UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): | July 28, 2016 |
RAIT Financial Trust
__________________________________________
(Exact name of registrant as specified in its charter)
Maryland | 1-14760 | 23-2919819 |
_____________________ (State or other jurisdiction |
_____________ (Commission |
______________ (I.R.S. Employer |
of incorporation) | File Number) | Identification No.) |
Two Logan Square, 100 North 18th Street, 23rd Floor, Philadelphia, Pennsylvania | 19103 | |
_________________________________ (Address of principal executive offices) |
___________ (Zip Code) |
Registrants telephone number, including area code: | (215) 207-2100 |
Not Applicable
______________________________________________
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement.
On July 28, 2016, 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 ) entered into the Second Amendment (the Citi Amendment ) to the Amended and Restated Master Repurchase Agreement, dated as of July 28, 2014 among Seller I, Seller III and Citibank (the Citi MRA ). The Citi Amendment modifies the following defined terms in the Citi MRA: applicable spread, facility amount and facility expiration date.
The description in this current report of the Citi Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Citi Amendment which is filed as Exhibit 10.1 to this current report and incorporated herein by reference. Such exhibit has been filed solely to provide information regarding its terms. Such exhibit may contain representations and warranties that the parties thereto made solely for the benefit of the other parties. In addition, such representations and warranties (i) may have been qualified by confidential disclosures made to the other party in connection with such document, (ii) may be subject to a materiality standard which may differ from what may be viewed as material by investors, (iii) were made only as of the date of such documents or such other date as is specified therein and (iv) may have been included in such documents for the purpose of allocating risk between or among the parties thereto rather than establishing matters as facts.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information set forth under Item 1.01 of this report is incorporated herein by reference.
Item 8.01 Other Events.
Attached to this Current Report is Exhibit 99.1 described as Material U.S. Federal Income Tax Considerations. This Exhibit 99.1 is intended to replace and supersede the Exhibit 99.1 described as Material U.S. Federal Income Tax Considerations attached to RAITs Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
The exhibits filed as part of this Current Report on Form 8-K are identified in the Exhibit Index immediately following the signature page of this report. Such Exhibit Index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
RAIT Financial Trust | ||||
July 29, 2016 | By: |
/s/ James J. Sebra
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Name: James J. Sebra | ||||
Title: Chief Financial Officer and Treasurer |
Exhibit Index
Exhibit No. | Description | |
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10.1
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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”). | |
99.1
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Material U.S. Federal Income Tax Considerations. |
SECOND AMENDMENT TO AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT (this Amendment), dated as of July 28, 2016 (the Effective Date), is made by and among CITIBANK, N.A. (together with its successors and/or assigns, Buyer), RAIT CMBS CONDUIT I, LLC, a Delaware limited liability company (Seller I) and RAIT CRE CONDUIT III, LLC, a Delaware limited liability company (Seller III; together with Seller I, collectively, Seller), for the purpose of acknowledging and agreeing to the provision set forth in Section 3 hereof, RAIT FINANCIAL TRUST., a Maryland real estate investment trust (Guarantor).
W I T N E S S E T H:
WHEREAS, Seller and Buyer have entered into that certain Amended and Restated Master Repurchase Agreement, dated as of July 28, 2014 (as the same may be amended, supplemented, extended, restated, replaced or otherwise modified from time to time, the Original Agreement);
WHEREAS, Seller and Buyer have entered into that certain First Amendment to Amended and Restated Master Repurchase Agreement, dated as of September 28, 2015 (the First Amendment; together with the Original Agreement, as the same may be further amended, restated, supplemented or otherwise modified and in effect from time to time, the Repurchase Agreement)
WHEREAS, all capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Repurchase Agreement;
WHEREAS, Seller and Buyer desire to modify certain terms and provisions of the Repurchase Agreement as set forth herein.
NOW, THEREFORE, in consideration of ten dollars ($10) and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Seller and Buyer covenant and agree as follows as of the Effective Date, and Guarantor acknowledges and agrees as to the provision set forth in Section 3 as of the Effective Date:
1. Modification of Repurchase Agreement. The Repurchase Agreement is hereby modified as of the Effective Date as follows:
(a) The following definitions in Section 2 of the Repurchase Agreement are hereby deleted in their entirety and the following corresponding definitions are substituted therefor:
Applicable Spread shall mean, with respect to each Transaction:
(i) so long as no Event of Default shall have occurred and be continuing, two hundred fifty basis points (i.e., 2.50%); provided, however, that, notwithstanding the foregoing, with respect to any new Transaction entered into after July 28, 2016, Buyer shall have the right to modify the Applicable Spread referred to in this clause (i) with respect to such Transaction at the time the Transaction occurs, in its sole discretion; or
(ii) after the occurrence and during the continuance of an Event of Default, the applicable incremental per annum rate described in clause (i) of this definition, as applicable, plus 400 basis points (4.0%).
Facility Amount shall mean $150,000,000.
Facility Expiration Date shall mean July 28, 2018.
2. Sellers Representations. Seller has taken all necessary action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered by or on behalf of Seller and constitutes the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms subject to bankruptcy, insolvency, and other limitations on creditors rights generally and to equitable principles. No Event of Default has occurred and is continuing, and no Event of Default will occur as a result of the execution, delivery and performance by Seller of this Amendment. Any consent, approval, authorization, order, registration or qualification of or with any Governmental Authority required for the execution, delivery and performance by Seller of this Amendment has been obtained and is in full force and effect (other than consents, approvals, authorizations, orders, registrations or qualifications that if not obtained, are not reasonably likely to have a Material Adverse Effect).
3. Reaffirmation of Guaranty. Guarantor has executed this Amendment for the purpose of acknowledging and agreeing that, notwithstanding the execution and delivery of this Amendment and the amendment of the Repurchase Agreement hereunder, all of Guarantors obligations under the Guaranty remain in full force and effect and the same are hereby irrevocably and unconditionally ratified and confirmed by Guarantor in all respects.
4. Conditions Precedent. This Amendment and its provision shall become effective upon the execution and delivery of this Amendment by a duly authorized officer of each of Seller, Buyer and Guarantor.
5. Agreement Regarding Expenses. Seller agrees to pay Buyers reasonable out of pocket expenses (including reasonable legal fees) incurred in connection with the preparation and negotiation of this Amendment promptly (and after Buyer or Buyers counsel gives Seller an invoice for such expenses).
6. Full Force and Effect. Except as expressly modified hereby, all of the terms, covenants and conditions of the Repurchase Agreement and the other Transaction Documents remain unmodified and in full force and effect and are hereby ratified and confirmed by Seller. Any inconsistency between this Amendment and the Repurchase Agreement (as it existed before this Amendment) shall be resolved in favor of this Amendment, whether or not this Amendment specifically modifies the particular provision(s) in the Repurchase Agreement inconsistent with this Amendment. All references to the Agreement in the Repurchase Agreement or to the Repurchase Agreement in any of the other Transaction Documents shall mean and refer to the Repurchase Agreement as modified and amended hereby.
7. No Waiver. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Buyer under the Repurchase Agreement, the Guaranty, any of the other Transaction Documents or any other document, instrument or agreement executed and/or delivered in connection therewith.
8. Headings. Each of the captions contained in this Amendment are for the convenience of reference only and shall not define or limit the provisions hereof.
9. Counterparts. This Amendment may be executed in any number of counterparts, and all such counterparts shall together constitute the same agreement. Signatures delivered by email (in PDF format) shall be considered binding with the same force and effect as original signatures.
10. Governing Law. This Amendment shall be governed in accordance with the terms and provisions of Section 20 of the Repurchase Agreement.
[No Further Text on this Page; Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives as of the day and year first above written and effective as of the Effective Date.
SELLER:
RAIT CMBS CONDUIT I, LLC, a Delaware limited liability company By: RAIT Funding, LLC, a Delaware limited liability company, its sole Member By: Taberna Realty Finance Trust, a Maryland real estate investment trust, its sole Member By: /s/ James Sebra |
Name: James Sebra Title: Chief Financial Officer |
RAIT CRE CONDUIT III, LLC, | ||
a Delaware limited liability company | ||
By: | RAIT Partnership, L.P., a Delaware limited partnership, its sole Member | |
By: | RAIT General, Inc., a Maryland corporation, its general partner | |
By: /s/ James Sebra | ||
Name: James Sebra | ||
Title: Chief Financial Officer | ||
[SIGNATURES PAGES CONTINUE ON NEXT PAGE] |
GUARANTOR:
RAIT FINANCIAL TRUST
a Maryland real estate investment trust
By: /s/ James Sebra
Name: James Sebra
Title: Chief Financial Officer
[SIGNATURES PAGES CONTINUE ON NEXT PAGE]
1
BUYER:
CITIBANK, N.A.
By: /s/ Richard B. Schlenger
Name: Richard B. Schlenger
Title: Authorized Signatory
2
Exhibit 99.1
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax considerations relating to
RAITs and the REIT affiliates qualification and taxation as real estate investment trusts, or
REITs, and the acquisition, holding, and disposition of RAIT shares of beneficial interest. For
purposes of this Exhibit, we refer to we, us, and our refer to RAIT only and not its
subsidiaries or other lower-tier entities, except as otherwise indicated.
This summary is based upon the Internal Revenue Code of 1986, as amended, or the Internal
Revenue Code, the Treasury regulations, current administrative interpretations and practices of the
Internal Revenue Service, or the IRS, (including administrative interpretations and practices
expressed in private letter rulings which are binding on the IRS only with respect to the
particular taxpayers who requested and received those rulings) and judicial decisions, all as
currently in effect and all of which are subject to differing interpretations or to change,
possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that
a court would not sustain, a position contrary to any of the tax consequences described below. No
advance ruling has been or will be sought from the IRS regarding any matter discussed in this
summary. The summary is also based upon the assumption that the operation of the company, and of
its subsidiaries and other lower-tier and affiliated entities, will, in each case, be in accordance
with its applicable organizational documents. This summary is for general information only, and
does not purport to discuss all aspects of U.S. federal income taxation that may be important to a
particular shareholder in light of its investment or tax circumstances or to shareholders subject
to special tax rules, such as:
This summary assumes that shareholders will hold our shares of beneficial interest as capital
assets, which generally means as property held for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR SHARES OF BENEFICIAL INTEREST DEPENDS
IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S.
FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE
TAX CONSEQUENCES OF HOLDING OUR SHARES OF BENEFICIAL INTEREST FOR ANY PARTICULAR SHAREHOLDER WILL
DEPEND ON THE SHAREHOLDERS PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR
REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN
LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF
OUR SHARES OF BENEFICIAL INTEREST.
Taxation
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable
year ended December 31, 1998. Our subsidiary, Taberna Realty Finance Trust, or TRFT, elected to be
taxed as a REIT under the Internal Revenue Code commencing with its taxable year ended December 31,
2005. We sponsored the initial public offering of Independence Realty Trust, Inc., or IRT, which is
a publicly-traded REIT. IRT elected to be taxed as a REIT under the Internal Revenue Code for its
taxable year ended December 31, 2011. We refer to TRFT and IRT, together with any other REITs we
sponsor, as the REIT affiliates. References to the REIT affiliates mean only each such REIT and not
its subsidiaries or other lower-tier entities, except as otherwise indicated. Where any description
is relevant exclusively to RAIT or one or more of our REIT affiliates, or applies differently to
RAIT or one or more of our REIT affiliates, the name of the specific entity being described is used
for purposes of such description.
We believe that each of RAIT and each REIT affiliate have been organized and operated in a
manner that will allow each of them to qualify for taxation as a REIT under the Internal Revenue
Code, and RAIT and the REIT affiliates intend to continue to be organized and operated in such a
manner.
While each of RAIT and the REIT affiliates believes that it has been organized and operated so
that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations and the possibility of future changes in RAITs or the
REIT affiliates circumstances, applicable law, or interpretations thereof, no assurance can be
given by RAIT or any REIT affiliate that RAIT or any REIT affiliate, respectively, will qualify as
a REIT for any particular year. RAIT shareholders should be aware that the foregoing is not binding
on the IRS, and no assurance can be given that the IRS will not challenge the foregoing.
Each of RAITs and each REIT affiliates qualification and taxation as a REIT depends on its
separate ability to meet, on a continuing basis, through actual results of operations, distribution
levels and diversity of share ownership, various qualification requirements imposed upon REITs by
the Internal Revenue Code. In addition, RAITs and each REIT affiliates ability to qualify as a
REIT may depend in part upon the operating results, organizational structure and entity
classification for U.S. federal income tax purposes of certain entities in which RAIT and the REIT
affiliates invest, which could include entities that have made elections to be taxed as REITs.
RAITs and each REIT affiliates ability to qualify as a REIT also requires that RAIT and the REIT
affiliates satisfy certain asset and income tests, some of which depend upon the fair market values
of assets directly or indirectly owned by RAIT and the REIT affiliates or which serve as security
for loans made by RAIT and the REIT affiliates. Such values may not be susceptible to a precise
determination. Accordingly, no assurance can be given that the actual results of RAITs and each
REIT affiliates operations for any taxable year will satisfy the requirements for qualification
and taxation as a REIT. In addition, because of RAITs ownership of all of the common, but not
preferred, equity of TRFT and because it is expected that RAIT will receive substantial dividend
income from TRFT, if TRFT fails to qualify as a REIT, it is very likely that RAIT will also fail to
qualify as a REIT. Similarly, if RAIT owns a significant amount of the equity of any REIT affiliate
(other than through a taxable REIT subsidiary, or TRS), and RAIT receives substantial dividend
income from such REIT affiliate, if such REIT affiliate fails to qualify as a REIT, it would
adversely affect RAITs ability to qualify as a REIT. RAIT currently owns all of IMTs common
equity directly and substantially all of IRTs common equity directly.
Taxation of REITs in General
As indicated above, qualification and taxation of each of RAIT and the REIT affiliates as a
REIT depends upon RAITs and each REIT affiliates ability to meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Internal Revenue Code. The material
qualification requirements are summarized below, under Requirements for QualificationGeneral.
While RAIT and the REIT affiliates intend to operate so that each qualifies as a REIT, no assurance
can be given that the IRS will not challenge RAITs or the REIT affiliates qualification as a REIT
or that RAIT or any REIT affiliate will be able to operate in accordance with the REIT requirements
in the future. See Failure to Qualify. In addition, the failure of TRFT to qualify as a REIT
would very likely result in RAITs failure to qualify as a REIT.
An entity that qualifies as a REIT will generally be entitled to a deduction for dividends
paid to its shareholders and, therefore, will not be subject to U.S. federal corporate income tax
on net taxable income that is currently distributed to its shareholders. This treatment
substantially eliminates the double taxation at the corporate and shareholder levels that results
generally from investment in a corporation. Rather, income generated by a REIT generally is taxed
only at the shareholder level, upon a distribution of dividends by the REIT.
For tax years 2013 and thereafter, U.S. shareholders (as defined below) who are taxed at
individual rates are generally taxed on corporate dividends at a maximum rate of 20% (the same as
long-term capital gains), thereby substantially reducing, though not completely eliminating, the
double taxation that has historically applied to corporate dividends. With limited exceptions,
however, dividends received by U.S. shareholders who are taxed at individual rates from us or from
other entities that are taxed as REITs will continue to be taxed at rates applicable to ordinary
income, which are as high as 39.6% for 2013 and subsequent years.
In addition, both qualifying dividends and most REIT dividends will be subject to the Medicare
surtax of 3.8% if modified adjusted gross income exceeds certain thresholds (for example, $250,000
if married and filing jointly).
Net operating losses, foreign tax credits and other tax attributes of a REIT generally do not
pass through to the shareholders of the REIT, subject to special rules for certain items, such as
capital gains, recognized by REITs. See Taxation of Shareholders.
If we and the REIT affiliates qualify as REITs, we and the REIT affiliates will nonetheless be
subject to U.S. federal income tax in the following circumstances:
Requirements for QualificationGeneral
The Internal Revenue Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation but for the special Internal Revenue
Code provisions applicable to REITs;
(4) that is neither a financial institution nor an insurance company subject to specific
provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) in which, during the last half of each taxable year, not more than 50% in value of the
outstanding shares is owned, directly or indirectly, by five or fewer individuals (as defined
in the Internal Revenue Code to include specified entities);
(7) which meets other tests described below, including with respect to the nature of its
income and assets and the amount of its distributions; and
(8) that makes an election to be a REIT for the current taxable year or has made such an
election for a previous taxable year that has not been terminated or revoked.
The Internal Revenue Code provides that conditions (1) through (4) must be met during the
entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do
not need to be satisfied for the first taxable year for which an election to become a REIT has been
made. Our and the REIT affiliates organizational documents provide restrictions regarding the
ownership and transfer of shares, which are intended to assist in satisfying the share ownership
requirements described in conditions (5) and (6) above. For purposes of condition (6), an
individual generally includes a supplemental unemployment compensation benefit plan, a private
foundation or a portion of a trust permanently set aside or used exclusively for charitable
purposes, but does not include a qualified pension plan or profit sharing trust.
To monitor compliance with the share ownership requirements, we and the REIT affiliates are
generally required to maintain records regarding the actual ownership of our and each of its
shares. To do so, we and the REIT affiliates must demand written statements each year from the
record holders of significant percentages of our and the REIT affiliates shares, in which the
record holders are to disclose the actual owners of the shares (i.e., the persons required to
include in gross income the dividends paid by us). A list of those persons failing or refusing to
comply with this demand must be maintained as part of our and TRFTs records. Failure by us or the
REIT affiliates to comply with these record-keeping requirements could subject us or the REIT
affiliates to monetary penalties. If we and the REIT affiliates satisfy these requirements and have
no reason to know that condition (6) is not satisfied, we and the REIT affiliates will be deemed to
have satisfied such condition. A shareholder that fails or refuses to comply with the demand is
required by the Treasury regulations to submit a statement with its tax return disclosing the
actual ownership of the shares and other information.
In addition, a corporation generally may not elect to become a REIT unless its taxable year is
the calendar year. We and the REIT affiliates satisfy this requirement.
Effect of Subsidiary Entities
Ownership of Partnership Interests. In the case of a REIT that is a partner in a partnership,
the Treasury regulations provide that the REIT is deemed to own its proportionate share of the
partnerships assets and to earn its proportionate share of the partnerships gross income based on
its pro rata share of its capital interest in the partnership for purposes of the asset and gross
income tests applicable to REITs, as described below. However, solely for purposes of the 10% value
test, described below, the determination of a REITs interest in partnership assets will be based
on the REITs proportionate interest in any securities issued by the partnership, excluding for
these purposes, certain excluded securities as described in the Internal Revenue Code. In addition,
the assets and gross income of the partnership generally are deemed to retain the same character in
the hands of the REIT. Thus, our and the REIT affiliates proportionate shares of the assets and
items of income of partnerships in which we or either of them own an equity interest are treated as
assets and items of income for purposes of applying the REIT requirements described below.
Consequently, to the extent that we and the REIT affiliates directly or indirectly hold a preferred
or other equity interest in a partnership, the partnerships assets and operations may affect our
or the REIT affiliates ability to qualify as a REIT, even though we and the REIT affiliates may
have no control or only limited influence over the partnership.
Disregarded Subsidiaries. If a REIT owns a corporate subsidiary that is a qualified REIT
subsidiary, that subsidiary is disregarded for U.S. federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the subsidiary are treated as assets,
liabilities and items of income, deduction and credit of the REIT, including for purposes of the
gross income and asset tests applicable to REITs, as summarized below. A qualified REIT subsidiary
is any corporation, other than a TRS, that is wholly owned by a REIT, by other disregarded
subsidiaries or by a combination of the two. Single member limited liability companies that are
wholly owned by a REIT are also generally disregarded as separate entities for U.S. federal income
tax purposes, including for purposes of the REIT gross income and asset tests. Disregarded
subsidiaries, along with partnerships in which a REIT holds an equity interest, are sometimes
referred to herein as pass-through subsidiaries. We expect that we and the REIT affiliates will
each hold assets and conduct operations, in part, through qualified REIT subsidiaries and
disregarded subsidiaries. Accordingly, all assets, liabilities, and items of income, deduction and
credit of each such subsidiary will be treated as assets, liabilities, and items of income,
deduction, and credit of ours or the REIT affiliates, as the case may be.
In the event that a disregarded subsidiary ceases to be wholly owned by us or the REIT
affiliatesfor example, if any equity interest in the subsidiary is acquired by a person other than
us or the REIT affiliates or another disregarded subsidiary of us or the REIT affiliatesthe
subsidiarys separate existence would no longer be disregarded for U.S. federal income tax
purposes. Instead, it would have multiple owners and would be treated as either a partnership or a
taxable corporation. Such an event could, depending on the circumstances, adversely affect our or
the REIT affiliates ability to satisfy the various asset and gross income tests applicable to
REITs, including the requirement that REITs generally may not own, directly or indirectly, more
than 10% of the value or voting power of the outstanding securities of another corporation. See
Asset Tests and Gross Income Tests.
Taxable REIT Subsidiaries. A REIT may jointly elect with a non-REIT subsidiary
corporation, whether or not wholly owned, to treat the subsidiary corporation as a TRS. The
separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as
discussed above, is not ignored for U.S. federal income tax purposes. Accordingly, such an entity
would generally be subject to corporate income tax on its earnings, which may reduce the cash flow
generated by us and our subsidiaries (including TRFT) in the aggregate and its ability to make
distributions to its shareholders.
TRFT has made a TRS election with respect to TCM, RAIT Funding, RAIT TRS, Taberna Equity
Funding, Ltd., or TEF, and RAIT Property Management Holdings, LLC. In addition, Taberna Funding
Capital Trust I, RAIT CMBS Conduit I, LLC and RAIT CMBS Conduit II, LLC, which are subsidiaries of
RAIT Funding. We collectively refer to the TRSs listed above as the TRFT TRSs. It is expected that
we and the REIT affiliates will make additional TRS elections, including with respect to future
non-U.S. entities that issue equity interests to us or the REIT affiliates pursuant to
collateralized debt obligation, or CDO, securitizations. The Internal Revenue Code and the Treasury
regulations provide a specific exemption from federal income tax to non-U.S. corporations that
restrict their activities in the United States to trading in shares 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. Certain U.S. shareholders (as defined below) of such a non-U.S.
corporation are required to include in their income currently their proportionate share of the
earnings of such a corporation, whether or not such earnings are distributed. TEF and certain
additional CDO entities in which we and the REIT affiliates may invest and with which we and the
REIT affiliates will jointly make a TRS election, will be organized as Cayman Islands companies and
will either rely on such exemption or otherwise operate in a manner so that they will not be
subject to federal income tax on their net income. Therefore, despite such contemplated status of
such CDO entities as TRSs, we expect that such entities should generally not be subject to federal
corporate income tax on their earnings. However, TRFT will be required to include in its income, in
certain cases, even without the receipt of actual distributions, on a current basis, the earnings
of such CDO entities. This could affect TRFTs, and thus our ability to comply with the REIT gross
income tests and distribution requirement. See Gross Income Tests and Annual Distribution
Requirements.
A REIT is not considered the owner of the assets of a TRS or other subsidiary corporation or
(until dividends are paid by the TRS to the REIT) the recipient of any income that a domestic TRS
earns. Rather, the shares issued by the subsidiary are an asset in the hands of the REIT, and the
REIT generally recognizes as income the dividends, if any, that it receives from a domestic TRS.
However, we or the REIT affiliates, as the case may be, will generally be required to include in
income on a current basis the earnings of certain non-U.S. TRSs, including CDO entities, as
described in the preceding paragraph. This treatment can affect the gross income and asset test
calculations that apply to us or the REIT affiliates, as described below. Because a REIT does not
include the assets and, in the case of a domestic TRS, income of such subsidiary corporations in
determining the REITs compliance with the REIT requirements, such entities may be used by a REIT
to undertake indirectly activities that the REIT rules might otherwise preclude it from doing
directly or through pass-through subsidiaries or render commercially unfeasible (for example,
activities that give rise to certain categories of income such as non-qualifying hedging or
prohibited transaction income). If dividends are paid to us or the REIT affiliates by one or more
of our or its TRSs, other than a non-U.S. TRS as described in the preceding paragraph, then a
portion of the dividends that we distribute to U.S. individual shareholders generally will be
eligible for taxation at preferential qualified dividend income tax rates rather than at ordinary
income rates. See Taxation of ShareholdersTaxation of Taxable U.S. Shareholders and Taxation
of ShareholdersDistributions.
Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject
to appropriate levels of U.S. federal income taxation. First, a TRS may not deduct interest
payments made in any year to an affiliated REIT to the extent that such payments exceed, generally,
50% of the TRSs adjusted taxable income for that year (although the TRS may carry forward to, and
deduct in, a succeeding year the disallowed interest amount if the 50% test is satisfied in that
year). In addition, if amounts are paid to a REIT or deducted by a TRS due to transactions between
a REIT, its tenants and/or a TRS, that exceed the amount that would be paid to or deducted by a
party in an arms-length transaction, the REIT generally will be subject to an excise tax equal to
100% of such excess. Rents we or the REIT affiliates receive that include amounts for services
furnished by one of our or the REIT affiliates TRSs to any of its tenants will not be subject to
the excise tax if such amounts qualify for the safe harbor provisions contained in the Internal
Revenue Code. Safe harbor provisions are provided where (1) amounts are excluded from the
definition of impermissible tenant service income as a result of satisfying the 1% de minimis
exception; (2) a TRS renders a significant amount of similar services to unrelated parties and the
charges for such services are substantially comparable; (3) rents paid to its REIT shareholder from
tenants that are not receiving services from the TRS are substantially comparable to the rents paid
by the REITs tenants leasing comparable space that are receiving such services from the TRS and
the charge for the services is separately stated; or (4) the TRSs gross income from the service is
not less than 150% of the TRSs direct cost of furnishing the service.
To the extent that the TRFT TRSs, or any additional TRSs we and the REIT affiliates may form
in the future, pay any taxes, they will have less cash available for distribution to TRFT or us. If
dividends are paid by a taxable domestic TRS, such as TRFT Capital or RAIT Funding, to TRFT, then
the dividends we designate and pay to our shareholders who are individuals, up to the amount of
dividends we receive from such entities, generally will be eligible to be taxed at the reduced 15%
maximum U.S. federal rate applicable to qualified dividend income. See Taxation of
ShareholdersTaxation of Taxable U.S. Shareholders. Currently, we anticipate that each of TCM and
RAIT Funding will retain its after tax income, if any, subject to compliance with the 25% asset
test applicable to TRFTs aggregate ownership of TRSs. See Asset Tests.
The shares that TRFT holds in TCM have a tax basis below the basis such shares would have had
if TRFT purchased such shares at their agreed value in connection with the completion of its
initial private placement of common shares and related transactions, which we refer to as TRFTs
formation transactions. If TRFT were to sell these shares, the gain that it would recognize would
be in excess of the amount of gain that would have been recognized had it purchased such shares in
a taxable transaction. Accordingly, such a sale could result in the generation of a significant
amount of income that would not qualify for the REIT 75% gross income test and an increased
distribution requirement and, accordingly, could adversely affect TRFTs ability to qualify as a
REIT. See the discussion under Gross Income Tests and Annual Distribution Requirements. In
addition, such a sale would result in a larger portion of RAITs dividend being subject to tax as a
capital gain dividend as opposed to a return of capital.
Taxable Mortgage Pools. An entity, or a portion of an entity, may be classified as a taxable
mortgage pool under the Internal Revenue Code if:
Under the Treasury regulations, if less than 80% of the assets of an entity (or a portion of
an entity) consist of debt obligations, these debt obligations are considered not to comprise
substantially all of its assets, and therefore the entity would not be treated as a taxable
mortgage pool.
TRFTs past securitizations of mortgage loans are likely classified as taxable mortgage pool
securitizations. If we and the REIT affiliates continue to make significant investments in mortgage
loans, commercial mortgage backed securities, or CMBS, or residential mortgage backed securities,
or RMBS, we and the REIT affiliates would likely continue to engage in securitization structures,
similar to these securitizations whereby we or the REIT affiliates convey one or more pools of real
estate mortgage loans to a trust, which issues several classes of mortgage-backed bonds having
different maturities, and the cash flow on the real estate mortgage loans will be the sole source
of payment of principal and interest on the several classes of mortgage-backed bonds. As with
TRFTs historical securitizations, neither we nor TRFT would likely make a REMIC election with
respect to such securitization transactions, and, as a result, each such similar transaction would
also be a taxable mortgage pool securitization.
A taxable mortgage pool generally is treated as a corporation for U.S. federal income tax
purposes. However, special rules apply to a REIT, a portion of a REIT, or a qualified REIT
subsidiary that is a taxable mortgage pool. If a REIT owns directly, or indirectly through one or
more qualified REIT subsidiaries or other entities that are disregarded as a separate entity for
U.S. federal income tax purposes, 100% of the equity interest in the taxable mortgage pool, the
taxable mortgage pool will be a qualified REIT subsidiary and, therefore, ignored as an entity
separate from the parent REIT for federal income tax purposes and would not generally affect the
qualification of the REIT. Rather, the consequences of the taxable mortgage pool classification
would generally, except as described below, be limited to the REITs shareholders. See Excess
Inclusion Income.
If we or the REIT affiliates own less than 100% of the ownership interests in a subsidiary
that is a taxable mortgage pool or fail to qualify as a REIT, the foregoing rules would not apply.
Rather, the subsidiary would be treated as a corporation for U.S. federal income tax purposes, and
would potentially be subject to corporate income tax. In addition, this characterization would
alter our or the REIT affiliates REIT income and asset test calculations and could adversely
affect our or the REIT affiliates compliance with those requirements. We do not expect that we or
the REIT affiliates will form any subsidiary in which we or the REIT affiliates own some, but less
than all, of the ownership interests that would become a taxable mortgage pool, and we intend to
monitor the structure of any taxable mortgage pools in which we or the REIT affiliates have an
interest to ensure that they will not adversely affect our or the REIT affiliates REIT
qualification.
Gross Income Tests
In order to maintain each of our and the REIT affiliates qualification as REITs, each entity
must satisfy two gross income tests annually. First, at least 75% of our and the REIT affiliates
gross income for each taxable year, excluding gross income from prohibited transactions, must be
derived from investments relating to real property or mortgages on real property, including rents
from real property, dividends received from other REITs (including, in RAITs case, dividends from
TRFT, provided TRFT qualifies as a REIT), interest income derived from mortgage loans secured by
real property (including certain types of mortgage-backed securities), and gains from the sale of
real estate assets, as well as income from certain kinds of temporary investments. Second, at least
95% of each of our and TRFTs 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 of beneficial interest or securities, which need not have any relation to
real property.
For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a
proportionate share of the income earned by any partnership, or any limited liability company
treated as a partnership for federal income tax purposes, in which it owns an interest, which share
is determined by reference to its capital interest in such entity, and is deemed to have earned the
income earned by any qualified REIT subsidiary.
Interest Income. Interest income constitutes qualifying mortgage interest for purposes of the
75% gross income test to the extent that the obligation is secured by a mortgage on real property.
If a REIT receives interest income with respect to a mortgage loan that is secured by both real
property and other property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property determined as of (1) the date such
REIT acquired or originated the mortgage loan or (2) as discussed further below, in the event of a
significant modification, the date we modified the loan, the interest income will be apportioned
between the real property and the other property, and its income from the loan will qualify for
purposes of the 75% gross income test only to the extent that the interest is allocable to the real
property. Even if a loan is not secured by real property or is under-secured, the income that it
generates may nonetheless qualify for purposes of the 95% gross income test.
Many of the terms of our mortgage loans and mezzanine loans have been modified and may in the
future be modified. Under the Internal Revenue Code, if the terms of a loan are modified in a
manner constituting a significant modification, such modification triggers a deemed exchange of
the original loan for the modified loan. Revenue Procedure 2011-16, as modified and superseded by
Revenue Procedure 2014-51, provides a safe harbor pursuant to which we will not be required to
redetermine the fair market value of the real property securing a loan for purposes of the gross
income and asset tests in connection with a loan modification that is: (1) occasioned by a borrower
default; or (2) made at a time when we reasonably believe that the modification to the loan will
substantially reduce a significant risk of default on the original loan. No assurance can be
provided all of our loan modifications have or will qualify for the safe harbor in Revenue
Procedure 2011-16 as modified and superseded by Revenue Procedure 2014-51. To the extent we
significantly modify loans in a manner that does not qualify for that safe harbor, we will be
required to redetermine the value of the real property securing the loan at the time it was
significantly modified. In determining the value of the real property securing such a loan, we
generally will not obtain third-party appraisals but rather will rely on internal valuations. No
assurance can be provided that the IRS will not successfully challenge our internal valuations. If
the terms of our mortgage loans, mezzanine loans and subordinated mortgage interests and loans
supporting our mortgage-backed securities are significantly modified in a manner that does not
qualify for the safe harbor in Revenue Procedure 2011-16, as modified and superseded by Revenue
Procedure 2014-51, and the fair market value of the real property securing such loans has decreased
significantly, we could fail the 75% gross income test, the 75% asset test and/or the 10% value
test.
To the extent that the terms of a loan provide for contingent interest that is based on the
cash proceeds realized upon the sale of the property securing the loan (a shared appreciation
provision), income attributable to the participation feature will be treated as gain from sale of
the underlying property, which generally will be qualifying income for purposes of both the 75% and
95% gross income tests, provided that the property is not inventory or dealer property in the hands
of the borrower or the lender.
To the extent that a REIT derives interest income from a loan where all or a portion of the
amount of interest payable is contingent, such income generally will qualify for purposes of the
gross income tests only if it is based upon the gross receipts or sales and not the net income or
profits of any person. This limitation does not apply, however, to a mortgage loan where the
borrower derives substantially all of its income from the property from the leasing of
substantially all of its interest in the property to tenants, to the extent that the rental income
derived by the borrower would qualify as rents from real property had it been earned directly by
the lender.
Any amount includible in a REITs gross income with respect to a regular or residual interest
in a REMIC generally is treated as interest on an obligation secured by a mortgage on real
property. If, however, less than 95% of the assets of a REMIC consists of real estate assets
(determined as if such REIT held such assets), such REIT will be treated as receiving directly its
proportionate share of the income of the REMIC.
Among the assets that we hold are mezzanine loans secured by equity interests in a
pass-through entity that directly or indirectly owns real property, rather than a direct mortgage
on the real property. IRS Revenue Procedure 2003-65 provides a safe harbor pursuant to which a
mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be
treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest
derived from it will be treated as qualifying real estate income for purposes of the 75% gross
income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it
does not prescribe rules of substantive tax law. Moreover, the mezzanine loans that we hold and
that we may acquire in the future do not and may not meet all of the requirements for reliance on
this safe harbor. Hence, there can be no assurance that the IRS will not challenge the
qualification of our mezzanine loans as real estate assets or the interest generated by these loans
as qualifying income under the 75% gross income test. To the extent we make corporate mezzanine
loans, such loans will not qualify as real estate assets and interest income with respect to such
loans will not be qualifying income for the 75% gross income test.
We believe that the interest, original issue discount, and market discount income that we and
the REIT affiliates receive from mortgage-related securities generally will be qualifying income
for purposes of both gross income tests. However, to the extent that we or the REIT affiliates own
non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans
(rather than by real property) or secured by non-real estate assets, or debt securities that are
not secured by mortgages on real property or interests in real property, the interest income
received with respect to such securities generally will be qualifying income for purposes of the
95% gross income test, but not the 75% gross income test. In addition, the loan amount of a
mortgage loan that we or the REIT affiliates own may exceed the value of the real property securing
the loan. In that case, a portion of the income from the loan will be qualifying income for
purposes of the 95% gross income test, but not the 75% gross income test.
Dividend Income. We and the REIT affiliates may receive distributions from TRSs or other
corporations that are not REITs or qualified REIT subsidiaries. These distributions will generally
be classified as dividend income to the extent of the earnings and profits of the distributing
corporation. Such distributions will generally constitute qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. Any dividends received by us or the REIT
affiliates from a REIT (including dividends RAIT receives from TRFT and IRT, provided TRFT and IRT
qualify as REITs) will be qualifying income for purposes of both the 95% and 75% gross income
tests. We and the REIT affiliates likely will be required to include in its income, even without
the receipt of actual distributions, earnings from its foreign TRSs which are CDOs. We and the REIT
affiliates treat certain of these income inclusions as qualifying income for purposes of the 95%
gross income test but not the 75% gross income test. The provisions that set forth what income is
qualifying income for purposes of the 95% gross income test provide that gross income derived from
dividends, interest and certain other enumerated classes of passive income qualify for purposes of
the 95% gross income test. Income inclusions from equity investments in foreign TRSs which are CDOs
are technically neither dividends nor any of the other enumerated categories of income specified in
the 95% gross income test for U.S. federal income tax purposes, and there is no other clear
precedent with respect to the qualification of such income. However, based on advice of counsel, we
and the REIT affiliates treat such income inclusions, to the extent distributed by a foreign TRS
which are CDOs in the year accrued, as qualifying income for purposes of the 95% gross income test.
In 2011, the IRS issued two private letter rulings considering situations in which a REIT had to
include income from foreign corporations. The IRS ruled that such income would qualify for the 95%
gross income test. Since private letter rulings only protect the recipient of the letter, it is
still possible that, because this income does not meet the literal requirements of the REIT
provisions, the IRS could successfully take the position that such income is not qualifying income.
In the event that such income was determined not to qualify for the 95% gross income test, we and
the REIT affiliates would be subject to a penalty tax with respect to such income to the extent it
and other nonqualifying income exceeds 5% of gross income and/or we or the REIT affiliates could
fail to qualify as a REIT. In addition, if such income was determined not to qualify for the 95%
gross income test, we or the REIT affiliates would need to invest in sufficient qualifying assets,
or sell some interests in foreign TRSs which are CDOs to ensure that the income recognized from
foreign TRSs which are CDOs or such other corporations does not exceed 5% of gross income, or cease
to qualify as a REIT. See Failure to Satisfy the Gross Income Tests.
Hedging Transactions. We and the REIT affiliates may enter into hedging transactions with
respect to one or more of our assets or liabilities. Hedging transactions could take a variety of
forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate
agreements or similar financial instruments. Except to the extent provided by the Treasury
regulations, any income from a hedging transaction we enter into in the normal course of its
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 if the hedging transaction was entered into on or before
July 30, 2008, but will not constitute non-qualifying income for purposes of the 75% gross income
test if the hedging transaction was entered into after July 30, 2008). To the extent that we or the
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. We
and the REIT affiliates intend to structure any hedging transactions in a manner that does not
jeopardize our or the REIT affiliates qualification as a REIT.
Rents from Real Property. To the extent that a REIT owns real property or interests therein,
rents it receives will qualify as rents from real property in satisfying the gross income tests
described above only if several conditions are met, including the following. If rent attributable
to personal property leased in connection with real property is greater than 15% of the total rent
received under any particular lease, then all of the rent attributable to such personal property
will not qualify as rents from real property. The determination of whether an item of personal
property constitutes real or personal property under the REIT provisions of the Internal Revenue
Code is subject to both legal and factual considerations and is therefore subject to different
interpretations.
In addition, in order for rents received by a REIT to qualify as rents from real property,
the rent must not be based in whole or in part on the income or profits of any person. However, an
amount will not be excluded from rents from real property solely by being based on a fixed
percentage or percentages of sales or if it is based on the net income of a tenant which derives
substantially all of its income with respect to such property from subleasing of substantially all
of such property, to the extent that the rents paid by the subtenants would qualify as rents from
real property, if earned directly by the REIT. Moreover, for rents received to qualify as rents
from real property, a REIT generally must not operate or manage the property or furnish or render
certain services to the tenants of such property, other than through an independent contractor
who is adequately compensated and from which we derive no income, or through a TRS, as discussed
below. A REIT is permitted, however, to perform services that are usually or customarily rendered
in connection with the rental of space for occupancy only and are not otherwise considered rendered
to the occupant of the property. In addition, a REIT may directly or indirectly provide
non-customary services to tenants of its properties without disqualifying all of the rent from the
property if the payment for such services does not exceed 1% of the total gross income from the
property. In such a case, only the amounts for non-customary services are not treated as rents from
real property and the provision of the services does not disqualify the related rent. Moreover, a
REIT is permitted to provide services to tenants through a TRS without disqualifying the rental
income received from tenants for purposes of the REIT gross income tests.
Rental income will qualify as rents from real property only to the extent that we a REIT does
not directly or constructively own, (1) in the case of any tenant which is a corporation, shares of
beneficial interest possessing 10% or more of the total combined voting power of all classes of
shares entitled to vote, or 10% or more of the total value of shares of all classes of shares of
such tenant, or (2) in the case of any tenant which is not a corporation, an interest of 10% or
more in the assets or net profits of such tenant. However, rental payments from a TRS will qualify
as rents from real property even if a REIT owns more than 10% of the combined voting power of the
TRS if at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is
substantially comparable to the rent paid by the unrelated tenants for comparable space.
Failure to Satisfy the Gross Income Tests. We intend to monitor our and the REIT affiliates
sources of income, including any non-qualifying income received by us or the REIT affiliates, so as
to ensure our and the REIT affiliates compliance with the gross income tests. If we or the REIT
affiliates fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year,
we or the REIT affiliates, as the case may be, may still qualify as a REIT for the year if entitled
to relief under applicable provisions of the Internal Revenue Code. These relief provisions will
generally be available if the failure to meet these tests was due to reasonable cause and not due
to willful neglect and, following the identification of such failure, we or the REIT affiliates set
forth a description of each item of our or the REIT affiliates gross income that satisfies the
gross income tests in a schedule for the taxable year filed in accordance with the Treasury
regulations. It is not possible to state whether we or the REIT affiliates would be entitled to the
benefit of these relief provisions in all circumstances. If these relief provisions are
inapplicable to a particular set of circumstances, we or the REIT affiliates will not qualify as a
REIT. As discussed above under Taxation of REITs in General, even where these relief provisions
apply, a tax would be imposed upon the profit attributable to the amount by which we or the REIT
affiliates fail to satisfy the particular gross income test multiplied by a fraction intended to
reflect our or its profitability. If the IRS were to determine that TRFT failed the 95% gross
income test because income inclusions with respect to its equity investments in foreign CDO TRSs
that were distributed by the foreign CDO TRSs during the year such income was accrued are not
qualifying income, it is possible that the IRS would not consider TRFTs position taken with
respect to such income, and accordingly its failure to satisfy the 95% gross income test, to be
considered to be due to reasonable cause and not due to willful neglect. If the IRS were to
successfully assert this position, TRFT, and therefore very likely RAIT, would fail to qualify as a
REIT. See Failure to Qualify.
Asset Tests
A REIT, at the close of each calendar quarter, must also satisfy four tests relating to the
nature of its assets. First, at least 75% of the value of the REITs total assets must be
represented by some combination of real estate assets, cash, cash items, U.S. government
securities and, under some circumstances, shares or debt instruments purchased with new capital.
For this purpose, real estate assets include interests in real property, such as land, buildings,
leasehold interests in real property, shares of other corporations that qualify as REITs (including
TRFT shares owned by RAIT, provided TRFT qualifies as a REIT) and certain kinds of mortgage-backed
securities and mortgage loans. Assets that do not qualify for purposes of the 75% test are subject
to the additional asset tests described below.
Second, the value of any one issuers securities owned by the REIT may not exceed 5% of the
value of the REITs gross assets. Third, the REIT may not own more than 10% of any one issuers
outstanding securities, as measured by either voting power or value. Fourth, the aggregate value of
all securities of TRSs held by a REIT may not exceed 25% (20% for years beginning after December
31, 2017) of the value of such REITs gross assets.
The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT
subsidiaries. The 10% value test does not apply to certain straight debt and other excluded
securities, as described in the Internal Revenue Code, including but not limited to any loan to an
individual or an estate, any obligation to pay rents from real property and any security issued by
a REIT. In addition, (a) a REITs interest as a partner in a partnership is not considered a
security for purposes of applying the 10% value test; (b) any debt instrument issued by a
partnership (other than straight debt or other excluded security) will not be considered a security
issued by the partnership if at least 75% of the partnerships gross income is derived from sources
that would qualify for the 75% REIT gross income test; and (c) any debt instrument issued by a
partnership (other than straight debt or other excluded security) will not be considered a security
issued by the partnership to the extent of the REITs interest as a partner in the partnership.
For purposes of the 10% value test, straight debt means a written unconditional promise to
pay on demand on a specified date a sum certain in money if (i) the debt is not convertible,
directly or indirectly, into shares, (ii) the interest rate and interest payment dates are not
contingent on profits, the borrowers discretion, or similar factors other than certain
contingencies relating to the timing and amount of principal and interest payments, as described in
the Internal Revenue Code and (iii) in the case of an issuer which is a corporation or a
partnership, securities that otherwise would be considered straight debt will not be so considered
if the REIT, and any of its controlled TRSs as defined in the Internal Revenue Code, hold any
securities of the corporate or partnership issuer which: (a) are not straight debt or other
excluded securities (prior to the application of this rule), and (b) have an aggregate value
greater than 1% of the issuers outstanding securities (including, for the purposes of a
partnership issuer, the REITs interest as a partner in the partnership).
After initially meeting the asset tests at the close of any quarter, a REIT will not lose its
qualification as such for failure to satisfy the asset tests at the end of a later quarter solely
by reason of changes in asset values. If a REIT fails to satisfy the asset tests because it
acquires securities during a quarter, it can cure this failure by disposing of sufficient
non-qualifying assets within 30 days after the close of that quarter. If a REIT fails the 5% asset
test, or the 10% vote or value asset tests at the end of any quarter and such failure is not cured
within 30 days thereafter, the REIT may dispose of sufficient assets (generally within six months
after the last day of the quarter in which such REITs identification of the failure to satisfy
these asset tests occurred) to cure such a violation that does not exceed the lesser of 1% of its
assets at the end of the relevant quarter or $10,000,000. If a REIT fails any of the other asset
tests or its failure of the 5% and 10% asset tests is in excess of the de minimis amount described
above, as long as such failure was due to reasonable cause and not willful neglect, the REIT is
permitted to avoid disqualification as a REIT, after the 30 day cure period, by taking steps
including the disposition of sufficient assets to meet the asset test (generally within six months
after the last day of the quarter in which the identification of the failure to satisfy the REIT
asset test occurred) and paying a tax equal to the greater of $50,000 or the highest corporate
income tax rate (currently 35%) of the net income generated by the non-qualifying assets during the
period in which the REIT fails to satisfy the asset test. Based on the current value of our
investment in IRT, we believe that our status as a REIT would not be jeopardized even if IRT failed
to qualify as a REIT, because such failure would result only our failing to satisfy the 10% asset
tests by a de minimis amount.
We expect that the assets and mortgage-related securities that we and the REIT affiliates own
generally will be qualifying assets for purposes of the 75% asset test. However, to the extent that
we or the REIT affiliates own non-REMIC collateralized mortgage obligations or other debt
instruments secured by mortgage loans (rather than by real property) or secured by non-real estate
assets, or debt securities issued by corporations that are not secured by mortgages on real
property, those securities may not be qualifying assets for purposes of the 75% asset test. In
addition, to the extent we or the REIT affiliates own the equity of a TruPS securitization and do
not make a TRS election with respect to such entity, we or the REIT affiliates, as the case may be,
will be deemed to own such TruPS, which will not be a qualifying real estate asset for purposes of
the 75% asset test described above. We believe that our or the REIT affiliates holdings of
securities and other assets will be structured in a manner that will comply with the foregoing REIT
asset requirements and intend to monitor compliance on an ongoing basis. Moreover, values of some
assets may not be susceptible to a precise determination and are subject to change in the future.
Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income
tax purposes may be uncertain in some circumstances, which could affect the application of the REIT
asset tests. As an example, if we or the REIT affiliates were to make an investment in preferred
securities or other equity securities of a REIT issuer that were determined by the IRS to represent
debt securities of such issuer, such securities would also not qualify as real estate assets.
Accordingly, there can be no assurance that the IRS will not contend that interests in subsidiaries
or in the securities of other issuers (including REIT issuers) cause a violation of the REIT asset
tests.
We have acquired and we and the REIT affiliates may acquire mezzanine loans, which are loans
secured by equity interests in a partnership or limited liability company that directly or
indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor
pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue
Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests,
and interest derived from the mezzanine loan will be treated as qualifying real estate income for
purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on
which taxpayers may rely, it does not prescribe rules of substantive tax law. RAIT has acquired and
we and the REIT affiliates may acquire mezzanine loans that may not meet all of the requirements
for reliance on this safe harbor. In the event we or the REIT affiliates own a mezzanine loan that
does not meet the safe harbor, the IRS could challenge such loans treatment as a real estate asset
for purposes of the REIT asset and income tests, and if such a challenge were sustained, we or the
REIT affiliates could fail to qualify as a REIT.
We and TRFT have entered into, and we and the REIT affiliates may enter into, sale and
repurchase agreements under which we and the REIT affiliates nominally sell certain of their
mortgage assets to a counterparty and simultaneously enter into an agreement to repurchase the sold
assets. We and the REIT affiliates believe that they have been and will be treated for U.S. federal
income tax purposes as the owner of the mortgage assets that are the subject of any such agreement
notwithstanding that they may transfer record ownership of the assets to the counterparty during
the term of the agreement. It is possible, however, that the IRS could assert that we or the REIT
affiliates did not own the mortgage assets during the term of the sale and repurchase agreement, in
which case our or the REIT affiliates ability to qualify as a REIT would be adversely affected.
Annual Distribution Requirements
In order to qualify as REITs, we and the REIT affiliates are required to make distributions,
other than capital gain dividends, to our respective shareholders (principally us, in the case of
TRFT) in an amount at least equal to:
(a) the sum of:
(b) the sum of specified items of non-cash income that exceeds a percentage of its income.
These distributions must be paid in the taxable year to which they relate or in the following
taxable year if such distributions are declared in October, November or December of the taxable
year, are payable to shareholders of record on a specified date in any such month and are actually
paid before the end of January of the following year. Such distributions are treated as both paid
by us and received by each shareholder on December 31 of the year in which they are declared. In
addition, at its election, a distribution for a taxable year may be declared before a REIT timely
files its tax return for the year and be paid with or before the first regular dividend payment
after such declaration, provided that such payment is made during the 12-month period following the
close of such taxable year. These distributions are taxable to the REITs shareholders in the year
in which paid, even though the distributions relate to its prior taxable year for purposes of the
90% distribution requirement.
In order for distributions to be counted towards our distribution requirement and to provide
us with a tax deduction for years prior to 2015, they must not be preferential dividends. A
dividend is not a preferential dividend if it is pro rata among all outstanding shares within a
particular class and is in accordance with the preferences among different classes of shares as set
forth in our organizational documents.
To the extent that we or the REIT affiliates distribute at least 90%, but less than 100%, of
our or its REIT taxable income, as adjusted, we or it, as the case may be, will be subject to tax
at ordinary corporate tax rates on the retained portion. In addition, we or the REIT affiliates may
elect to retain, rather than distribute, our or its net long-term capital gains and pay tax on such
gains. In this case, we or the REIT affiliates, as the case may be, could elect to have our or its
shareholders include their proportionate share of such undistributed long-term capital gains in
income and receive a corresponding credit for their proportionate share of the tax paid by us or
the REIT affiliates. Our or the REIT affiliates shareholders would then increase the adjusted
basis of their shares of beneficial interest in us or the REIT affiliates by the difference between
the designated amounts included in their long-term capital gains and the tax deemed paid with
respect to their proportionate shares.
If we or the REIT affiliates fail to distribute during each calendar year at least the sum of
(a) 85% of our REIT ordinary income for such year, (b) 95% of our or its REIT capital gain net
income for such year and (c) any undistributed taxable income from prior periods, we or the REIT
affiliates, as the case may be, will be subject to a 4% excise tax on the excess of such required
distribution over the sum of (x) the amounts actually distributed (taking into account excess
distributions from prior periods) and (y) the amounts of income retained on which we or the REIT
affiliates, as the case may be, have paid corporate income tax. We intend to make and to have the
REIT affiliates make timely distributions so that we and the REIT affiliates are not subject to the
4% excise tax.
It is possible that we or the REIT affiliates, from time to time, may not have sufficient
cash to meet the distribution requirements due to timing differences between (a) the actual receipt
of cash, including receipt of distributions from our or the REIT affiliates subsidiaries and
(b) the inclusion of items in income by us or the REIT affiliates for U.S. federal income tax
purposes including the inclusion of items of income from CDO entities in which we or the REIT
affiliates, as the case may be, hold an equity interest. See Effect of Subsidiary
EntitiesTaxable REIT Subsidiaries. In the event that such timing differences occur, in order to
meet the distribution requirements, it might be necessary to arrange for short-term, or possibly
long-term, borrowings or to pay dividends in the form of taxable in-kind distributions of property.
A REIT is also treated as having paid a dividend if it and its shareholders elect to treat
certain amounts as distributed, although no actual distribution is made. The election may be filed
at any time not later than the date (including extensions) of the REITs income tax return for the
taxable year for which the dividend paid deduction is claimed. TRFT used this consent dividend
election to comply with its distribution requirement for 2007-2014 and may do so in 2015 and
subsequent years. It, and we, as the holder of all of the common shares of TRFT filed such an
election with TRFTs 2007-2014 tax returns and intend to do so for 2015. As a result, we had
dividend income from TRFT for 2007-2014 in amounts equal to such consent dividends. We believe we
have distributed to our shareholders sufficient dividends for 2007-2014 so that we were in
compliance with our distribution requirements even after including the consent dividends from TRFT
in our income.
We or the REIT affiliates may be able to rectify a failure to meet the distribution
requirements for a year by paying deficiency dividends to shareholders in a later year, which may
be included in our or the REIT affiliates deduction for dividends paid for the earlier year. In
this case, we or the REIT affiliates, as the case may be, may be able to avoid losing our or its
qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, we
or the REIT affiliates, as the case may be, will be required to pay interest and a penalty based on
the amount of any deduction taken for deficiency dividends.
Excess Inclusion Income
If we or the REIT affiliates own a residual interest in a REMIC, we or the REIT affiliates may
realize excess inclusion income. If we or the REIT affiliates are deemed to have issued debt
obligations having two or more maturities, the payments on which correspond to payments on mortgage
loans owned by us or the REIT affiliates, such arrangement will be treated as a taxable mortgage
pool for U.S. federal income tax purposes. See Effect of Subsidiary EntitiesTaxable Mortgage
Pools. If all or a portion of us or the REIT affiliates is treated as a taxable mortgage pool, our
or the REIT affiliates qualification as a REIT generally should not be impaired. Neither we nor
TRFT have ever had any excess inclusion income, and we intend to manage our investments and take
all necessary steps to prevent us from having excess inclusion income in the future.
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. The term
prohibited transaction generally includes a sale or other disposition of property (other than
foreclosure property) that is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business by a REIT, by a pass-through entity in which the REIT holds an equity
interest or by a borrower that has issued a shared appreciation mortgage or similar debt instrument
to the REIT. We intend to conduct our operations so that no asset owned by us, the REIT affiliates
or our pass-through subsidiaries will be held as inventory or for sale to customers in the ordinary
course of business. However, whether property is held for sale to customers in the ordinary course
of a trade or business depends on the particular facts and circumstances. No assurance can be
given that any particular property in which we or the REIT affiliates hold a direct or indirect
interest will not be treated as property held for sale to customers or that certain safe-harbor
provisions of the Internal Revenue Code that prevent such treatment will apply. The 100% tax will
not apply to gains from the sale of property by a TRS or other taxable corporation, although such
income will be subject to tax in the hands of the corporation at regular U.S. federal corporate
income tax rates.
Foreclosure Property
Foreclosure property is real property and any personal property incident to such real property
(1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure or
having otherwise reduced the property to ownership or possession by agreement or process of law
after there was a default (or default was imminent) on a lease of the property or a mortgage loan
held by the REIT and secured by the property, (2) for which the related loan or lease was acquired
by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT
makes a proper election to treat the property as foreclosure property. REITs generally are subject
to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property,
including any gain from the disposition of the foreclosure property, other than income that would
otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of
property for which a foreclosure property election has been made will not be subject to the 100%
tax on gains from prohibited transactions described above, even if the property would otherwise
constitute inventory or property held for sale to customers in the ordinary course of business in
the hands of the selling REIT. We do not anticipate that we or the REIT affiliates will receive any
income from foreclosure property that is not qualifying income for purposes of the 75% gross income
test, but, if we or the REIT affiliates do receive any such income, we intend to elect, or to have
TRFT elect, to treat the related property as foreclosure property.
Failure to Qualify
In the event that we or the REIT affiliates violate a provision of the Internal Revenue Code
that would result in our or its failure to qualify as a REIT, specified relief provisions will be
available to us or the REIT affiliates to avoid such disqualification if (1) the violation is due
to reasonable cause and not due to willful neglect, (2) we or the REIT affiliates pay a penalty of
$50,000 for each failure to satisfy the provision and (3) the violation does not include a
violation under the gross income or asset tests described above (for which other specified relief
provisions are available). This cure provision reduces the instances that could lead to our or the
REIT affiliates disqualification as a REIT for violations due to reasonable cause and not due to
willful neglect. If we or the REIT affiliates fail to qualify for taxation as a REIT in any taxable
year and none of the relief provisions of the Internal Revenue Code apply, we or the REIT
affiliates will be subject to tax, including any applicable alternative minimum tax, on our or the
REIT affiliates taxable income at regular corporate rates. Distributions to our shareholders in
any year in which we are not a REIT will not be deductible by us or the REIT affiliates, nor will
they be required to be made. In this situation, to the extent of current and accumulated earnings
and profits, and, subject to limitations of the Internal Revenue Code, distributions to our or the
REIT affiliates shareholders will generally be taxable in the case of our shareholders who are
individual U.S. shareholders (as defined below), at a maximum rate of 20% (and, depending on the
individuals modified adjusted gross income, possibly an additional Medicare surtax of 3.8%) for
2013 and subsequent taxable years, and dividends in the hands of our corporate U.S. shareholders
may be eligible for the dividends received deduction. In addition, our or the REIT affiliates
taxable mortgage pool securitizations will be treated as separate taxable corporations for U.S.
federal income tax purposes. Unless we are entitled to relief under the specific statutory
provisions, we or the REIT affiliates will also be disqualified from re-electing to be taxed as a
REIT for the four taxable years following a year during which qualification was lost. It is not
possible to state whether, in all circumstances, we or the REIT affiliates will be entitled to
statutory relief.
Use of Net Operating Loss Carryovers
We have net operating loss carryovers that we have used and may use in the future to reduce
REIT taxable income, thereby reducing our distribution requirement. Under section 382 of the Code,
if there has been a more than fifty percent change in ownership of the equity of a corporation
(including a REIT), the ability to use net operating losses incurred prior to the change in
ownership will be limited. If it is determined that a requisite ownership change has occurred, and
we have used our net operating losses to reduce our distribution for any post-change year, we would
have to pay a deficiency dividend and an interest charge to satisfy the distribution requirement
for any such year.
Taxation of Shareholders
Taxation of Taxable U.S. Shareholders. This section summarizes the taxation of
U.S. shareholders that are not tax-exempt organizations. For these purposes, a U.S. shareholder is
a beneficial owner of either our shares of beneficial interest that for U.S. federal income tax
purposes is:
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes
holds our shares of beneficial interest, the U.S. federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the partnership. A
partner of a partnership holding our shares of beneficial interest should consult its tax advisor
regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and
disposition of our shares of beneficial interest by the partnership.
For taxable years beginning after December 31, 2012, certain U.S. shareholders who are
individuals, estates or trusts and whose income exceeds certain thresholds are required to pay a
3.8% Medicare tax. The Medicare tax applies to, among other things, dividends and other income
derived from certain trades or business and net gains from the sale or other disposition of
property subject to certain exceptions. Our dividends generally will be subject to the Medicare
tax.
If certain disclosure requirements related to U.S. accounts are not satisfied, U.S.
shareholders that hold our shares of beneficial interest through foreign accounts or intermediaries
will be subject to U.S. federal withholding tax at a rate of 30% on dividends paid after June 30,
2014 (subject to a transition period applicable through the end of 2015 with respect to which the
IRS will take into account certain good faith compliance efforts) and proceeds of sale of our stock
paid after December 31, 2018.
Distributions. Provided that we qualify as a REIT, distributions made to our taxable
U.S. shareholders out of our current and accumulated earnings and profits, and not designated as
capital gain dividends, will generally be taken into account by them as ordinary dividend income
and will not be eligible for the dividends received deduction generally available to corporate U.S.
shareholders. In determining the extent to which a distribution with respect to our shares of
beneficial interest constitutes a dividend for U.S. federal income tax purposes, our earnings and
profits will be allocated first to distributions with respect to our preferred shares of beneficial
interest and then to our common shares. Dividends received from REITs generally are not eligible to
be taxed at the preferential qualified dividend income rates applicable to individual
U.S. shareholders who receive dividends from regular corporations.
In addition, distributions from us that are designated as capital gain dividends will be taxed
to U.S. shareholders as long-term capital gains, to the extent that they do not exceed the actual
net capital gain of us for the taxable year, without regard to the period for which the
U.S. shareholder has held its shares. To the extent that we elect under the applicable provisions
of the Internal Revenue Code to retain our net capital gains, U.S. shareholders will be treated as
having received, for U.S. federal income tax purposes, our undistributed capital gains as well as a
corresponding credit for taxes paid by us on such retained capital gains. U.S. shareholders will
increase their adjusted tax basis in our shares of beneficial interest by the difference between
their allocable share of such retained capital gain and their share of the tax paid by us.
Corporate U.S. shareholders may be required to treat up to 20% of some capital gain dividends as
ordinary income. Long-term capital gains are generally taxable at maximum U.S. federal income tax
rates of 20% for 2013 and subsequent taxable years in the case of U.S. shareholders taxed at
individual rates, and 35% for corporations. Capital gains attributable to the sale of depreciable
real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax
rate for U.S. shareholders taxed at individual rates to the extent of previously claimed
depreciation deductions. U.S. shareholders taxed at individual rates may also be subject to the
3.8% Medicare tax on all capital gains.
Distributions in excess of our current and accumulated earnings and profits will not be
taxable to a U.S. shareholder to the extent that they do not exceed the adjusted tax basis of the
U.S. shareholders shares in respect of which the distributions were made, but rather will reduce
the adjusted tax basis of these shares. To the extent that such distributions exceed the adjusted
tax basis of an individual U.S. shareholders shares, they will be included in income as long-term
capital gain, or short-term capital gain if the shares have been held for one year or less. In
addition, any dividend declared by us in October, November or December of any year and payable to a
U.S. shareholder of record on a specified date in any such month will be treated as both paid by us
and received by the U.S. shareholder on December 31 of such year, provided that the dividend is
actually paid by us before the end of January of the following calendar year.
With respect to U.S. shareholders taxed at individual rates, we may elect to designate a
portion of its distributions paid to such U.S. shareholders as qualified dividend income. A
portion of a distribution that is properly designated as qualified dividend income is taxable to
non-corporate U.S. shareholders as capital gain, provided that the U.S. shareholder has held the
shares with respect to which the distribution is made for more than 60 days during the 121-day
period beginning on the date that is 60 days before the date on which such shares became
ex-dividend with respect to the relevant distribution. The maximum amount of our distributions
eligible to be designated as qualified dividend income for a taxable year is equal to the sum of:
(a) the qualified dividend income received by us during such taxable year from non-REIT
corporations that are subject to U.S. federal income tax;
(b) the excess of any undistributed REIT taxable income recognized during the
immediately preceding year over the U.S. federal income tax paid by us with respect to such
undistributed REIT taxable income; and
(c) the excess of any income recognized during the immediately preceding year attributable
to the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the U.S. federal income tax paid by us with respect to such
built-in gain.
In addition, to the extent TRFT pays dividends to us comprised of the above items, our
dividends should generally be treated as qualified dividend income.
Generally, dividends that we receive will be treated as qualified dividend income for
purposes of (a) above if the dividends are received from a domestic corporation (other than a REIT
or a RIC) that is subject to U.S. federal income tax, or a qualifying foreign corporation and
specified holding period requirements and other requirements are met. We expect that any foreign
corporate CDO entity in which we or the REIT affiliates invest would not be a qualifying foreign
corporation, and accordingly our distribution of any income with respect to such entities will not
constitute qualified dividend income.
To the extent that we or the REIT affiliates have available net operating losses and capital
losses carried forward from prior tax years, such losses may reduce the amount of distributions
that must be made in order to comply with the REIT distribution requirements. See Taxation of
REITs in General, Annual Distribution Requirements and Use of Net Operating Loss Carry
Forwards. Such losses, however, are not passed through to our shareholders (and, in the case of
TRFT, are not passed through to us) and do not offset income of our shareholders from other
sources, nor do they affect the character of any distributions that are actually made by us, which
are generally subject to tax in the hands of our shareholders to the extent that we have current or
accumulated earnings and profits.
Dispositions of Our Shares of Beneficial Interest. In general, a U.S. shareholder will realize
gain or loss upon the sale, redemption or other taxable disposition of our shares of beneficial
interest in an amount equal to the difference between the sum of the fair market value of any
property and the amount of cash received in such disposition and the U.S. shareholders adjusted
tax basis in the shares at the time of the disposition. In general, a U.S. shareholders adjusted
tax basis will equal the U.S. shareholders acquisition cost, increased by the excess of net
capital gains deemed distributed to the U.S. shareholder (discussed above) less tax deemed paid on
it and reduced by returns of capital. In general, capital gains recognized by individual
U.S. shareholders upon the sale or disposition of our shares of beneficial interest will be subject
to a maximum U.S. federal income tax rate of 20% for 2013 and subsequent taxable years, if our
shares of beneficial interest are held for more than 12 months, and will be taxed at ordinary
income rates (of up to 39.6% for 2013 and subsequent taxable years) if our shares of beneficial
interest are held for 12 months or less. Dividends and gains for the sale of our shares will also
be subject to a 3.8% Medicare surtax in the case of taxpayers whose modified adjusted gross income
exceeds certain thresholds. Gains recognized by U.S. shareholders that are corporations are subject
to U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital
gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would
apply a U.S. federal income tax rate of 25% (which is generally higher than the long-term capital
gain tax rates for non-corporate holders) to a portion of capital gain realized by U.S.
shareholders taxed at individual rates on the sale of REIT shares that would correspond to the
REITs unrecaptured Section 1250 gain. Capital losses recognized by a U.S. shareholder upon the
disposition of our shares of beneficial interest held for more than one year at the time of
disposition will be considered long-term capital losses, and are generally available only to offset
capital gain income of the U.S. shareholder but not ordinary income (except in the case of
individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon
a sale or exchange of our shares of beneficial interest by a U.S. shareholder who has held the
shares of beneficial interest for six months or less, after applying holding period rules, will be
treated as a long-term capital loss to the extent of distributions received from us that were
required to be treated by the U.S. shareholder as long-term capital gain.
Redemption of Offered Preferred Shares. Redemption of offered preferred shares for cash will
be treated under Section 302 of the Code as a distribution taxable as a dividend (to the extent of
our current and accumulated earnings and profits) at ordinary income rates, unless the redemption
satisfies one of the tests set forth in Section 302(b) of the Code for the sale or exchange of the
redeemable shares. The redemption will be treated as a sale or exchange if it (i) is substantially
disproportionate with respect to you, (ii) results in a complete termination of your share
interest in us, or (iii) is not essentially equivalent to a dividend with respect to you, all
within the meaning of Section 302(b) of the Code.
In determining whether any of these tests have been met, common shares, all series of
preferred shares and any options to acquire the foregoing considered to be owned by you by reason
of certain constructive ownership rules set forth in the Code, as well as common shares, all series
of preferred shares and any options to acquire the foregoing actually owned by you, must generally
be taken into account. If you do not own (actually or constructively) any of our common shares, or
you own an insubstantial percentage of our outstanding common shares or preferred shares, based
upon current law, a redemption of your preferred shares is likely to qualify for sale or exchange
treatment because the redemption would not be essentially equivalent to a dividend. However,
because the determination as to whether any of the alternative tests of Section 302(b) of the Code
will be satisfied with respect to your preferred shares depends upon the facts and circumstances at
the time the determination must be made, you are advised to consult your own tax advisor to
determine such tax treatment.
If a redemption of preferred shares is not treated as a distribution taxable as a dividend to
you, it will be treated as a taxable sale or exchange of the shares. As a result, you will
recognize gain or loss for federal income tax purposes in an amount equal to the difference between
(i) the amount of cash and the fair market value of any property received (less any portion thereof
attributable to accumulated and declared but unpaid dividends, which will be taxable as a dividend
to the extent of our current and accumulated earnings and profits), and (ii) your adjusted basis in
the preferred shares for tax purposes. Such gain or loss will be capital gain or loss if the
preferred shares have been held as a capital asset, and will be long-term gain or loss if the
preferred shares have been held for more than one year at the time of the redemption. If a
redemption of preferred shares is treated as a distribution taxable as a dividend, the amount of
the distribution will be measured by the amount of cash and the fair market value of any property
received by you. Your adjusted basis in the redeemable preferred shares for tax purposes will be
transferred to your remaining shares in us. If you do not own any of our other shares, such basis
may, under certain circumstances, be transferred to a related person or it may be lost entirely.
The IRS published proposed Treasury regulations that would require a share-by-share
determination upon redemption so that a holder with varying tax basis for its shares of preferred
stock could have taxable income with respect some shares, even though the holders aggregate basis
for the shares would be sufficient to absorb the entire redemption distribution. Additionally,
these proposed Treasury regulations would not permit the transfer of basis in the redeemed shares
to the remaining shares of our stock held (directly or indirectly) by the redeemed holder. Instead,
the unrecovered basis in our preferred shares would be treated as a deferred loss to be recognized
when certain conditions are satisfied. These proposed Treasury regulations would be effective for
transactions that occur after the date the regulations are published as final Treasury regulations.
Passive Activity Losses and Investment Interest Limitations. Distributions made by us and gain
arising from the sale or exchange by a U.S. shareholder of our shares of beneficial interest will
not be treated as passive activity income. As a result, U.S. shareholders will not be able to apply
any passive losses against income or gain relating to its ownership of our shares of beneficial
interest. Distributions made by us, to the extent they do not constitute a return of capital,
generally will be treated as investment income for purposes of computing the investment interest
limitation. A U.S. shareholder that elects to treat capital gain dividends, capital gains from the
disposition of shares of beneficial interest or qualified dividend income as investment income for
purposes of the investment interest limitation will be taxed at ordinary income rates on such
amounts.
Taxation of Tax-Exempt U.S. Shareholders. U.S. tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts, generally are exempt
from U.S. federal income taxation. However, they are subject to taxation on their UBTI. While many
investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a
REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a
tax-exempt U.S. shareholder has not held our shares of beneficial interest as debt financed
property within the meaning of the Internal Revenue Code (i.e., where the acquisition or holding
of the property is financed through a borrowing by the tax-exempt shareholder), (2) the shares of
beneficial interest of us are not otherwise used in an unrelated trade or business, and (3) we and
the REIT affiliates do not hold an asset that generates excess inclusion income (See Effect of
Subsidiary EntitiesTaxable Mortgage Pools and Excess Inclusion Income), distributions from us
and income from the sale of our shares of beneficial interest should generally not be treated as
UBTI to a tax-exempt U.S. shareholder. We do not currently own and we do not intend to acquire in
the future any UBTI producing assets.
Tax-exempt U.S. shareholders that are social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S.
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal
Revenue Code, respectively, are subject to different UBTI rules, which generally will require them
to characterize distributions from us as UBTI. In certain circumstances, a pension trust (1) that
is described in Section 401(a) of the Internal Revenue Code, (2) is tax exempt under
Section 501(a) of the Internal Revenue Code, and (3) that owns more than 10% of our shares of
beneficial interest could be required to treat a percentage of the dividends from us as UBTI if we
are a pension-held REIT. We will not be a pension-held REIT unless (1) either (A) one pension
trust owns more than 25% of the value of our shares of beneficial interest, or (B) a group of
pension trusts, each individually holding more than 10% of the value of our shares of beneficial
interest, collectively owns more than 50% of such shares; and (2) we would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that shares
owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of
the value of the outstanding shares of a REIT is owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code to include certain entities) by the
beneficiaries of such trusts. Certain restrictions on ownership and transfer of our shares of
beneficial interest should generally prevent a tax-exempt entity from owning more than 10% of the
value of our shares of beneficial interest, or us from becoming a pension-held REIT.
Tax-exempt U.S. shareholders are urged to consult their tax advisors regarding the U.S. federal,
state, local and foreign tax consequences of owning our shares of beneficial interest.
Taxation of Non-U.S. Shareholders. The following is a summary of certain U.S. federal income
tax consequences of the acquisition, ownership and disposition of our shares of beneficial interest
applicable to non-U.S. shareholders of our shares of beneficial interest. For purposes of this
summary, a non-U.S. shareholder is a beneficial owner of our shares of beneficial interest that is
not a U.S. shareholder or an entity taxed as a partnership for U.S. federal income tax purposes.
The discussion is based on current law and is for general information only. It addresses only
selective and not all aspects of U.S. federal income taxation.
Ordinary Dividends. The portion of dividends received by non-U.S. shareholders payable
out of our earnings and profits that are not attributable to gains from sales or exchanges of
U.S. real property interests, or USRPIs, and which are not effectively connected with a U.S. trade
or business of the non-U.S. shareholder will generally be subject to U.S. federal withholding tax
at the rate of 30%, unless reduced or eliminated by an applicable income tax treaty. Under some
treaties, however, lower rates generally applicable to dividends do not apply to dividends from
REITs. In addition, any portion of the dividends paid to non-U.S. shareholders that are treated as
excess inclusion income will not be eligible for exemption from the 30% withholding tax or a
reduced treaty rate. As previously noted, we and the REIT affiliates may engage in transactions
that result in a portion of our dividends being considered excess inclusion income, and
accordingly, it is possible that a portion of our dividends received by a non-U.S. shareholder will
not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.
In general, non-U.S. shareholders will not be considered to be engaged in a U.S. trade or
business solely as a result of their ownership of our shares of beneficial interest. In cases where
the dividend income from a non-U.S. shareholders investment in our shares of beneficial interest
is, or is treated as, effectively connected with the non-U.S. shareholders conduct of a U.S. trade
or business, the non-U.S. shareholder generally will be subject to U.S. federal income tax at
graduated rates, in the same manner as U.S. shareholders are taxed with respect to such dividends,
and may also be subject to a 30% branch profits tax, after the application of the U.S. federal
income tax, in the case of a non-U.S. shareholder-that is a corporation.
For dividends paid after June 30, 2014, certain non-U.S. shareholders will be subject to U.S.
federal withholding tax at a rate of 30% on dividends paid on our shares of beneficial interest, if
certain disclosure requirements related to U.S. ownership are not satisfied. In addition, if those
disclosure requirements are not satisfied, a U.S. federal withholding tax at a rate of 30% will be
imposed, for taxable years beginning after December 31, 2018, on proceeds from the sale of shares
received by certain non-U.S. shareholders. If payment of withholding taxes is required, non-U.S.
shareholders that are otherwise eligible for an exemption from, or reduction of, U.S. federal
withholding taxes with respect to such distributions and proceeds will be required to seek a refund
from the Internal Revenue Service to obtain the benefit or such exemption or reduction.
Non-Dividend Distributions. Unless (A) our shares of beneficial interest constitute a USRPI or
(B) either (1) if the non-U.S. shareholders investment in our shares of beneficial interest is
effectively connected with a U.S. trade or business conducted by such non-U.S. shareholder (in
which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain) or (2) if the non-U.S. shareholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and has a tax home in
the United States (in which case the non-U.S. shareholder will be subject to a 30% tax on the
individuals net capital gain for the year), distributions by us which are not dividends out of our
earnings and profits will not be subject to U.S. federal income tax. If it cannot be determined at
the time at which a distribution is made whether or not the distribution will exceed current and
accumulated earnings and profits, the distribution will be subject to withholding at the rate
applicable to dividends. However, the non-U.S. shareholder may seek a refund from the IRS of any
amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of
our current and accumulated earnings and profits. If our shares of beneficial interest constitute a
USRPI, as described below, distributions by us in excess of the sum of our earnings and profits
plus the non-U.S. shareholders adjusted tax basis in our shares of beneficial interest will be
taxed under the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, at the rate of tax,
including any applicable capital gains rates, that would apply to a U.S. shareholder of the same
type (e.g., an individual or a corporation), and the collection of the tax will be enforced by a
withholding at a rate of 10% of the amount by which the distribution exceeds the shareholders
share of our earnings and profits.
Capital Gain Dividends. Under FIRPTA, a distribution made by us to a non-U.S. shareholder, to
the extent attributable to gains from dispositions of USRPIs held by us directly or through
pass-through subsidiaries, or USRPI capital gains, will be considered effectively connected with a
U.S. trade or business of the non-U.S. shareholder and will be subject to U.S. federal income tax
at the rates applicable to U.S. shareholders, without regard to whether the distribution is
designated as a capital gain dividend. In addition, we will be required to withhold tax equal to
35% of the amount of capital gain dividends to the extent the dividends constitute USRPI capital
gains. Moreover, if a non-U.S. shareholder disposes of our shares of beneficial interest during the
30-day period preceding a dividend payment by us, and such non-U.S. shareholder (or a person
related to such non-U.S. shareholder) acquires or enters into a contract or option to acquire our
shares of beneficial interest within 61 days of the first day of the 30-day period described above,
and any portion of such dividend payment would, but for the disposition, be treated as a USRPI
capital gain to such non-U.S. shareholder, then such non-U.S. shareholder shall be treated as
having USRPI capital gain in an amount that, but for the disposition, would have been treated as
USRPI capital gain. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax
when received by a non-U.S. shareholder that is a corporation. However, the 35% withholding tax
will not apply to any capital gain dividend with respect to any class of our shares of beneficial
interest which is regularly traded on an established securities market located in the United States
if the non-U.S. shareholder did not own more than 10% (5% for 2015 and prior years) of such class
of shares at any time during the taxable year. Instead any capital gain dividend will be treated as
a distribution subject to the rules discussed above under Taxation of Non-U.S. Shareholders and
Ordinary Dividends. Also, the branch profits tax will not apply to such a distribution.
A distribution is not a USRPI capital gain if we held the underlying asset solely as a creditor,
although the holding of a shared appreciation mortgage loan would not be solely as a creditor.
Capital gain dividends received by a non-U.S. shareholder from a REIT that are not USRPI capital
gains generally are not subject to U.S. federal income or withholding tax, unless either (1) if the
non-U.S. shareholders investment in our shares of beneficial interest is effectively connected
with a U.S. trade or business conducted by such non-U.S. shareholder (in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders with respect to such
gain) or (2) if the non-U.S. shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a tax home in the United
States (in which case the non-U.S. shareholder will be subject to a 30% tax on the individuals net
capital gain for the year).
Dispositions of Our Shares of Beneficial Interest. Unless our shares of beneficial interest
constitute a USRPI, a sale of the shares by a non-U.S. shareholder generally will not be subject to
U.S. federal income taxation under FIRPTA. The shares will not be treated as a USRPI if less than
50% of our assets throughout a prescribed testing period consist of interests in real property
located within the United States, excluding, for this purpose, interests in real property solely in
a capacity as a creditor. We do not expect that more than 50% of our assets (including our
proportionate share of TRFTs assets) will consist of interests in real property located in the
United States.
In addition, our shares of beneficial interest will not constitute a USRPI if we are a
domestically controlled REIT. A domestically controlled REIT is a REIT in which, at all times
during a specified testing period, less than 50% in value of its outstanding shares is held
directly or indirectly by non-U.S. shareholders. We believe that we are, and expect us to continue
to be, a domestically controlled REIT and, therefore, the sale of our shares of beneficial interest
should not be subject to taxation under FIRPTA. However, because our shares of beneficial interest
are widely held and publicly traded, we cannot assure investors that we are or will remain a
domestically controlled REIT. Even if we do not qualify as a domestically controlled REIT, a
non-U.S. shareholders sale of our shares of beneficial interest nonetheless will generally not be
subject to tax under FIRPTA as a sale of a USRPI, provided that (a) our shares of beneficial
interest owned are of a class that is regularly traded, as defined by the applicable Treasury
regulations, on an established securities market, and (b) the selling non-U.S. shareholder owned,
actually or constructively, 10% (5% for 2015 and prior years) or less of our outstanding shares of
that class at all times during a specified testing period.
If gain on the sale of our shares of beneficial interest were subject to taxation under
FIRPTA, the non-U.S. shareholder would be subject to the same treatment as a U.S. shareholder with
respect to such gain, subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals, and the purchaser of the shares could be
required to withhold 10% of the purchase price and remit such amount to the IRS.
Gain from the sale of our shares of beneficial interest that would not otherwise be subject to
FIRPTA will nonetheless be taxable in the United States to a non-U.S. shareholder in two cases:
(a) if the non-U.S. shareholders investment in our shares of beneficial interest is effectively
connected with a U.S. trade or business conducted by such non-U.S. shareholder, the
non-U.S. shareholder will be subject to the same treatment as a U.S. shareholder with respect to
such gain, or (b) if the non-U.S. shareholder is a nonresident alien individual who was present in
the United States for 183 days or more during the taxable year and has a tax home in the United
States, the nonresident alien individual will be subject to a 30% tax on the individuals capital
gain.
Backup Withholding and Information Reporting
We will report to our U.S. shareholders and the IRS the amount of dividends paid during each
calendar year and the amount of any tax withheld. Under the backup withholding rules, a
U.S. shareholder may be subject to backup withholding with respect to dividends paid unless the
holder is a corporation or comes within other exempt categories and, when required, demonstrates
this fact or provides a taxpayer identification number or social security number, certifies as to
no loss of exemption from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A U.S. shareholder that does not provide his or her correct taxpayer
identification number or social security number may also be subject to penalties imposed by the
IRS. In addition, we may be required to withhold a portion of capital gain distribution to any
U.S. shareholder who fails to certify its non-foreign status.
We must report annually to the IRS and to each non-U.S. shareholder the amount of dividends
paid to such holder and the tax withheld with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in which the non-U.S.
shareholder resides under the provisions of an applicable income tax treaty. A non-U.S. shareholder
may be subject to backup withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of our shares of beneficial interest within the United
States is subject to both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a non-U.S. shareholder (and the payor does not have
actual knowledge or reason to know that the beneficial owner is a U.S. person) or the holder
otherwise establishes an exemption. Payment of the proceeds of a sale of our shares of beneficial
interest conducted through certain United States related financial intermediaries is subject to
information reporting (but not backup withholding) unless the financial intermediary has
documentary evidence in its records that the beneficial owner is a non-U.S. shareholder and
specified conditions are met or an exemption is otherwise established.
Backup withholding is not an additional tax. Any amounts withheld under the backup
withholding rules may be claimed as a refund or a credit against such holders U.S. federal income
tax liability, provided the required information is furnished to the IRS.
State, Local and Foreign Taxes
We and our subsidiaries (including our REIT affiliates and their subsidiaries) and our
shareholders may be subject to state, local or foreign taxation in various jurisdictions, including
those in which we or they transact business, own property or reside. We and the REIT affiliates may
own interests in properties located in a number of jurisdictions, and may be required to file tax
returns in certain of those jurisdictions. The state, local or foreign tax treatment of any of our
REIT affiliates, us and our shareholders may not conform to the U.S. federal income tax treatment
discussed above. Any foreign taxes incurred by us or the REIT affiliates would not pass through to
our shareholders as a credit against their U.S. federal income tax liability. Prospective
shareholders should consult their tax advisors regarding the application and effect of state, local
and foreign income and other tax laws on an investment in our shares of beneficial interest.
U.S. expatriates;
persons who mark-to-market our shares of beneficial interest;
subchapter S corporations;
U.S. shareholders (as defined below) whose functional currency is not the U.S.
dollar;
financial institutions;
insurance companies;
broker-dealers;
regulated investment companies;
trusts and estates;
holders who receive our shares of beneficial interest through the exercise of
employee shares options or otherwise as compensation;
persons holding our shares of beneficial interest as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated investment;
persons subject to the alternative minimum tax provisions of the Internal Revenue
Code;
persons holding our shares of beneficial interest through a partnership or similar
pass-through entity;
persons holding a 10% or more (by vote or value) beneficial interest in RAIT; and,
except to the extent discussed below:
tax-exempt organizations; and
non-U.S. shareholders (as defined below).
Each of RAIT and the REIT affiliates will be taxed at regular corporate rates on
any undistributed income, including undistributed net capital gains.
We and the REIT affiliates may be subject to the alternative minimum tax on its
items of tax preference, if any.
If we or the REIT affiliates have net income from prohibited transactions, which
are, in general, sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than foreclosure property, such
income will be subject to a 100% tax. See Prohibited Transactions and Foreclosure
Property, below.
If we or the REIT affiliates elect to treat property that we acquire in connection
with a foreclosure of a mortgage loan or from certain leasehold terminations as
foreclosure property. We or the REIT affiliates may thereby avoid (a) the 100% tax on
gain from a resale of that property (if the sale would otherwise constitute a prohibited
transaction) and (b) the inclusion of any income from such property not qualifying for
purposes of the REIT gross income tests discussed below, but the income from the sale or
operation of the property may be subject to corporate income tax at the highest
applicable rate (currently 35%).
If we or the REIT affiliates fail to satisfy the 75% gross income test or the 95%
gross income test, as discussed below, but our failure is due to reasonable cause and not
due to willful neglect, and we or the REIT affiliates, as the case may be, nonetheless
maintain our or their REIT qualification because other requirements are met, we or the
REIT affiliates will be subject to a 100% tax on an amount equal to the greater of the
amount by which we or the REIT affiliates fail the 75% gross income test or the 95% gross
income test, as the case may be, multiplied by (b) a fraction intended to reflect our or
the REIT affiliates profitability.
If we or the REIT affiliates fail to satisfy any of the REIT asset tests, as
described below, other than in the case of a de minimis failure of the 5% or 10% asset
tests, but such failure is due to reasonable cause and not due to willful neglect and we
or the REIT affiliates nonetheless maintain our or its REIT qualification because of
specified cure provisions, we or the REIT affiliates will be required to pay a tax equal
to the greater of $50,000 or the highest corporate tax rate (currently 35%) of the net
income generated by the non-qualifying assets during the period in which we or the REIT
affiliates failed to satisfy the asset tests.
If we or the REIT affiliates fail to satisfy any provision of the Internal Revenue
Code that would result in our or its failure to qualify as a REIT (other than a gross
income or asset test requirement) and the violation is due to reasonable cause and not
due to willful neglect, we or the REIT affiliates may retain our REIT qualification but
we or the REIT affiliates will be required to pay a penalty of $50,000 for each such
failure.
If we or the REIT affiliates fail to distribute during each calendar year at least
the sum of (a) 85% of our or its respective REIT ordinary income for such year, (b) 95%
of our or the REIT affiliates REIT capital gain net income for such year and (c) any
undistributed taxable income from prior periods, or the required distribution, we or
the REIT affiliates, as the case may be, will be subject to a 4% excise tax on the excess
of the required distribution over the sum of (1) the amounts actually distributed (taking
into account excess distributions from prior years), plus (2) retained amounts on which
income tax is paid at the corporate level.
We or the REIT affiliates may be required to pay monetary penalties to the IRS in
certain circumstances, including if we or the REIT affiliates fail to meet record-keeping
requirements intended to monitor our and the REIT affiliates compliance with rules
relating to the composition of our and the REIT affiliates shareholders, as described
below in Requirements for QualificationGeneral.
A 100% excise tax may be imposed on some items of income and expense that are directly
or constructively paid between us and our TRSs and between TRFT and its TRSs (as
described below) if and to the extent that the IRS successfully adjusts the reported
amounts of these items.
If we or the REIT affiliates acquire appreciated assets from a corporation that is
not a REIT in a transaction in which the adjusted tax basis of the assets in our or the
REIT affiliates hands is determined by reference to the adjusted tax basis of the assets
in the hands of the non-REIT corporation, we or the REIT affiliates, as the case may be,
will be subject to tax on such appreciation at the highest corporate income tax rate then
applicable if we subsequently recognize gain on a disposition of any such assets during
the 5-year period following their acquisition from the non-REIT corporation. The results
described in this paragraph assume that the non-REIT corporation will not elect, in lieu
of this treatment, to be subject to an immediate tax when the asset is acquired by us or
the REIT affiliates.
We will generally be subject to tax on the portion of any excess inclusion income
derived from an investment by us or the REIT affiliates in residual interests in real
estate mortgage investment conduits, or REMICs, to the extent our shares are held in
record name by specified tax-exempt organizations not subject to tax on unrelated
business taxable income, or UBTI. Similar rules apply if we or the REIT affiliates own an
equity interest in a taxable mortgage pool. To the extent that we own a REMIC residual
interest or a taxable mortgage pool through a TRS, we will not be subject to this tax.
For a discussion of excess inclusion income, see Effect of Subsidiary
EntitiesTaxable Mortgage Pools and Excess Inclusion Income.
We may elect to retain and pay income tax on its net long-term capital gain. In
that case, a shareholder would include its proportionate share of our undistributed
long-term capital gain (to the extent we make a timely designation of such gain to the
shareholder) in its income, would be deemed to have paid the tax that we paid on such
gain, and would be allowed a credit for its proportionate share of the tax deemed to have
been paid, and an adjustment would be made to increase the shareholders basis in its
shares.
We or the REIT affiliates may have subsidiaries or own interests in other
lower-tier entities that are C corporations, including our or the REIT affiliates
domestic TRSs, the earnings of which will be subject to U.S. federal corporate income
tax.
In addition, we, the REIT affiliates and our subsidiaries may be subject to a
variety of taxes other than U.S. federal income tax, including payroll taxes and state,
local, and foreign income, property and other taxes on assets, income and operations. As
further described below, RAIT TRS, LLC, or RAIT TRS, Taberna Capital Management, LLC, or
TCM, RAIT Funding LLC, or RAIT Funding, and other domestic TRSs will be subject to U.S.
federal corporate income tax on their taxable income. We and the REIT affiliates could
also be subject to tax in situations and on transactions not presently contemplated.
substantially all of its assets consist of debt obligations or interests in debt
obligations;
more than 50% of those debt obligations are real estate mortgage loans or interests
in real estate mortgage loans as of specified testing dates;
the entity has issued debt obligations that have two or more maturities; and
the payments required to be made by the entity on its debt obligations bear a
relationship to the payments to be received by the entity on the debt obligations that
it holds as assets.
90% of our REIT taxable income (computed without regard to its
deduction for dividends paid and our net capital gains); and
90% of the net income (after tax), if any, from foreclosure property
(as described below); minus
a citizen or resident of the United States;
a corporation (including an entity treated as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the United States or of a
political subdivision thereof (including the District of Columbia);
an estate whose income is subject to U.S. federal income taxation regardless of its
source; or
any trust if (1) a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the authority to control
all substantial decisions of the trust or (2) it has a valid election in place to be
treated as a U.S. person.