Note H—Variable Interest Entity (VIE)

VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

The most common type of VIE is a special purpose entity (SPE). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. The basic SPE structure involves a company selling assets to the SPE with the SPE funding the purchase of those assets by issuing securities to investors. The agreements that govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets. The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company holds variable interests in Walnut Street 2014-1 LLC (WS 2014), accounted for as a debt instrument for which the Company elected the fair value option. The debt acquired was a 49% equity interest in WS 2014 as well as 100% of the A-Notes and 49% of the B-Notes that WS 2014 issued in a securitization transaction. The assets within the securitization consisted of loans and loan collateral from the Company’s discontinued loan portfolio. The variable interests relate to the economic interests held by the Company in WS 2014 and the asset management contract between the Company and WS 2014. The Company is not the primary beneficiary, as it does not have the controlling financial interest in WS 2014, and therefore does not consolidate WS 2014. At December 31, 2019, the Company’s investment in WS 2014 was $39.2 million and was classified as an investment in unconsolidated entity in the consolidated balance sheet. The Company’s remaining exposure to loss is equal to the balance of the Company’s interest, or $39.2 million.

The following table shows the total unpaid principal amount of assets held in WS 2014, shown as commercial and other, at December 31, 2019 and 2018 (in thousands). Continuing involvement for WS 2014 includes servicing the loans and holding senior interests or subordinated interests. It also separately shows the Company’s interests in CRE1, CRE2, CRE3, CRE4, CRE5 and CRE6, which represent single securities purchased by the Company in each of the securitizations for which the Company generated all of the commercial mortgage-backed loan collateral.


	December 31, 2019
	Principal amount outstanding			The Company's
			Assets held in	interest
	Total assets	Assets held in	nonconsolidated	in securitized
	held by	consolidated	VIEs with	assets in
	securitization	securitization	continuing	nonconsolidated
	VIEs (a)	VIEs	involvement	VIEs (b)
Commercial and other	$ 56,661	$ -	$ 56,661	$ 39,154
Commercial mortgage-backed securities
CRE1 (c)	52,143	-	52,143	16,794
CRE2	134,216	-	134,216	12,570
CRE3	221,285	-	221,285	19,861
CRE4	296,827	-	296,827	29,612
CRE5	494,567	-	494,567	38,496
CRE6	775,557	-	775,557	51,558

	December 31, 2018
	Principal amount outstanding			The Company's
			Assets held in	interest
	Total assets	Assets held in	nonconsolidated	in securitized
	held by	consolidated	VIEs with	assets in
	securitization	securitization	continuing	nonconsolidated
	VIEs (a)	VIEs	involvement	VIEs
Commercial and other	$ 152,893	$ -	$ 152,893	$ 59,273
Commercial mortgage-backed securities
CRE1	126,393	-	126,393	16,687
CRE2	238,231	-	238,231	16,565
CRE3	284,069	-	284,069	24,390
CRE4	336,374	-	336,374	32,513

(a) Consists of notes backed by commercial loans predominantly secured by real estate.
(b) For securities purchased from securitizations which comprise the Company's interest: CRE1 and CRE2 are non-rated and CRE3, CRE4, CRE5 and CRE6 are "A-" rated as of December 31, 2019. CRE1, CRE2, CRE3, CRE4, and CRE5 are valued by discounted cash flow analysis and CRE6 is priced by a pricing service.
(c) The Company's $16.8 million interest would have been repaid in October 2019 had remaining underlying loan collateral been paid as agreed. However, remaining collateral comprised of one commercial real estate owned property, a second loan in process of collection and an extended loan, are instead in the process of disposition. While the estimated value of these sources of repayment exceeds the amount to be repaid to the Company and other applicable bondholders, there can be no assurance that the Company's interest will be fully repaid or as to the timing of repayment.