (Dollars in thousands, except share and per share amounts) NOTE 21: SUBSEQUENT EVENTS We have evaluated subsequent events or transactions that have occurred after the consolidated balance sheet date of December 31, 2016, but prior to the filing of the consolidated financial statements with the SEC on this Annual Report on Form 10-K. We have determined that, except as disclosed within this Note and other Notes, there are no subsequent events that require disclosure in this Annual Report on Form 10-K. On February 23, 2017, Highland Select Equity Master Fund, L.P., an affiliate of Highland Capital Management, L.P., a Delaware limited partnership (“Highland”) purported to notify us of its intention to nominate Nancy Jo Kuenstner, John M. Pons, Andrew C. Richardson, James D. Dondero and Matt McGraner for election as trustees at our 2017 Annual Meeting of Shareholders and, thereby, replace more than a majority of the nine members on our Board of Trustees. According to the Schedule 13D filed with the SEC by Highland and its affiliates on February 24, 2017, Highland and its affiliates beneficially own approximately 5.9% of our outstanding common stock. On February 23, 2017, Highland and its affiliates filed with the SEC soliciting material under Rule 14a-12 of the Exchange Act confirming their intention to file a preliminary proxy statement and an accompanying proxy card with the SEC to solicit votes for the election of its slate of five trustee nominees to our Board of Trustees, at our 2017 Annual Meeting of Shareholders. 173 RAIT Financial Trust Schedule II Valuation and Qualifying Accounts For the Three Years Ended December 31, 2016 (Dollars in thousands) Allowance for Losses Balance, Beginning of Period Additions Deductions Provision Other (a) Balance, End of Period For the year ended December 31, 2016 $17,097 $8,050 $1,019 $(13,812) $12,354 For the year ended December 31, 2015 $ 9,218 $8,300 $ — $ (421) $17,097 For the year ended December 31, 2014 $22,955 $5,500 $ — $(19,237) $ 9,218 (a) Represents capitalization of past due interest on modified loans. 174 n o i t a i c e r p e D n o i t i s i u q c A f o e f i L f o r a e Y d i a p n U ( ) l a p i c n i r P s e c n a r b m u c n E d e t a l u m u c c A - 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i t l u M L F , o d n a l r O y l i m a F - i t l u M I W , e e k u a w l i M X T , n o t s u o H C S , h c a e B e l t r y M L F , n o t a R a c o B V N , s a g e V s a L y l i m a F - i t l u M 0 1 0 2 ) 2 ( ) 6 4 2 , 1 1 ( ) 6 1 7 , 2 ( 1 5 5 , 0 1 0 8 2 , 2 1 3 4 , 1 — 0 2 1 , 9 0 8 2 , 2 A P , e v o r G w o l l i W 0 1 0 2 ) 3 ( ) 4 8 7 , 8 ( ) 8 1 2 , 3 ( 0 7 4 , 0 1 0 8 9 , 1 0 5 5 , 2 — 0 2 9 , 7 0 8 9 , 1 J N , l l i H y r r e h C 0 1 0 2 ) 2 ( ) 4 8 0 , 6 2 ( ) 1 6 1 , 5 ( 0 9 2 , 0 2 2 2 5 , 4 4 0 2 , 2 — 6 8 0 , 8 1 2 2 5 , 4 S M , n o s k c a J y l i m a F - i t l u M 0 1 0 2 1 1 0 2 1 1 0 2 1 1 0 2 1 1 0 2 1 1 0 2 1 1 0 2 2 1 0 2 2 1 0 2 ) 2 ( ) 2 ( ) 2 ( ) 2 ( ) 2 ( ) 2 ( ) 5 9 8 , 6 1 ( ) 0 0 0 , 3 2 ( ) 0 5 3 , 4 2 ( ) 7 7 0 , 1 1 ( ) 3 2 3 , 4 ( ) 0 2 5 ( ) 2 ( ) 2 ( ) 2 ( ) 9 4 6 , 2 1 ( ) 0 0 5 , 8 1 ( ) 0 0 6 , 8 ( ) 8 0 5 , 3 ( ) 0 4 7 , 3 ( ) 7 0 7 , 3 ( — — — — 3 4 6 1 3 4 3 0 2 , 1 1 6 9 7 , 7 1 8 1 9 , 8 1 1 8 5 , 4 6 9 3 , 3 0 6 0 , 4 0 8 4 , 4 0 3 2 , 6 9 7 3 , 3 9 0 4 7 9 6 , 3 1 4 3 , 2 8 9 9 1 8 5 , 4 3 4 6 1 0 0 3 , 0 1 3 4 ) 5 4 6 , 4 ( ) 9 6 1 , 1 ( 6 8 6 , 6 0 7 1 , 3 1 0 6 6 , 3 0 2 8 , 1 9 2 3 4 6 1 , 9 — — — — — — — — — 6 0 5 , 7 5 5 4 , 5 1 0 2 9 , 7 1 — — — — 6 9 3 , 3 0 6 0 , 4 0 8 4 , 4 0 3 2 , 6 9 7 3 , 3 9 0 4 , s g n i r p S o d a r o l o C C N , e t t o l r a h C N T , e l l i v h s a N O C L F L F L F , h c a e B a n o t y a D , h c a e B a n o t y a D , h c a e B a n o t y a D 0 0 3 , 0 1 L F , h c a e B a n o t y a D 6 0 0 , 4 7 5 3 , 6 0 6 6 , 3 0 2 8 , 1 X T , k c o R d n u o R N M , l u a P . t S e c i f f O e c i f f O l i a t e R d n a L d n a L d n a L e c i f f O l i a t e R d n a L l i a t e R e c i f f O d n a L l i a t e R e c i f f O e c i f f O e c i f f O e m a N y t r e p o r P e v o r G w o l l i W l l i H y r r e h C t n i o P r e t s y O y a B y n a c s u T l l e w o D c M s s u e R l l a M n w o t s p r a h S r e t n e C e v i t u c e x E s g n i d n a L y e r o C y a B d l a r e m E d a o R o t a m a Y 1 0 5 1 — s w e M e v i t u c e x E l l a M e r a u q S t e l n I e v o r G w o l l i W — s w e M e v i t u c e x E t a s l i a r T / n o t g n i x e L l l i H y r r e h C e t n i o p h t r o N e r a u q S y n a f f i T e r a u q S e c r u o s e R r u o F a z a l P h t u o S t r o s e R d n a l s I e r u s a e r T t r o s e R s e r o h S y n n u S h c a e B r e b m o c h c a e B p o h S t f i G S G M g n i s s o r C s ’ y a M r e w o T S B U t r o s e R 175 g n i y r r a C s s o r G t n u o m A , s t n e m e v o r p m I s t n e m e r i t e R f o t e n t s o C l a i t i n I f o t s o C n o i t a i c e r p e D n o i t i s i u q c A f o e f i L f o r a e Y s e c n a r b m u c n E d i a p n U ( ) l a p i c n i r P d e t a l u m u c c A - n o i t a i c e r p e D g n i d l i u B g n i d l i u B ) 1 ( ) 1 ( d n a L g n i d l i u B d n a L g n i d l i u B d n a L n o i t a c o L n o i t p i r c s e D e m a N y t r e p o r P 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 3 1 0 2 4 1 0 2 ) 2 ( ) 2 ( ) 3 3 4 , 5 ( ) 1 3 4 , 3 3 ( 4 1 0 2 4 1 0 2 4 1 0 2 ) 0 1 ( ) 0 1 ( ) 3 3 5 , 6 1 ( ) 8 8 3 , 8 1 ( ) 2 ( ) 5 8 0 , 6 2 ( 4 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 5 1 0 2 ) 2 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 8 ( ) 2 ( ) 0 5 4 , 5 ( ) 2 1 2 , 7 ( ) 2 1 2 , 7 ( ) 3 2 9 , 1 ( ) 4 9 3 , 9 ( ) 0 9 1 , 2 1 ( ) 7 4 6 , 0 1 ( ) 2 4 7 , 6 1 ( ) 8 9 3 , 4 1 ( ) 1 8 5 , 5 ( ) 1 4 6 , 7 ( ) 4 5 5 , 2 7 ( ) 6 6 1 , 4 ( ) 8 4 6 , 1 ( ) 4 0 0 , 3 ( ) 3 4 4 , 1 ( ) 5 5 6 , 1 ( ) 0 6 4 ( ) 4 7 1 ( ) 4 4 1 ( ) 0 3 ( ) 7 9 1 ( ) 4 4 0 , 1 ( ) 3 6 3 ( ) 0 7 6 ( ) 5 5 2 ( ) 8 0 2 ( ) 0 2 2 ( 4 9 9 , 6 7 2 9 , 3 3 3 7 9 , 6 2 5 2 3 , 6 1 7 7 1 , 0 2 5 4 8 , 3 5 6 1 , 4 2 8 2 , 3 1 6 6 5 7 3 , 4 2 6 5 , 4 2 4 9 4 , 8 7 2 1 , 6 1 1 7 0 , 6 9 5 6 , 4 5 9 9 , 4 9 1 7 0 1 2 , 4 8 4 4 , 2 1 3 0 , 6 3 5 3 , 5 1 4 4 , 1 6 6 5 5 1 4 0 6 4 7 8 7 1 1 0 , 2 9 1 1 , 1 9 1 7 3 9 3 , 1 4 4 5 3 0 4 3 9 4 , 1 3 9 6 , 1 9 8 4 6 9 7 0 4 5 , 3 9 5 2 — 9 5 6 3 4 1 8 6 5 2 5 — — ) 2 3 0 , 3 ( 5 5 3 , 2 5 5 8 3 , 7 1 3 9 7 , 9 — — — — — — — — — — — — — — — — — 1 0 3 , 5 4 3 4 , 2 3 3 3 4 , 3 2 6 3 8 , 5 1 1 8 3 , 9 1 6 8 5 , 3 5 6 1 , 4 3 7 2 , 3 6 5 6 1 6 3 , 4 6 2 5 , 4 2 6 8 4 , 8 7 2 1 , 6 1 1 7 0 , 6 3 0 6 , 4 3 4 9 , 4 9 1 7 0 1 2 , 4 8 4 4 , 2 1 3 0 , 6 3 5 3 , 5 1 4 4 , 1 6 6 5 5 1 4 0 6 4 7 8 7 1 1 0 , 2 9 1 1 , 1 9 1 7 3 9 3 , 1 4 4 5 3 0 4 2 6 5 , 2 4 5 8 3 , 7 1 , s g n i r p S o d a r o l o C D M , n w a l d o o W e c i f f O e c i f f O l a c i d e M n o i n U d r o f r e h t u R C N , m a h r u D y l i m a F - i t l u M e c a r r e T h t u o S A P , n w o t g n i n w o D O C , d o o w e l g n E S K , a t i h c t i W V N , s k r a p S A M , o r o b e l t t A A M , d l e i f g n i r p S t s e W A P , n o t g n i s n e K w e N I M , s l l i H n r u b u A L F , y a B m l a P H O , e l l i v s y r a M H O , s u b m u l o C H O , d n a l e v e l C I M I M , y o r T , y o r T O C l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I e c i f f O l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I l a i r t s u d n I t f a r c r i A s m a d A e l a d n e l G t s a E e u n e v A y r r e P o c d i M h t u o S e v i r D e t a t s r e t n I y e l l a V t n u H d r a v e l u o B x e R e v i r D f r o d n o F e v i r D e r a u q S e l c r i C y b r i K e l c r i C r e t s a c n a L e u n e v A t s a E 0 0 1 e c i f f O r e w o T w e i v e i r E g r u b s y t t e G l i a t e R l i a t e R e r a u q S d n a l k a O a z a l P d n a l k a O 176 6 1 0 2 ) 9 ( ) 2 6 8 , 3 ( ) 0 2 1 ( 6 1 0 2 6 1 0 2 6 1 0 2 ) 9 ( ) 9 ( ) 9 ( ) 5 2 7 , 1 ( ) 0 6 7 , 3 ( ) 9 5 9 , 9 ( ) 5 5 ( ) 7 6 ( ) 4 9 1 ( 6 6 0 , 5 5 0 2 , 2 7 1 2 , 2 7 2 0 , 4 2 4 2 4 0 1 4 9 7 5 9 9 , 1 7 4 1 6 1 9 9 2 1 7 3 — 9 1 9 , 4 — — — 9 8 1 , 2 8 1 9 , 1 6 5 6 , 3 2 4 2 4 0 1 4 9 7 5 9 9 , 1 N I , e n y a W t r o F l a i r t s u d n I 0 3 9 6 e k i P N I N I N I , e n y a W , e n y a W t r o F t r o F , d n e B h t u o S l a i r t s u d n I 2 3 9 6 e k i P e c i f f O e c i f f O e u n e v A e k a L t r u o C u a e r o M g r u b s y t t e G ) 1 6 0 , 9 2 8 ( $ ) 4 1 2 , 8 3 1 ( $ 3 1 5 , 5 8 6 $ 5 3 1 , 9 6 1 $ 6 0 2 , 6 1 1 $ — $ 4 0 3 , 9 6 5 $ 5 3 1 , 9 6 1 $ 6 1 0 2 ) 2 ( ) 0 0 0 , 9 2 ( — 7 7 9 , 7 2 3 1 3 , 3 1 2 — 6 5 9 , 7 2 3 1 3 , 3 J N , n a t i r a R l i a t e R g n i p p o h S r e t n e C n a t i r a R . 6 1 0 2 , 1 3 r e b m e c e D t a t n u o m a g n i y r r a c e h t s e t a m i x o r p p a e t a t s e l a e r n i s t n e m t s e v n i r u o f o s e s o p r u p x a t e m o c n i l a r e d e f r o f s i s a b t s o c e t a g e r g g a e h T I I T I A R d n a I T I A R , s n o i t a z i t i r u c e s d e t a d i l o s n o c r u o y b d l e h e r a s e c n a r b m u c n e e s e h T . I I T I A R y b d l e h s i 2 4 9 , 1 1 $ d n a s e i t r a p d r i h t . T I A R y b d l e h s i 4 8 5 , 1 $ d n a s e i t r a p d r i h t y b y b d l e h d l e h s i s i 0 0 2 , 7 $ , s e c n a r b m u c n e e s e h t 1 9 1 , 5 $ , s e c n a r b m u c n e e s e h t f O f O ) 1 ( ) 2 ( ) 3 ( ) 4 ( (5) Of these encumbrances, $9,143 is held by third parties and $20,578 is held by RAIT II. (6) Of these encumbrances, $8,647 is held by third parties and $19,300 is held by RAIT II. (7) Of these encumbrances, $21,424 is held by third parties and $32,500 is held by RAIT I. (8) Of these encumbrances, $81,942 is held by third parties and $11,000 is held by RAIT I. (9) Of these encumbrances, $17,770 is held by third parties and $1,537 is held by RAIT I. (10) These encumbrances are held entirely by third parties. Investments in Real Estate Balance, beginning of period Additions during period: Acquisitions Improvements to land and building Deductions during period: Dispositions, impairments and deconsolidation of real estate Balance, end of period: Accumulated Depreciation Balance, beginning of period Depreciation expense Dispositions and deconsolidation of real estate Balance, end of period: For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 $1,145,630 $1,151,339 49,734 22,701 147,633 18,332 (363,419) (171,674) $ 854,646 $1,145,630 For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 $158,688 36,944 (57,418) $168,480 36,818 (46,610) $138,214 $158,688 177 RAIT Financial Trust Schedule IV Mortgage Loans on Real Estate As of December 31, 2016 (Dollars in thousands) (1) Summary of Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests Interest Rate Maturity Date Principal Description of mortgage loans Loans Lowest Highest Earliest Latest Lowest Highest Commercial mortgage loans Number of Carrying Amount of Mortgage Loans (a) (c) Multi-family Office Retail Other Subtotal Mezzanine loans Multi-family Office Retail Other Subtotal Preferred equity interests Multi-family Office Subtotal 20 36 27 11 94 5 15 2 1 23 7 10 17 Total commercial mortgage loans, mezzanine loans and preferred equity interests 134 5.0% 4.4% 4.4% 5.0% 8.0% 4/1/2017 9/30/2020 $ 4,800 $ 34,350 $ 264,187 422,627 7.2% 2/1/2017 4/16/2022 377,484 7.5% 4/1/2017 12/1/2025 97,083 6.3% 1/1/2017 11/30/2021 27,040 45,939 23,850 1,486 299 650 6.0% 5.1% 5.0% 12.0% 1/1/2025 14.5% 4/1/2017 5/1/2025 12.5% 2/9/2017 12.5% 3/1/2017 5/8/2018 12.0% 12/1/2017 12/1/2017 6.0% 11.9% 4/1/2020 0.0% (b) 11.0% 1/11/2017 7/1/2027 1/2/2029 7,235 131,179 1,161,381 500 380 142 1,379 2,401 238 750 988 12,339 18,500 658 1,379 32,876 7,948 3,650 11,598 19,868 67,810 799 1,379 89,856 27,813 15,016 42,829 $10,624 $175,653 $1,294,066 (a) The tax basis of the commercial mortgage loans, mezzanine loans and preferred equity interests approximates the carrying amount. (b) Relates to a $2.5 million preferred equity interest and a $3.7 million preferred equity interest where there is no contractual interest; however, we receive returns based on the performance of the underlying real estate property. (c) Reconciliation of carrying amount of commercial mortgage loans, mezzanine loans and preferred equity interests: Balance, beginning of period Additions during period: Investments in loans Accretion of discount Deductions during period: Collections of principal Sales of conduit loans Conversion of loans to real estate and charge-offs Balance, end of period: 178 For the Year Ended December 31, 2016 For the Year Ended December 31, 2015 $1,625,838 $1,393,132 165,240 458 1,012,310 1,301 (417,735) (35,177) (44,558) (291,228) (424,979) (64,698) $1,294,066 $1,625,838 (a) Summary of Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests by Geographic Location: Location by State Texas Florida Various California Ohio Pennsylvania Colorado New York Wisconsin Maryland North Carolina Georgia Illinois Alabama Minnesota Massachusetts Tennessee New Jersey Arizona Indiana Connecticut Oklahoma Michigan Virginia South Carolina Missouri Delaware New Mexico Nevada Washington District of Columbia Interest Rate Principal Number of Loans Lowest Highest Lowest Highest 24 14 3 16 7 4 2 3 12 3 1 6 5 5 1 1 2 1 3 2 1 3 1 5 1 1 1 1 3 1 1 134 5.0% 4.6% 4.4% 0.0% (a) 5.5% 5.0% 5.1% 5.9% 5.5% 5.5% 5.5% 5.5% 5.3% 5.0% 4.4% 7.2% 6.0% 11.0% 5.3% 10.0% 12.0% 5.5% 5.8% 4.8% 5.5% 9.1% 12.5% 6.0% 6.0% 6.5% 6.8% 0.0% 14.5% $ 238 12.0% 142 299 7.5% 7.3% 1,486 6.5% 1,590 884 11.9% 820 5.8% 9.7% 4,000 11.0% 500 7.0% 4,040 650 5.5% 380 12.5% 6.8% 5,400 6.5% 6,739 5.5% 3,995 7.2% 18,500 7.0% 6,159 11.0% 4,000 12.1% 2,000 900 12.0% 12.0% 554 10.0% 4,878 5.8% 6,800 6.5% 5,500 5.5% 9,000 9.1% 2,600 12.5% 658 6.0% 4,550 6.3% 8,400 6.5% 11,000 6.8% 6,185 0 14.5% $ $34,350 27,040 45,939 24,100 20,000 15,500 21,009 7,875 13,000 12,000 23,850 30,804 13,000 13,600 16,000 18,500 7,250 4,000 11,750 1,054 4,000 7,860 6,800 16,956 9,000 2,600 658 4,550 26,000 11,000 6,185 $45,939 Carrying Amount of Mortgage Loans $ 236,249 186,409 110,574 148,901 65,570 34,574 23,315 18,625 33,347 24,990 24,500 57,384 48,757 46,464 19,995 18,381 13,409 4,000 19,980 1,954 8,302 18,338 6,800 45,906 9,000 2,600 658 4,550 43,350 11,000 6,185 $1,294,066 (a) Relates to a $3.7 million preferred equity interest and a $2.5 million preferred equity interest where there is no contractual interest; however, we receive returns based on the performance of the underlying real estate property. 179 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer determined that our disclosure controls and procedures are effective at the reasonable assurance level. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of December 31, 2016, our internal control over financial reporting is effective. Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report is included as part of Item 8 in this annual report on Form 10-K. Changes in Internal Control Over Financial Reporting Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). There were no changes in our internal control over financial reporting or in other factors during our last fiscal quarter, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting 180 Item 9B. Other Information The disclosure below is intended to satisfy any obligation of ours to provide disclosures pursuant to the Item 5.02 “Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers” of Form 8-K. (e) On March 9, 2017, the Compensation Committee of the Board of Trustees (the “Compensation Committee”) of RAIT Financial Trust (“RAIT”) approved RAIT paying a discretionary cash bonus award (each, a “Bonus” and collectively, the “Bonuses”) to each of Scott L. N. Davidson, RAIT’s Chief Executive Officer and President, James J. Sebra, RAIT’s Chief Financial Officer and Treasurer, and Scott F. Schaeffer, RAIT’s former Chief Executive Officer and a former Trustee in the amounts of $430,000, $95,000 and $325,000, respectively. Each Bonus recipient is a named executive officer (as defined in instruction 4 to Item 5.02 of Form 8-K) of RAIT. The Compensation Committee approved the payment of the Bonuses to compensate the recipients for their significant contributions towards accomplishing the IRT management internalization which the Compensation Committee determined was beneficial to RAIT’s shareholders. 181 PART III Item 10. Trustees, Executive Officers and Trust Governance The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on or before May 1, 2017, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions and Trustee Independence The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders, and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information required by this item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders, and is incorporated herein by reference. 182 Item 15. Exhibits, Financial Statement Schedules PART IV (a) Listed below are all financial statements, financial statement schedules, and exhibits filed as part of this 10-K and herein included. (1) Financial Statements December 31, 2016 Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2016 and 2015 Consolidated Statements of Operations for the Three Years Ended December 31, 2016 Consolidated Statements of Comprehensive Income (Loss) for the Three Years Ended December 31, 2016 Consolidated Statements of Changes in Equity for the Three Years Ended December 31, 2016 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2016 Notes to Consolidated Financial Statements Supplemental Schedules: Schedule II: Valuation and Qualifying Accounts Schedule III: Real Estate and Accumulated Depreciation Schedule IV: Mortgage Loans on Real Estate and Mortgage Related Receivables 92 94 95 96 97 98 99 174 175 178 All other schedules are not applicable or are omitted since either (i) the required information is not material or (ii) the information required is included in the consolidated financial statements and notes thereto. (2) Exhibits The Exhibits furnished as part of this annual report on Form 10-K are identified in the Exhibit Index immediately following the signature pages of this annual report. Such Exhibit Index is incorporated herein by reference. Item 16. Form 10-K Summary Not applicable. 183 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES RAIT FINANCIAL TRUST By: /S/ SCOTT L. N. DAVIDSON Scott L. N. Davidson Chief Executive Officer, President and Trustee March 13, 2017 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Capacity With RAIT Financial Trust /S/ SCOTT L. N. DAVIDSON Scott L. N. Davidson Chief Executive Officer, President and Trustee (Principal Executive Officer) Date March 13, 2017 /S/ JAMES J. SEBRA James J. Sebra Chief Financial Officer and Treasurer (Principal Financial Officer) March 13, 2017 /S/ ALFRED J. DILMORE Alfred J. Dilmore Chief Accounting Officer (Principal Accounting Officer) Trustee Trustee Trustee /S/ ANDREW BATINOVICH Andrew Batinovich /S/ FRANK A. FARNESI Frank A. Farnesi /S/ S. KRISTIN KIM S. Kristin Kim /S/ MICHAEL J. MALTER Michael J. Malter Trustee and Chairman of the Board March 13, 2017 By: /S/ JON C. SARKISIAN Trustee March 13, 2017 By: By: By: Jon C. Sarkisian /S/ ANDREW M. SILBERSTEIN Andrew M. Silberstein /S/ MURRAY STEMPEL, III Murray Stempel, III /S/ THOMAS D. WREN Thomas D. Wren Trustee Trustee Trustee 184 March 13, 2017 March 13, 2017 March 13, 2017 March 13, 2017 March 13, 2017 March 13, 2017 March 13, 2017 By: By: By: By: By: By: By: Exhibit Number 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 3.1.7 3.1.8 3.1.9 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14 EXHIBIT INDEX Description of Documents Amended and Restated Declaration of Trust of RAIT Financial Trust (“RAIT”). Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077). Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067). Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518). Certificate of Correction to the Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2002 (File No. 1-14760). Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on December 15, 2006 (File No. 1-14760). Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July, 1 2011 (File No. 1-14760). Articles Supplementary (the “Series A Articles Supplementary”) relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760). Certificate of Correction to the Series A Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760). Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series B Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760). Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series C Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760). Articles Supplementary relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2012 (File No. 1-14760). Certificate of Correction relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2012 (File No. 1-14760). Articles Supplementary (the “Series D Articles Supplementary”) relating to the Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series D Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760). Articles Supplementary relating to the Series E Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series E Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760). 3.1.15 Amendment dated November 30, 2012 to the Series D Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760). 185 Exhibit Number 3.1.16 3.2 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.2.1 4.2.2 4.2.3 4.3.1 4.3.2 4.4 4.5.1 4.5.2 4.5.3 Description of Documents Articles Supplementary relating to the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on June 13, 2014 (File No. 1-14760). Amended and Restated Bylaws of RAIT Financial Trust, as adopted on November 16, 2016. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 17, 2016 (File No. 1-14760). Form of Certificate for Common Shares of Beneficial Interest. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July 1, 2011 (File No. 1-14760). Form of Certificate for the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760). Form of Certificate for the Series B Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760). Form of Certificate for the Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760). Form of Certificate for the Series D Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760). Form of Certificate for the Series E Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760). Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.2.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Base Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760). Supplemental Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760). Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No. 1-14760). Registration Rights Agreement dated as of October 1, 2012 by and among RAIT and ARS VI Investor I, LLC (“ARS VI”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760). Amendment No. 1 to Registration Rights Agreement dated as of April 25, 2014 by and among RAIT and ARS VI. Incorporated by reference to RAIT’s Registration Statement on Form S-3 (Registration No. 333-195547). Common Share Purchase Warrant No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760). 186 Exhibit Number 4.5.4 4.5.5 4.5.6 4.5.7 4.5.8 4.5.9 Description of Documents Common Share Appreciation Right No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760). Common Share Purchase Warrant No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760). Common Share Appreciation Right No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760). Common Share Purchase Warrant No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760). Common Share Appreciation Right No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760). Common Share Purchase Warrant No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760). 4.5.10 Common Share Appreciation Right No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760). 4.6.1 4.6.2 4.6.3 4.6.4 4.6.5 4.6.6 Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.6.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760). Second Supplemental Indenture, dated as of April 14, 2014, between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on April 14, 2014. (File No. 1-14760). Form of 7.625% Senior Notes due 2024 (included as Exhibit A to Exhibit 4.6.4 hereto). Third Supplemental Indenture, dated as of August 14, 2014, between RAIT, as Issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on August 14, 2014. 4.6.7 Form of 7.125% Senior Notes due 2019 (included as Exhibit A to Exhibit 4.6.6 hereto). Certain Instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments. 10.1.1 Form of Indemnification Agreement”). Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077). 187 Exhibit Number 10.1.2 10.2.1 10.2.2 10.2.3 10.2.4 10.2.5 10.2.6 10.2.7 10.2.8 10.3.1 10.3.2 10.4.1 10.4.2 10.4.3 Description of Documents Indemnification Agreement dated as of October 17, 2012 by and among RAIT, RAIT General, Inc. RAIT Limited, Inc. and RAIT Partnership, L.P. as the indemnitors, and Andrew M. Silberstein, as the indemnitee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760). Second Amended and Restated Employment Agreement dated as of December 11, 2006 between RAIT and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 15, 2006 (File No. 1-14760). Amendment dated as of December 15, 2008 to Employment Agreement between RAIT and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 19, 2008 (File No. 1-14760). Amendment dated as of February 22, 2009 to Employment Agreement between RAIT and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 23, 2009 (File No. 1-14760). Third Amended and Restated Employment Agreement dated as of August 4, 2011 between RAIT and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2011 (File No. 1-14760). Amendment 2014-1 dated May 8, 2014 and effective January 29, 2014 to the Third Amended and Restated Employment Agreement dated as of August 4, 2011 between RAIT and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Binding Memorandum of Understanding, dated September 26, 2016, by and between RAIT Financial Trust and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on September 27, 2016 (File No. 1-14760). Separation Agreement, dated as of December 14, 2016, between RAIT Financial Trust and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 16, 2016 (File No. 1-14760). Consulting Agreement, dated as of December 14, 2016, between RAIT Financial Trust and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 16, 2016 (File No. 1-14760). Offer Letter dated February 17, 2017 between RAIT Financial Trust and Paul W. Kopsky, Jr. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760). Employment Agreement dated February 17, 2017 between RAIT Financial Trust and Paul W. Kopsky, Jr. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760). Employment Agreement dated as of January 29, 2014 between RAIT and Scott L.N. Davidson. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 4, 2014 (File No. 1-14760). Binding Memorandum of Understanding, dated September 26, 2016, by and between RAIT Financial Trust and Scott L. N. Davidson. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on September 27, 2016 (File No. 1-14760). Employment Agreement dated November 1, 2016 between RAIT Financial Trust and Scott L. N. Davidson. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 7, 2016 (File No. 1-14760). 188 Exhibit Number 10.5.1 10.5.2 10.5.3 10.5.4 10.5.5 10.6.1 10.6.2 10.6.3 10.6.4 10.6.5 10.6.6 10.6.7 10.6.8 10.6.9 Description of Documents Employment Agreement dated as of May 22, 2007, by and between RAIT and James J. Sebra. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 24, 2007 (File No. 1-14760). Amendment dated as of December 15, 2008 to Employment Agreement between RAIT and James J. Sebra. Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2008 (File No. 1-14760). Employment Agreement dated as of August 2, 2012 between RAIT and James J. Sebra. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2012 (File No. 1-14760). Binding Memorandum of Understanding, dated September 26, 2016, by and between RAIT Financial Trust and James J. Sebra. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on September 27, 2016 (File No. 1-14760). Separation Agreement, dated as of December 14, 2016, between RAIT Financial Trust and James J. Sebra. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 16, 2016 (File No. 1-14760). RAIT Phantom Share Plan (As Amended and Restated, Effective July 20, 2004) (the “PSP”). Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended June 30, 2004 (File No. 1-14760). RAIT Financial Trust 2008 Incentive Award Plan, as Amended and Restated May 20, 2008 Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 27, 2008 (File No. 1-14760). RAIT Financial Trust 2012 Incentive Award Plan, as Amended and Restated May 22, 2012, (the “IAP”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2012 (File No. 1-14760). IAP Form of Share Appreciation Rights Award Agreement adopted January 24, 2012. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 26, 2012 (File No.1-14760). IAP Form of Share Appreciation Rights Award Agreement adopted January 29, 2013. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 1, 2013. (File No. 1-14760). IAP Form of Share Award Grant Agreement for participants other than non-management trustees adopted January 29, 2013. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 1, 2013. (File No. 1-14760). IAP Form of Share Award Grant Agreement for non-management trustees adopted January 29, 2013.Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2012 (File No. 1-14760). IAP Form of Share Award Grant Agreement for non-management trustees adopted January 29, 2014. Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2013 (File No. 1-14760). RAIT 2015 Annual Incentive Compensation Plan Form of Target Cash Bonus Award Grant Agreement adopted under the RAIT 2012 Incentive Award Plan (“IAP”). Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2015 (File No. 1-14760). 10.6.10 RAIT 2015 Long Term Incentive Plan Form of Performance Share Unit Award Grant Agreement adopted under the IAP. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2015 (File No. 1-14760). 189 Exhibit Number 10.6.11 10.6.12 10.6.13 10.6.14 10.6.15 10.6.16 10.6.17 10.6.18 10.6.19 10.6.20 10.6.21 10.7.1 10.7.2 10.8.1 Description of Documents Terms of 2015 Annual Incentive Compensation Plan (the “2015 AICP”) and the 2015 Long Term Incentive Plan (the “2015 LTIP”) and the 2015 awards made thereunder adopted under the RAIT 2012 Incentive Award Plan (“IAP”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 6, 2016 (File No. 1-14760). Terms of the 2015 AICP and the 2015 LTIP and the 2016 LTIP and the 2016 awards made thereunder adopted under the IAP. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 28, 2016 (File No. 1-14760). RAIT 2016 Annual Incentive Compensation Plan Form of Target Cash Bonus Award Grant Agreement adopted under the RAIT 2012 Incentive Award Plan (“IAP”). Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2016 (File No. 1-14760). RAIT 2016 Long Term Incentive Plan Form of Performance Share Unit Award Grant Agreement adopted under the IAP. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2016 (File No. 1-14760). Amendment 2016-1 to RAIT 2015 Long Term Incentive Plan Form of Performance Share Unit Award Grant Agreement adopted under the IAP. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2016 (File No. 1-14760). Share Award Grant Agreement dated as of May 23, 2016 from RAIT Financial Trust to Scott L. N. Davidson under the terms of the RAIT Financial Trust 2012 Incentive Award Plan. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2016 (File No. 1-14760). Share Award Grant Agreement, dated December 23, 2016, by and between RAIT Financial Trust and Scott L. N. Davidson. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 30, 2016 (File No. 1-14760). Share Award Grant Agreement, dated December 23, 2016, by and between RAIT Financial Trust and Scott F. Schaeffer. Incorporated by reference to RAIT’s Form 8-K as filed with the Sec on December 30, 2016 (File No. 1-14760). Share Award Grant Agreement, dated January 9, 2017, by and between RAIT Financial Trust and Scott L. N. Davidson. Filed herewith. Form of Share Appreciation Rights Award Agreement adopted under the RAIT 2012 Incentive Award Plan (“IAP”) on February 14, 2017. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760). Form of Share Award Grant Agreement for participants other than non-management trustees adopted under the IAP on February 14, 2017. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 21, 2017. (File No. 1-14760). Securities and Asset Purchase Agreement among RAIT Financial Trust, Jupiter Communities, LLC, RAIT TRS, LLC, the RAIT selling stockholders named therein, IRT and IROP dated September 27, 2016. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on September 27, 2016 (File No. 1-14760). Shared Services Agreement, dated December 20, 2016, by and among Independence Realty Trust, Inc. and RAIT Financial Trust. Incorporated by reference to RAIT’s Form 8-K as filed with the Sec on December 20, 2016 (File No. 1-14760). Exchange Agreement dated as of October 5, 2011 by and among RAIT and Taberna Preferred Funding VIII, Ltd. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). 190 Exhibit Number 10.8.2 10.8.3 10.8.4 10.8.5 10.9.1 10.9.2 10.9.3 10.9.4 10.9.5 10.9.6 10.9.7 10.9.8 10.9.9 Description of Documents 6.75% Senior Secured Note No. 1 due 2017 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). 6.85% Senior Secured Note No. 2 due 2017 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). 7.15% Senior Secured Note No. 3 due 2018 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). 7.25% Senior Secured Note No. 4 due 2019 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). Master Repurchase Agreement dated as of October 27, 2011, by and among RAIT CMBS Conduit I, LLC and Citibank, N.A. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). Guaranty dated October 27, 2011 by RAIT, as guarantor, for the benefit of Citibank, N.A. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No.1-14760). First Amendment to Master Repurchase Agreement and other transaction documents dated as of June 30, 2013 among RAIT CMBS Conduit I, LLC (“RAIT CMBS I”), Citibank N.A., (“Citibank”) and RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Second Amendment dated as of October 11, 2013 among Citibank, N.A., RAIT CMBS Conduit I, LLC and RAIT to Master Repurchase Agreement dated as of October 27, 2011.Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 18, 2013. (File No. 1-14760). Third Amendment to Master Repurchase Agreement dated as of December 9, 2013 among RAIT CMBS I, Citibank and RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Amended and Restated Master Repurchase Agreement dated as of July 28, 2014 by and among RAIT CMBS Conduit I, LLC, RAIT CRE Conduit III, LLC, collectively as seller, and Citibank, N.A., as buyer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on August 1, 2014 (File No. 1-14760). Guaranty dated July 28, 2014 by RAIT, as guarantor, for the benefit of Citibank, N.A. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on August 1, 2014 (File No. 1-14760). First Amendment dated December 12, 2014 to the Amended and Restated Guaranty dated as of July 28, 2014 made by RAIT Financial Trust, as guarantor, in favor of Citibank, N.A. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2014 (File No.1-14760). First Amendment dated as of September 28, 2015 among RAIT CMBS Conduit I, LLC (“Seller I”) and RAIT CRE Conduit III, LLC (“Seller III”), RAIT (to reaffirm its guaranty of the Citi MRA (defined below)) and Citibank, N.A. (“Citibank”) to the Amended and Restated Master Repurchase Agreement, dated as of July 28, 2014 among Seller I, Seller III and Citibank (the “Citi MRA”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 2, 2015 (File No. 1-14760). 191 Exhibit Number 10.10.1 10.10.2 10.10.3 10.10.4 10.10.5 10.10.6 10.10.7 10.10.8 10.11.1 10.11.2 10.11.3 10.12.1 10.12.2 Description of Documents Master Repurchase Agreement, dated as of November 23, 2011, among RAIT CMBS Conduit II, LLC and Barclays Bank PLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 25, 2011 (File No.1-14760). Guaranty Agreement, dated as of November 23, 2011, of RAIT in favor of Barclays Bank PLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 25, 2011 (File No.1-14760). Notice dated November 28, 2012 from RAIT CMBS Conduit II, LLC to Barclays Bank PLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760). First Amendment to Master Repurchase Agreement dated as of December 27, 2011 between Barclays and RAIT CMBS Conduit II, LLC (“RAIT CMBS II”). Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Second Amendment to Master Repurchase Agreement dated as of February 16, 2012 between Barclays and RAIT CMBS II. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). First Omnibus Amendment dated as of June 30, 2013 to Master Repurchase Agreement dated as of December 27, 2011 and other transaction documents among RAIT CMBS Conduit II, Barclays and RAIT. Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2014 (File No. 1-14760). Third Amendment dated December 12, 2014 but effective as of November 19, 2014 to Master Repurchase Agreement dated as of November 23, 2011, as amended, between Barclays Bank PLC, as purchaser, and RAIT CMBS Conduit II, LLC, as seller. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2014 (File No.1-14760). Second Amendment dated December 12, 2014 but effective as of November 19, 2014 to the Guaranty dated as of November 23, 2011, as amended, made by RAIT Financial Trust, as guarantor, in favor of Barclays Bank PLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2014 (File No.1-14760). Master Repurchase Agreement, dated as of December 14, 2012 among RAIT CRE Conduit I, LLC, as seller, RAIT as guarantor, and Column Financial, Inc., as buyer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760). Guaranty Agreement, dated as of December 14, 2012, of RAIT in favor of Column Financial, Inc. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760). Amendment No. 1 to Master Repurchase Agreement dated as of March 20, 2014 among Column Financial, Inc. (“Column”) and RAIT CRE Conduit I, LLC (“RAIT CRE I”) and RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Master Repurchase Agreement dated as of January 24, 2014 among RAIT CRE Conduit II, LLC, as seller, RAIT, as guarantor, and UBS Real Estate Securities Inc., as buyer. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 31, 2014 (File No. 1-14760). Guaranty Agreement, dated as of January 24, 2014, of RAIT in favor of UBS Real Estate Securities Inc. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 31, 2014 (File No. 1-14760). 192 Exhibit Number 10.12.3 10.12.4 10.12.5 10.12.6 10.12.7 10.12.8 10.12.9 10.12.10 10.13.1 10.13.2 Description of Documents Amendment No. 1 to Master Repurchase Agreement dated as of March 17, 2014 among UBS Real Estate Securities Inc. (“UBS”), RAIT CRE CONDUIT II, LLC (“RAIT CRE II”) and RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Amendment No. 2 to Master Repurchase Agreement dated as of March 27, 2014 among UBS, RAIT CRE II and RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Amendment No. 3, dated as of September 28, 2015 among RAIT CRE Conduit II, LLC (“Seller II”), RAIT (as guarantor under the UBS MRA (defined below)) and UBS Real Estates Securities Inc. (“UBS”) to the Master Repurchase Agreement dated as of January 24, 2014 among Seller II, RAIT and UBS (the “UBS MRA”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 2, 2015 (File No. 1-14760). Amendment No. 4, dated as of November 13, 2015 among RAIT CRE Conduit II, LLC (the “Seller”), RAIT Financial Trust (“RAIT”) (as guarantor under the UBS MRA (defined below)) and UBS Real Estates Securities Inc. (“UBS”), as buyer, under the Master Repurchase Agreement dated as of January 24, 2014 among Seller, RAIT and UBS (the “UBS MRA”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 16, 2015 (File No. 1-14760). Amendment No. 5 dated as of December 23, 2015 among RAIT CRE Conduit II, LLC (“Seller,” as seller under the UBS MRA (defined below)), RAIT Financial Trust (“RAIT,” as guarantor under the UBS MRA) and UBS Real Estates Securities Inc. (“UBS,” as buyer under the Master Repurchase Agreement dated as of January 24, 2014 among Seller, RAIT and UBS (the “UBS MRA”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 23, 2015 (File No. 1-14760). Second Amendment dated as of July 28, 2016 among RAIT CMBS Conduit I, LLC (“Seller I”) and RAIT CRE Conduit III, LLC (“Seller III”), RAIT Financial Trust (to reaffirm its guaranty of the Citi MRA (defined below)) and Citibank, N.A. (“Citibank”) to the Amended and Restated Master Repurchase Agreement, dated as of July 28, 2014 among Seller I, Seller III and Citibank (the “Citi MRA”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July 29, 2016 (File No. 1-14760). Assignment and Amendment No. 6 to Master Repurchase Agreement and Assignment and Amendment No. 4 to Pricing Letter, dated October 20, 2016 among RAIT CRE Conduit II, LLC, as seller, UBS Real Estate Securities Inc., as assignor, UBS AG, as assignee, and RAIT Financial Trust, as guarantor. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 24, 2016 (File No. 1-14760). Assignment and Reaffirmation of Guaranty, dated October 20, 2016 among UBS Real Estate Securities Inc., as assignor, UBS AG, as assignee, and RAIT Financial Trust, as guarantor. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 24, 2016 (File No. 1-14760). Master Repurchase Agreement dated as of December 23, 2014 between Barclays Bank PLC, as purchaser, and RAIT CRE Conduit IV, LLC, as seller. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 30, 2014 (File No. 1-14760). Guaranty dated as of December 23, 2014, made by RAIT Financial Trust for the benefit of Barclays Bank PLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 30, 2014 (File No. 1-14760). 193 Exhibit Number 10.13.3 10.13.4 10.14.1 10.14.2 10.14.3 10.15.1 10.15.2 10.16 10.17 10.18.1 10.18.2 Description of Documents Second Omnibus Amendment to Master Repurchase Agreement and Other Transaction Documents dated December 28, 2016 but effective as of November 16, 2016 among RAIT CMBS Conduit II, LLC, as seller, Barclays Bank PLC, as purchaser, and RAIT Financial Trust, as guarantor. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 30, 2016 (File No. 1-14760). Omnibus Amendment to Master Repurchase Agreement and Other Transaction Documents dated December 28, 2016 but effective as of December 20, 2016 among RAIT CRE Conduit IV, LLC, as seller, Barclays Bank PLC, as purchaser, and RAIT Financial Trust, as guarantor. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 30, 2016 (File No. 1-14760). Securities Purchase Agreement dated as of October 1, 2012 by and among RAIT, RAIT Partnership, L.P., Taberna Realty Finance Trust, RAIT Asset Holdings IV, LLC and ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760). Amendment dated September 30, 2015 effective September 28, 2015 among RAIT Financial Trust (“RAIT”), RAIT Partnership, L.P. (the “Operating Partnership”), Taberna Realty Finance Trust (“TRFT”), and RAIT Asset Holdings IV, LLC (“RAIT IV”) and together with RAIT, the Operating Partnership and TRFT, the “Issuer Parties”) and ARS VI Investor I, LP, (formerly known as ARS VI Investor I, LLC (the “Investor”) to the Securities Purchase Agreement dated as of October 1, 2012 by and among the Issuer Parties and the Investor. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 2, 2015 (File No. 1-14760). Securities Repurchase Agreement dated as of November 23, 2016 by and among ARS VI Investor I, LP, RAIT Financial Trust, RAIT Partnership, L.P., Taberna Realty Finance Trust, and RAIT Asset Holdings IV, LLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 30, 2016 (File No. 1-14760). Capped Call Confirmation dated December 4, 2013 between RAIT and Barclays Bank PLC. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions have been filed with the SEC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 10, 2013 (File No. 1-14760). Amendment Agreement dated February 28, 2014 between RAIT and Barclays to the Capped Call Confirmation dated December 4, 2013 between RAIT and Barclays. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2014 (File No. 1-14760). Capped Call Confirmation dated February 28, 2014 between RAIT and Barclays Bank PLC. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions have been filed with the SEC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 28, 2014 (File No. 1-14760). At the Market Issuance Sales Agreement, dated June 13, 2014, by and between RAIT and MLV & Co. LLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on June 13, 2014 (File No. 1-14760). Capital on Demand Sales Agreement dated as of November 21, 2012 between RAIT Financial Trust, RAIT Partnership, L.P. and JonesTrading Institutional Services LLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012. (File No. 1-14760). Amendment No. 1 dated November 26, 2014 to the Capital on Demand Sales Agreement dated as of November 21, 2012 between RAIT Financial Trust, RAIT Partnership, L.P. and JonesTrading Institutional Services LLC. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 26, 2014 (File No. 1-14760). 194 Exhibit Number 10.19 12.1 21.1 23.1 31.1 31.2 32.1 32.2 99.1 101 Description of Documents Commitment by RAIT Financial Trust effective September 2, 2015. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on September 4, 2015 (File No. 1-14760). Statements regarding computation of ratios as of December 31, 2016. Filed herewith. List of Subsidiaries. Filed herewith. Consent of KPMG LLP. Filed herewith. Rule 13a-14(a) Certification by the Chief Executive Officer of RAIT. Filed herewith. Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT. Filed herewith. Section 1350 Certification by the Chief Executive Officer of RAIT. Filed herewith. Section 1350 Certification by the Chief Financial Officer of RAIT. Filed herewith. Material U.S. Federal Income Tax Considerations. Filed herewith. Pursuant to Rule 405 of Regulation S-T, the following financial information from RAIT’s Annual Report on Form 10-K for the period ended December 31, 2016 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three years ended December 31, 2016; (ii) Consolidated Balance Sheets as of December 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2016; (iv) Consolidated Statements of Cash Flows for three years ended December 31, 2016; and (v) Notes to Consolidated Financial Statements. Filed herewith. 195 Sh a re holde r I n for m at ion T R U S T E E S Michael J. Malter Chairman of the Board Andrew Batinovich Trustee E X E C U T I V E OF F IC E R S Scott L.N. Davidson Chief Executive Officer, President & Trustee Paul W. Kopsky, Jr. Chief Financial Officer & Treasurer Scott L.N. Davidson Chief Executive Officer, President & Trustee John J. Reyle General Counsel Glenn Riis Senior Managing Director – Chief Credit Risk Officer Frank A. Farnesi Trustee Chairman – Audit Committee S. Kristin Kim Trustee Chairman – Risk Management Committee Jon C. Sarkisian Trustee Chairman – Compensation Committee Andrew M. Silberstein Trustee Murray Stempel, III Trustee Chairman – Nominating and Governance Committee Thomas D. Wren Trustee S H A R E S L I S T E D RAIT’s Common Shares are traded on the New York Stock Exchange under the symbol “RAS”. DI V I DE N D R E I N V E S T M E N T & S H A R E P U R C H A S E PL A N RAIT has a Dividend Reinvestment & RAIT’s Series A, B and C Preferred Shares are Share Purchase Plan for current and future traded on the New York Stock Exchange under shareholders. Interested participants can obtain the symbols “RAS PrA”, “RAS PrB” and “RAS more information by contacting RAIT or its PrC”, respectively. Transfer Agent and by visiting RAIT’s website. T R A N S F E R AG E N T American Stock Transfer & Trust Company 6201 15th Avenue | Brooklyn, NY 11219 tel 1.800.937.5449 | www.amstock.com I N V E S T OR R E L A T ION S C ON T AC T Andres Viroslav Senior Managing Director – Corporate Communications & Investor Relations tel 215.207.2100 aviroslav@rait.com | www.rait.com Two Logan Square | 100 N. 18th Street 23rd Floor | Philadelphia, PA 19103 t: 215.207.2100 info@rait.com | www.rait.com