SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
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(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 317-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
------------------------------------------
Shares of Beneficial Interest
Name of each exchange on which registered:
------------------------------------------
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No ___
The approximate aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant as of December 31, 2004
was approximately $1,231,926,000, based on a price of $24.44 per share, the
closing sales price for the Registrant's shares of beneficial interest on the
American Stock Exchange on that date.
As of March 31, 2005 there were 51,323,062 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Index to exhibits may be found on page 119
Page 1 of 148
TABLE OF CONTENTS
CHARTERMAC
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business 4
Risk Factors 11
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Shareholders 26
PART II
Item 5. Market for Registrant's Common Equity and Related Share Matters 27
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 45
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 99
Item 9A. Disclosures Controls and Procedures 99
PART III
Item 10. Directors and Executive Officers of the Registrant 100
Item 11. Executive Compensation 107
Item 12. Security Ownership of Certain Beneficial Owners and Management 114
Item 13. Certain Relationships and Related Transactions 116
Item 14. Principal Accounting Fees and Services 117
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 119
SIGNATURES 123
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements. These
forward-looking statements are not historical facts, but rather our beliefs and
expectations and are based on our current expectations, estimates, projections,
beliefs and assumptions about our Company and industry. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. Some of
these risks include, among other things:
o adverse changes in the real estate markets including, among other
things, competition with other companies;
o interest rate fluctuations;
o general economic and business conditions, which will, among other
things, affect the availability and credit worthiness of prospective
tenants, lease rents and the terms and availability of financing for
properties financed by revenue bonds owned by us;
o risk of real estate development and acquisition;
o environment/safety requirements;
o changes in applicable laws and regulations;
o our tax treatment, the tax treatment of our subsidiaries and the tax
treatment of our investments; and
o risk of default associated with the revenue bonds and other securities
held by us or our subsidiaries.
We caution you not to place undue reliance on these forward-looking
statements, which reflect our view only as of the date of this annual report.
PART I
Item 1. Business.
General
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CharterMac (which may be referred to as the "Company", "we" or "us"), through
its subsidiaries, is one of the nation's leading full-service real estate
finance companies, providing capital solutions to developers and owners of
properties as well as quality investment products to institutional and retail
investors. Through our subsidiary operations, we offer financing for every part
of a property's capital structure with a core focus on multifamily rental
housing. We commenced operations in October 1997 and have since expanded through
several acquisitions.
Additional Information
- ----------------------
Additional information about CharterMac beyond what is included in this Form
10-K is available at www.chartermac.com. We make available, free of charge, on
or through our website:
o our annual report on Form 10-K;
o our quarterly reports in Form 10-Q;
o our current reports of Form 8-K; and
o amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act,
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the Securities and Exchange Commission ("SEC"). Materials
we file with the SEC may also be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. This information may also be
obtained by calling the SEC at 1-800-SEC-0300. The SEC also maintains an
Internet website that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at
www.sec.gov. We will provide a copy of any of the foregoing documents upon
request.
None of the information on our website that is not otherwise expressly set forth
or incorporated by reference in the Form 10-K is a part of this Form 10-K.
Business Overview
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Through our subsidiaries, we are a full-service real estate finance company,
with a strong core focus on the multifamily sector. We have direct financing
relationships with over 800 real estate developers and owners throughout the
country. We operate from a fully integrated real estate platform, which enables
us to originate, underwrite and manage the risk of every transaction in which we
provide debt or equity financing. Our platform offers us several competitive
advantages, including:
o The ability to cross sell our financing products. Frequently on
transactions, we are able to offer one or more pieces of the
property's capital structure.
o The ability to originate the financing wholesale. Our "one stop
shopping" capability enables us to capture substantially all of the
financing fees associated with the transaction.
o The ability to control the credit quality of the underlying property.
By working directly with the property's owner and by risk managing the
underlying asset, our credit losses are extremely low.
Operating Segments
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We operate in four business segments:
1. Portfolio Investing, which includes subsidiaries that invest in
primarily tax-exempt first mortgage revenue bonds issued by various
state or local governments, agencies or authorities and other
investments designed to produce federally tax-exempt income. The
revenue bonds are used to finance the new construction, substantial
rehabilitation, acquisition, or refinancing of affordable multifamily
housing throughout the United States.
4
2. Fund Management, which includes:
o subsidiaries that sponsor real estate equity investment funds
that primarily invest in Low-Income Housing Tax Credit ("LIHTC")
properties. In exchange for sponsoring and managing these funds,
we receive fee income for providing asset management,
underwriting, origination and other services;
o a subsidiary which provides advisory services to other
subsidiaries of ours and to American Mortgage Acceptance Company
("AMAC"), an affiliated, publicly traded real estate investment
trust; and
o subsidiaries that par ticipate in credit enhancement
transactions, including guaranteeing mortgage loans and specified
returns to investors in LIHTC equity funds, in exchange for
guarantee fees.
3. Mortgage Banking, which includes subsidiaries that originate and
service mostly multifamily mortgage loans on behalf of third parties,
primarily:
o the Federal National Mortgage Association ("Fannie Mae");
o the Federal Home Loan Mortgage Corporation ("Freddie Mac");
o the Federal Housing Authority ("FHA"); and
o insurance companies and conduits.
In exchange for these origination and servicing activities, we receive
origination and servicing fees.
4. Variable Interest Entities ("VIEs"), which includes primarily the
LIHTC equity funds we sponsor through the Fund Management segment's
subsidiaries, for which we are the primary beneficiary. For more
information regarding these VIEs, refer to Note 2 to the consolidated
financial statements.
Comparative segment revenues, profits and other financial information for 2004,
2003 and 2002 are presented in Note 19 to the consolidated financial statements.
1. PORTFOLIO INVESTING
We conduct most of our portfolio investing through CharterMac Equity Issuer
Trust ("Equity Issuer"), a subsidiary we formed in 1999.
As of December 31, 2004, our revenue bond portfolio included direct or indirect
interests in revenue bonds with an aggregate fair value of approximately $2.1
billion, secured by affordable multifamily properties containing 46,360 units
located in 27 states and the District of Columbia.
Portfolio Investing generates cash flow from the spread between the interest
earned from our revenue bond portfolio and the cost of capital we use to
purchase the bonds.
We believe we have a competitive advantage in our Portfolio Investing business
due to our "Direct Purchase Program". The traditional methods of financing
affordable multifamily housing with tax-exempt bonds are complex and time
consuming and involve the participation of many intermediaries. Through the
Direct Purchase Program we have streamlined the process by removing all
intermediaries (except for the governmental issuer of the revenue bond) and
enabling the developer to deal directly with one source. Because we purchase our
revenue bonds directly from the governmental issuer, our program eliminates the
need for underwriters and their counsel, rating agencies and costly
documentation. This reduces the financing life cycle, often by several months,
and also reduces the bond issuance costs, usually by 30% or more. By dealing
directly with us, we believe developers feel more confident about the terms and
timing of their financing.
The acquisition of revenue bonds requires capital. In addition to using a
portion of our operating cash flows, we obtain such capital by:
o securitizing many of the bonds we purchase for our portfolio;
o utilizing commercial bank borrowings; and
o issuing equity securities.
5
For more information on our securitization activity, see Note 9 to our
consolidated financial statements. For information regarding issuances of
preferred shares of Equity Issuer and our common and preferred shares, see Notes
13 and 14 to our consolidated financial statements.
2. FUND MANAGEMENT
Our Fund Management segment includes:
o Tax Credit Fund Sponsorship;
o Advisory Services; and
o Credit Enhancement.
TAX CREDIT FUND SPONSORSHIP
- ---------------------------
We conduct our tax credit fund sponsorship activities through Related Capital
Company LLC ("RCC"), which we acquired in November 2003 (see Note 3 to our
consolidated financial statements).
RCC is one of the nation's largest sponsors of LIHTC investment funds, having
raised nearly $7 billion in equity from institutional and retail investors. As a
sponsor of over 270 public and private real estate investment programs, RCC has
provided financing for over 1,100 properties in 45 states, Puerto Rico and the
District of Columbia.
In a typical LIHTC tax credit fund sponsorship program, investors acquire a
direct limited partnership interest in an "upper-tier" investment partnership
through which such investments are made. The investment partnership, in turn,
invests as a limited partner in one or more "lower-tier" operating partnerships
which own and operate the housing projects. Limited partners in the upper-tier
partnerships are most often corporations who are able to utilize the tax
benefits and usually derive limited economic benefit from the investment other
than the expected tax credits and tax losses from the operations of the
lower-tier partnership properties. In some cases, in conjunction with the final
disposition of the property, the limited partners may receive an additional
return.
We often borrow the cash to acquire investments from a warehouse lender. This
arrangement enables us to obtain and hold suitable investments for a fund until
it has admitted investors and obtained investment capital. As a result, we are
better able to provide investment opportunities to the funds we sponsor when
investment capital is available. When we admit investors to a fund, the fund
simultaneously pays us an amount sufficient to enable us to repay the funds we
borrowed from the warehouse lender, and the fund is either admitted as a limited
partner of the lower-tier operating partnership in our place or the warehouse
lender releases its lien on the fund's assets.
Tax credit fund sponsorship generates cash flow predominantly from:
o organization and offering fees we earn in connection with the capital
raising and sponsorship of investment programs, which we receive upon
the closing of a fund;
o fees associated with acquisition activity of each fund we sponsor,
which we receive at the time of the acquisition; and
o partnership management and asset management fees associated with
ongoing administration of investment programs we advise, which we
receive either at the time a fund closes or over several years.
ADVISORY SERVICES
- -----------------
A subsidiary of RCC provides management and advisory services to sister
subsidiaries of CharterMac as well as to AMAC.
Providing services to CharterMac subsidiaries generates cash flows in this
segment from:
o fees associated with acquisition of revenue bonds by the Portfolio
Investing segment, which fees are paid by the borrower and received by
us when we acquire the revenue bond;
o fees associated with asset management services provided to the
Portfolio Investing segment with regard to the investments it holds;
and
o fees associated with the origination of certain mortgages by CMC.
6
While some of these fees are eliminated in consolidation, our segment results
presented elsewhere in this document reflect these fees as earned.
AMAC is a publicly traded real estate investment trust that focuses on providing
mezzanine and bridge financing to commercial real estate properties. In addition
to providing bridge and mezzanine loans, AMAC also invests in government-insured
debt securities that are predominantly secured by first mortgages on multifamily
properties. As of December 31, 2004, AMAC had $349.0 million in assets and a
total market capitalization of approximately $366.0 million.
Providing management to AMAC generates cash flow predominantly from:
acquisition fees paid by the borrowers upon the closing of a loan that AMAC
originates; asset management fees based upon AMAC's total assets, which are
paid on an annual basis; and incentive management fees received annually if
AMAC achieves certain earnings and distribution benchmarks.
CREDIT ENHANCEMENT
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We conduct our credit enhancement business primarily through CharterMac
Corporation ("CM Corp."), a subsidiary we formed in July 2001. Guarantees we
issue fall into several categories:
o guaranteeing a specified rate of return during the life of an LIHTC
fund for which we receive a fee (payable in three installments) that
we recognize over the guarantee period. These guarantees may be for
the construction period or the operation period of a pool of
properties. This normally involves backing up a primary guarantors'
obligations;
o guaranteeing a developer's credit during the construction phase of a
property, for which we receive a fee at the inception of the deal
which we recognize over the construction phase of the property;
o guaranteeing a developer's credit following the stabilization of a
property for the operational period for the pool of properties, for
which we receive a fee at the inception of the deal and recognize over
the estimated operational period of the property; and
o guaranteeing borrowers' obligations on either individual or mortgage
pools for a fee.
We will continue to seek new sources of revenue using our financial guarantee
capabilities and expanding our credit enhancement activities.
3. MORTGAGE BANKING
We conduct our mortgage-banking activity through CharterMac Mortgage Capital
Corp. ("CMC"), previously named PW Funding Inc. As of December 31, 2004, we
owned 87% of CMC, having first acquired 80% in 2001. In the first quarter of
2005, we acquired the remaining 13%.
CMC is a full-service, direct mortgage banking firm specializing in originating,
underwriting, and servicing mortgage loans for conventional apartment
properties, affordable housing, senior housing, and commercial properties
nationwide.
CMC is one of 26 approved Delegated Underwriters and Servicers ("DUSTM") in
Fannie Mae's principal multifamily loan program. Fannie Mae delegates the
responsibility for originating, underwriting, closing and delivering multifamily
mortgages to the DUS lenders and the DUS lenders share the risk of loss with
Fannie Mae and service the loans for a fee. Under the DUS program, upon
obtaining a commitment from Fannie Mae with regard to a particular loan, Fannie
Mae commits to acquire the mortgage loan based upon our underwriting, and we
agree to bear a portion of the risk of potential losses in the event of a
default. Fannie Mae commitments may be made to acquire and/or credit enhance the
mortgage loan from CMC for cash or in exchange for a mortgage-backed security
backed by the mortgage loan.
In addition to DUS originations, our mortgage banking activities include:
o closing and delivering multifamily mortgages to Freddie Mac as a
Freddie Mac Program Plus(R) Seller/Servicer. Similar to the DUS
program with Fannie Mae, as a Program Plus lender, we originate
mortgages based on commitments from Freddie Mac, and we then sell
those loans to Freddie Mac. Unlike the DUS program, however, there is
not a loss sharing aspect to the transactions;
7
o acting as an approved seller/servicer for the Government National
Mortgage Association ("Ginnie Mae");
o originating and servicing loans as a leading commercial loan
correspondent for Wall Street conduits and life insurance companies;
o acting as an approved loan processor/servicer for the FHA; and
o sub-servicing loans originated by other firms.
Mortgage loans we originate for Fannie Mae, Freddie Mac or Ginnie Mae are closed
in CMC's name, using cash borrowed from a warehouse lender. Approximately one
week to one month following closing of a loan, the loan documentation and an
assignment are delivered to the mortgagor, or a document custodian on its
behalf, and the cash purchase price or mortgage-backed security is delivered to
us. We use the cash received to repay the warehouse loans or we sell the
mortgage-backed securities for cash pursuant to prior agreements and use that
cash to repay the warehouse loans. We do not retain any interest in any of the
mortgage loans except for mortgage servicing rights ("MSRs") and certain
contingent liabilities under the loss-sharing arrangement with Fannie Mae.
Our mortgage banking activities generate cash flow predominantly from:
o origination fees;
o ongoing fees for servicing a majority of the loans we originate as
well as other loans that we sub-service. Servicing fees include a risk
sharing premium for loans originated for Fannie Mae;
o trading profits upon sale of the mortgage loans; and
o the interest rate spread during the periods prior to settlement of the
sale of mortgage loans.
During 2004, we originated loans totaling approximately $1.0 billion and, at
December 31, 2004, serviced a loan portfolio of approximately $4.1 billion.
In the first quarter of 2005, we acquired Capri Capital Finance ("CCF") and
combined CCF with CMC. For a description of this transaction, see Note 21 to the
consolidated financial statements and MANAGEMENT'S DISCUSSION AND ANALYSIS -
SUBSEQUENT EVENTS.
4. VARIABLE INTEREST ENTITIES ("VIES")
In accordance with accounting rules requiring the consolidation of VIEs, we
consolidate the balance sheets and operations of numerous funds that we sponsor
and other partnerships that we indirectly manage. While we have no equity
interest in these VIEs, we are considered to control them (according to
accounting rules) for reasons associated with our role in managing them and the
nominal equity interests of our executive officers. While our Fund Management
and Portfolio Investing segments earn fees or interest from these VIEs, we
consider them separately for management purposes. For a more detailed
discussion, see Note 2 to the consolidated financial statements.
Competition
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From time to time, we may be in competition with private investors, regional
investment banks, mortgage banking companies, lending institutions,
quasi-governmental agencies such as Fannie Mae and Freddie Mac, mutual funds,
domestic and foreign credit enhancers, bond insurers, investment partnerships
and other entities with objectives similar to ours. Although we operate in a
competitive environment, competitors focused on providing all of our
custom-designed programs are relatively few. Specifically:
o our Portfolio Investing business competes directly with regional
investment banks, other real estate finance companies and others
seeking to invest in tax-exempt revenue bonds;
o our Fund Management business competes directly with others seeking to
raise capital for tax advantaged funds, some of which offer credit
enhancement for their funds, regional and national banks that directly
acquire LIHTC investments and other real estate fund management
companies; and
o our Mortgage Banking business is in competition with 25 other licensed
DUS lenders which originate multifamily mortgages on behalf of Fannie
Mae, 34 other Freddie Mac Program Plus lenders, as well as numerous
banks, finance companies and others that originate mortgages for
resale.
8
We face many competitors, some of whom have substantially greater financial and
operational resources than we do. In addition, affiliates of some of our
managing trustees have formed, and may continue to form, various entities to
engage in businesses that may be competitive with us, but, at this time, there
is no other such business that has all of our financing products. See RISKS
RELATED TO INVESTING IN OUR COMPANY below. However, we feel we can effectively
compete due to our on-going relationships with certain developers. Due to our
unified product platform, we believe we are better positioned to offer a full
range of financing programs on both affordable and market-rate multifamily
housing. Our origination groups are able to cross market all of our financing
products, thereby offering developers a single, streamlined execution.
We face increasing levels of competition both in terms of new competitors and
new competing products. We continually seek to develop new products that will
complement our real estate financing products.
Financing and Equity
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As noted in the segment descriptions above, we typically fund the expansion of
our business through a combination of operating cash flows, short-term
borrowings, securitizations, long-term borrowings and equity issuances. These
funding vehicles are described in detail in MANAGEMENT'S DISCUSSION AND ANALYSIS
- - LIQUIDITY AND CAPITAL RESOURCES and in Notes 9, 10, 13 and 14 to our
consolidated financial statements.
Tax Matters
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We are a Delaware statutory trust and a significant portion of our revenue is
non-taxable. Further, we (the parent trust) and many of our subsidiaries
(including all that constitute our Portfolio Investing segment) are partnerships
that are not subject to income taxes. We pass along our income, including
federally tax-exempt income to our shareholders for inclusion in their tax
returns. We derive a substantial portion of our income from ownership of first
mortgage "Private Activity Bonds." The interest from these bonds is generally
tax-exempt from regular federal income tax. However, the Tax Reform Act of 1986
classified this type of interest for bonds issued after August 7, 1986 as a tax
preference item for alternative minimum tax ("AMT") purposes. The percentage of
our tax-exempt interest income subject to AMT was approximately 93% for the year
ended December 31, 2004, compared to 88% in 2003 and 85% in 2002. As a result of
AMT, the percentage of our income that is exempt from federal income tax may be
different for each shareholder.
With regard to our revenue bond investing and tax credit fund sponsorship, we
operate in a regulatory environment governed primarily by two sections of the
Internal Revenue Code of 1986 (the "Code") relating to affordable housing:
o Section 142(d), which governs the issuance of federally tax-exempt
revenue bonds for affordable multifamily housing to be owned by
private, for-profit developers; and
o Section 42, which authorizes federal LIHTCs for qualifying affordable
housing properties.
TAX-EXEMPT FINANCING
Section 142(d) provides for the issuance of federally tax-exempt revenue bonds,
the proceeds of which are to be loaned to private developers for the new
construction or acquisition and rehabilitation of multifamily rental housing.
Under the Code, in order to qualify for federally tax-exempt financing, certain
ongoing requirements must be complied with on a continual basis. The principal
requirement is that the property be operated as a rental property and that
during the Qualified Project Period (defined below) at least either
o 20% of the units must be rented to individuals or families whose
income is less than 50% of the area median gross income (the "20/50
test"); or
o 40% of the units must be rented to individuals or families whose
income is less than 60% of the area median gross income (the "40/60
test");
in each case with adjustments for family size. The Qualified Project Period
begins when 10% of the units in the property are first occupied and ends on the
latest of the date:
(i) which is 15 years after 50% of the units are occupied;
(ii) on which all the bonds have been retired; or
9
(iii)on which any assistance provided under Section 8 of the U.S. Housing
Act of 1937 terminates.
If these requirements are not complied with on a continual basis interest on the
revenue bonds could be determined to be includable in gross income,
retroactively to the date such bonds were issued. There is no federal statutory
or regulatory limit on the amount of rent that may be charged. The availability
of federally tax-exempt financing for affordable multifamily housing to be owned
by private, for-profit developers in each state is limited by an annual volume
cap contained in Section 146 of the Code. At the end of 2000, Congress enacted
legislation which increased the volume cap by 25% in both 2001 and 2002 and
thereafter as indexed for inflation.
Bonds issued for affordable multifamily housing properties must compete with all
other types of private activity bonds (other than private activity bonds issued
for qualifying Section 501(c)(3) organizations) for an allocation of a state's
available volume cap. Non-profit organizations described in Section 501(c)(3) of
the Code whose charitable purpose is to provide low income housing may also
avail themselves of federally tax-exempt financing to construct or acquire and
rehabilitate affordable multifamily housing properties. Revenue bonds for such
charities are governed by Section 145 of the Code and may be issued without
regard to the statewide volume cap that applies to for-profit developers. Under
Section 145 of the Code at least 95% of the proceeds of the bond issue must be
used in a manner that furthers the charitable purpose of the Section 501(c)(3)
organization, or a related purpose. In Revenue Procedure 96-32, the IRS
promulgated a non-exclusive safe harbor for Section 501(c)(3) organizations
whose charitable purpose is to provide affordable housing: if either the 20/50
or 40/60 tests described above are met and, in addition, at least 75% of all
units are rented to families whose income does not exceed 80% of area median
gross income (adjusted for family size) and the Section 501(c)(3) organization
charges tenants "affordable rents", the proceeds of a revenue bond issue will be
treated as being used to further the Section 501(c)(3) organization's charitable
purpose.
FEDERAL LIHTCS
Section 42 of the Code authorizes federal LIHTCs for affordable multifamily
rental housing. Under this program, a project either receives an allocation of
federal LIHTCs from an agency designated by the government of the state in which
the project is located or the project is entitled to the LIHTCs by reason of its
being financed by volume cap revenue bonds. There are two types of credits:
o 4% credits - for new buildings and existing buildings financed with
revenue bonds that receive an allocation of volume cap, or for new and
existing buildings financed with below-market federal financing that
receive an allocation of federal LIHTCs from state agencies; and
o 9% credits - for new buildings that receive an allocation of federal
LIHTCs from state agencies.
The credits are taken over a period of 10 years, which can span over an 11-year
operating period. The credit amount is based on the qualified basis of each
building, which is based upon the adjusted basis of the building multiplied by
the percentage of units in the building leased to low-income tenants.
In order to qualify for the federal LIHTC, the property must comply with either
of the 20/50 or 40/60 tests that apply to tax-exempt bonds (see TAX-EXEMPT
FINANCING above). However, in addition, the amount of rent that may be charged
to qualifying low-income tenants cannot exceed 30% of the "imputed income" for
each unit, i.e., 30% of the imputed income of a family earning 50% or 60% of
area median income, as adjusted for family size. Failure to comply continuously
with these requirements throughout the fifteen year recapture period could
result in a recapture of the federal LIHTCs. In addition, if the rents from the
property are not sufficient to pay debt service on the revenue bonds or other
financing secured by the property and a default ensues, the initial borrower
could lose ownership of the project as the result of foreclosure of the mortgage
securing the bonds. In such event, the initial equity investors would no longer
be entitled to claim the federal LIHTCs, but the foreclosing lender could claim
the remaining LIHTCs provided the project continues to be operated in accordance
with the requirements of Section 42. As a result, there is a strong incentive
for the federal LIHTC investor to ensure that the development is current on debt
service payments by making additional capital contributions or otherwise.
With respect to most of the properties that secure our revenue bonds, all the
multifamily units are rented to individuals or families at 60% of area median
income and, thus, 100% of the qualified basis may be used to determine the
amount of the federal LIHTC. This maximizes the amount of equity raised from the
purchasers of the federal LIHTCs for each development and provides for the
maximum amount of rent that can be obtained from tenants where there is
currently strong occupancy demand.
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Investors in RCC sponsored funds are usually Fortune 500 corporations that have
projected long-term positive tax positions. These investors generally become
limited partners in the RCC sponsored fund which, in turn, invests as a limited
partner in the developer/owner of the affordable housing property. The RCC
sponsored fund contributes to the developer/owner an amount equal to the present
value of the projected credits and other tax benefits in the form of an up-front
equity contribution to the developer. In the case of properties utilizing 4%
credits, this contribution will usually provide between 25% and 35% of the costs
of the development. For properties utilizing 9% credits, this payment will
usually provide between 45% and 55% of the cost of the development.
Governance
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We are governed by a board of trustees comprised of fifteen managing trustees,
eight of whom are independent. Our board of trustees has six committees:
(1) Audit;
(2) Compensation;
(3) Nominating/Governance;
(4) Capital Markets;
(5) Conflicts; and
(6) Investment.
The Audit, Compensation, Nominating/Governance and Capital Markets committees
consist entirely of independent trustees.
Employees
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We had approximately 300 employees at December 31, 2004, none of whom were
parties to any collective bargaining agreement.
Regulatory Matters
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Our Mortgage Banking business is subject to various governmental and
quasi-governmental regulations. As noted above, CMC is licensed or approved to
service and/or originate and sell mortgage loans under Fannie Mae, Freddie Mac,
Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal
government and Fannie Mae and Freddie Mac are federally-chartered public
corporations. These agencies require CMC to meet minimum net worth and capital
requirements and to comply with other requirements. Mortgage loans made under
these programs are also required to meet the requirements of these programs. In
addition, under Fannie Mae's DUS program, CMC has the authority to originate
loans without a prior review by Fannie Mae and is required to share in the
losses on loans originated under this program. If CMC fails to comply with the
requirements of these programs, the agency can terminate its license or
approval. In addition, Fannie Mae and Freddie Mac have the authority under their
guidelines to terminate a lender's authority to originate and service their
loans for any reason. If CMC's authority is terminated under any of these
programs, it would prevent CMC from originating or servicing loans under that
program. We were required to guarantee the obligations under these programs as a
condition for receiving Fannie Mae and Freddie Mac's approval of our
acquisitions of CMC and CCF.
Risk Factors
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As with any business, our Company faces a number of risks. If any of the
following risks occur, our business, prospects, results of operations and
financial condition would likely suffer. We have grouped these risk factors into
several categories, as follows:
1. General Risks Related to Our Business
2. Risks Related to Our Portfolio Investing Business
3. Risks Related to Our Fund Management Business
4. Risks Related to Our Mortgage Banking Business
5. Risks Related to Application of Tax Laws
6. Risks Related to Investing in Our Company
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1. GENERAL RISKS RELATED TO OUR BUSINESS
THERE ARE RISKS ASSOCIATED WITH THE PROPERTIES OUR PRODUCTS FINANCE THAT COULD
ADVERSELY AFFECT OUR EARNINGS
Through our taxable and tax-exempt subsidiaries, we derive a large portion of
our income by financing real estate through:
o investing in taxable and tax-exempt bonds secured by residential and
rental properties;
o sponsoring funds that provide equity to such properties; and
o originating and servicing mortgages on such properties.
In many cases, we are both the sponsor of the fund and the holder of the debt
which is secured by the property which is indirectly owned by the fund. In
addition, we also issue guarantees on behalf of developers, guarantee investment
returns to the investors in certain equity funds we sponsor and issue other
guarantees associated with the performance of a property.
Our success depends in large part on the performance of the properties which are
the subject of our businesses and, therefore, subjects us to various types and
degrees of risk, including the following:
o the property securing debt might not generate sufficient income to
meet its operating expenses and payments on its related debt;
o the failure of a mortgage obligor to make principal payments on a loan
originated for Fannie Mae could expose us to losses under our risk
sharing agreement;
o local, regional or national economic conditions may limit the amount
of rent that can be charged for rental units at the properties and may
result in a reduction in rent payments or the timeliness of rent
payments or a reduction in occupancy levels;
o federal LIHTCs and local, state and federal housing subsidy or similar
programs which apply to many of the properties impose rent limitations
that could adversely affect the ability to increase rents to generate
the funds necessary to maintain the properties in proper condition,
which is particularly important during periods of rapid inflation or
declining market value of such properties;
o if a bond defaults, the value of the property securing such bond
(plus, for properties that have availed themselves of the federal
LIHTC, the remaining value of such LIHTC) may be less than the
unamortized principal amount of such bond.
o there are certain types of losses (generally of a catastrophic nature,
such as toxic mold or other environmental conditions, earthquakes,
floods, terrorism and wars) which are either uninsurable or not
economically insurable.
o under various laws, ordinances and regulations, an owner or operator
of real estate is liable for damages caused by or the costs of removal
or remediation of certain hazardous or toxic substances released on,
above, under or in such real estate. These laws often impose liability
whether or not the owner knew of, or was responsible for, the presence
of such hazardous or toxic substances. As a result, the entities we
sponsor which own real estate, and the owners of the real estate
securing our investments, could be required to pay for such damages or
removal or remediation costs.
All of these conditions and events may increase the possibility that, among
other things:
o a property owner may be unable to meet its obligations to us as holder
of its debt;
o a fund may not be able to pay our fees;
o a fund may not generate the return that we have guaranteed and we may
be called upon to satisfy the guarantee; and
o we could lose our invested capital and/or anticipated future revenue.
This could decrease the value of our investments, lower the value of assets we
pledge as collateral and affect our net income and cash available for
distribution to shareholders.
WE MAY SUFFER ADVERSE CONSEQUENCES FROM CHANGING INTEREST RATES
Because a large portion of our debt is variable rate, an increase in interest
rates could negatively affect our net income and cash available for distribution
to our shareholders. Additionally, increasing interest rates may:
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o reduce the carrying value of our investments, particularly our
fixed-rate revenue bonds and residual interests in tax-exempt
securitization transactions;
o decrease the amount we could realize on the sale of those investments;
o result in a reduction in the number of properties which are
economically feasible to finance through either tax-exempt financing
or tax credit equity;
o reduce the demand for multifamily tax-exempt and taxable financing,
which could limit our ability to invest in revenue bonds or to
structure transactions;
o increase our borrowing costs;
o restrict our access to capital;
o cause investors to find alternative investments that are more
attractive than the equity funds we sponsor; and
o adversely affect the amount of cash available for distribution to
shareholders.
Since a significant portion of our investments are residual interests in revenue
bonds or other securities whose cash flow is first used to pay senior securities
with short-term floating interest rates, any increase in short-term interest
rates will increase the amount of interest paid on the senior securities and
reduce the cash flow in our Portfolio Investing business. Further, increasing
interest rates may reduce the likelihood of property development or mortgage
refinancing, thereby deceasing the origination volume of in our Mortgage Banking
business.
Conversely, a decrease in interest rates may lead to the refinancing of some of
the debt we own if lockout periods have ended. We may not be able to reinvest
the proceeds of any such refinancing at the same interest rates as the debt
refinanced. Additionally, falling interest rates may prompt historical renters
to become homebuyers, in turn potentially reducing the demand for multifamily
housing.
If a change in interest rates causes the consequences described above, or
otherwise negatively affects us, the result could adversely affect our ability
to generate income or cash flows to make distributions and other payments in
respect of our shares.
THE INABILITY TO MAINTAIN OUR RECURRING FEE ARRANGEMENTS AND TO GENERATE NEW
TRANSACTION FEES COULD HAVE A NEGATIVE IMPACT ON OUR EARNINGS
Two taxable revenue sources in our Fund Management segment are the transaction
fees generated by our sponsorship of new investment programs and recurring fees
payable by existing and future programs. Transaction fees are generally
"up-front" fees that are generated by:
o the sponsorship of new investment programs; and
o upon investment of the capital raised in an investment program.
Recurring fees are generated by the ongoing operation of investment programs we
sponsor. The termination of one or more of these recurring fee arrangements, or
the inability to sponsor new programs which will generate new recurring and
transaction fees, would adversely affect our results of operations and reduce
earnings. There can be no assurance that existing recurring fee arrangements
will not be reduced or terminated or that we will be able to realize revenues
from new investment programs.
Likewise, the two principal revenue streams in our Mortgage Banking business are
fees we earn for originating loans and ongoing fees we earn for servicing loans.
A decline in origination volume or the loss or termination of a servicing
arrangement could adversely affect our results of operations and reduce our
earnings. There can be no assurance that existing recurring fee arrangements
will not be reduced or terminated or that we will be able to realize revenues
from new business.
WE RELY UPON RELATIONSHIPS WITH KEY INVESTORS AND CUSTOMERS WHICH MAY NOT
CONTINUE
We rely upon relationships with key investors and developers. If these
relationships do not continue, or if we are unable to form new relationships,
our ability to generate revenue will be adversely affected. In 2004, five key
investors provided approximately 69.2% of the equity capital raised by tax
credit syndication programs we sponsored, with Fannie Mae and Freddie Mac
together providing approximately 44.9% of the capital. In addition, ten key
developers provided approximately 46.8% of the LIHTC properties for which we
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arranged equity financing in 2004. Further, Fannie Mae and Freddie Mac were the
purchasers of 72.9% of the loans originated by our Mortgage Banking business in
2004.
There can be no assurance that we will be able to continue to do business with
these key investors and developers or that new relationships will be formed. By
reason of their regulated status, certain of our investors have incentives to
invest in our sponsored investment programs in addition to the economic return
from such investments. A change in such regulations could result in
determinations to seek other investment opportunities.
REVENUES FROM OUR FEE-GENERATING ACTIVITIES ARE LESS PREDICTABLE THAN THOSE FROM
OUR REVENUE BOND INVESTMENTS AND COULD RESULT IN A DECREASE IN CASH FLOW,
FLUCTUATIONS IN OUR SHARE PRICE AND A REDUCTION IN THE PORTION OF OUR INCOME
THAT IS TAX-EXEMPT
As of December 31, 2004 in excess of 30% of our GAAP revenue recognized was
derived from fee-generating service activities through our taxable subsidiaries.
Although we expect that these fee-generating businesses will generate
significant growth for us, they are inherently less predictable than the
ownership of interests in revenue bonds, and there can be no assurance that the
fee-generating activities will be profitable. In addition, the earnings and cash
generated by the fund sponsorship portion of our Fund Management business has
historically fluctuated between quarters due to the variability and seasonality
inherent in investments in tax credit partnerships. These fluctuations could be
perceived negatively and, therefore, adversely affect our share price.
In addition, the portion of our distributions that is excludable from gross
income for federal income tax purposes could decrease based on the size of our
future taxable business. Our taxable subsidiaries do not currently distribute
dividend income to us but rather reinvest it in their businesses. If we invest
in a larger percentage of taxable investments, or if our taxable subsidiaries
were to distribute dividend income to us, the result would likely be that the
taxable portion of our overall income would increase, and, therefore, the
percentage of our net income distributed to shareholders that is federally
tax-exempt to them would likely decrease.
2. RISKS RELATED TO OUR PORTFOLIO INVESTING BUSINESS
WE HAVE NO RECOURSE AGAINST STATE OR LOCAL GOVERNMENTS OR PROPERTY OWNERS UPON
DEFAULT OF OUR REVENUE BONDS OR UPON THE BANKRUPTCY OF AN OWNER OF PROPERTIES
SECURING OUR REVENUE BONDS
Although state or local governments or their agencies or authorities issue the
revenue bonds we purchase, the revenue bonds are not general obligations of any
state or local government. No government, as an issuer of these bonds, is liable
to make payments on the revenue bonds, nor is the taxing power of any government
pledged for the payment of principal of or interest on the revenue bonds. An
assignment by the issuing government agency or authority of the mortgage loan in
favor of a bond trustee on behalf of us, or in some cases, an assignment
directly to the bondholder, secures each revenue bond we own. The mortgage loan
is also secured by an assignment of rents. Following the time that the
properties securing the mortgage loans are placed into service and achieve
stabilized occupancy, the underlying mortgage loans are non-recourse to the
property owner, other than customary recourse carve-outs for bad acts, such as
fraud and breach of environmental representations and covenants. Accordingly,
the revenue derived from the operation of the properties securing the revenue
bonds that we own and amounts derived from the sale, refinancing or other
disposition of the properties are the sole sources of funds for payment of
principal and interest on the revenue bonds.
Our revenue may also be adversely affected by the bankruptcy of an owner of
properties securing the revenue bonds that we directly or indirectly own. An
owner of properties under bankruptcy protection may be able forcibly to
restructure its debt service payments and stop making debt service payments to
us, temporarily or otherwise. Our rights in this event would be defined by
applicable law.
WE ARE SUBJECT TO CONSTRUCTION COMPLETION AND REHABILITATION RISKS THAT COULD
ADVERSELY AFFECT OUR EARNINGS
As of December 31, 2004, revenue bonds with an aggregate carrying value of
approximately $335.5 million were secured by affordable multifamily housing
properties which are still in various stages of construction and revenue bonds
with an aggregate carrying value of approximately $218.6 million were secured by
affordable multifamily housing properties which are undergoing substantial
rehabilitation. Construction and/or substantial rehabilitation of such
properties generally lasts approximately 12 to 24 months. The principal risk
associated with this type of lending is the risk of non-completion of
construction or rehabilitation which may arise as a result of:
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o underestimated initial construction or rehabilitation costs;
o cost overruns;
o delays;
o failure to obtain governmental approvals; and
o adverse weather and other unpredictable contingencies beyond the
control of the developer.
If a mortgage loan is called due to construction and/or rehabilitation not being
completed as required in the mortgage loan documents, we, as the holder of the
revenue bonds secured by such mortgage, may incur certain costs and be required
to invest additional capital in order to preserve our investment.
THE PROPERTIES SECURING CERTAIN OF OUR REVENUE BONDS, WHICH ARE CURRENTLY IN
CONSTRUCTION OR LEASE-UP STAGES, MAY EXPERIENCE FINANCIAL DISTRESS IF THEY DO
NOT MEET OCCUPANCY AND DEBT SERVICE COVERAGE LEVELS SUFFICIENT TO STABILIZE SUCH
PROPERTIES, NEGATIVELY AFFECTING OUR ASSETS AND EARNINGS
As of December 31, 2004, revenue bonds in our portfolio with a carrying value of
approximately $1.1 billion were secured by mortgages on properties in
construction or lease-up stages. The lease-up of these underlying properties may
not be completed on schedule or at anticipated rent levels, resulting in a
greater risk that they may go into default than bonds secured by mortgages on
properties that are fully leased-up. Moreover, there can be no assurance that
the underlying property will achieve expected occupancy or debt service coverage
levels.
CERTAIN OF OUR REVENUE BONDS WE AND OUR SUBSIDIARIES HOLD HAVE BEEN PLEDGED
A significant portion of our revenue bond portfolio has been pledged as
collateral in connection with our securitizations, credit enhancement activities
and warehouse borrowing and we may not have full access to them until we exit
the related programs. The carrying value of the pledged bonds varies from time
to time. As of December 31, 2004, the carrying value of all pledged bonds was
approximately $743 million.
OTHER PARTIES HAVE THE FIRST RIGHT TO CASH FLOW FROM OUR SECURITIZED REVENUE
BOND INVESTMENTS
Because of our utilization of securitization, a substantial portion of our
revenue bond investments are subordinated or may be junior in right of payment
to other bonds, notes or instruments. There are risks in investing in
subordinated revenue bonds and other junior residual interests that could
adversely affect our net income, including:
o the risk that borrowers may not be able to make payments on both the
senior and the subordinated revenue bonds or interests, resulting in
us, as the holder of the subordinated revenue bond, receiving less
than the full and timely payments of interest and principal;
o the risk that short-term interest rates may rise significantly,
increasing the amounts payable to the holders of the floating-rate
senior interests created through our securitizations and reducing the
amounts payable to us as holders of the junior residual interests; and
o the risk that the holders of the senior revenue bonds or senior
interests may control the ability to enforce remedies, limiting our
ability to take actions that might protect our interests.
RISK ASSOCIATED WITH SECURITIZATION COULD ADVERSELY AFFECT OUR NET INCOME
Through securitizations, we seek to enhance our overall return on our
investments and to generate proceeds that, along with equity offering proceeds,
facilitate the acquisition of additional investments. In our debt
securitizations, a bank or another type of financial institution stands ready to
provide liquidity to the purchasers of senior interests in our revenue bonds.
They also provide certain credit enhancements with respect to the underlying
revenue bond, which enables the senior interests to be sold to investors seeking
investments with credit ratings of at least "A" short term and "AA" long term.
The liquidity facilities are generally for one-year terms and are renewable
annually. If the credit strength of either the liquidity or credit enhancement
providers deteriorates, we anticipate that the return on the residual interests
would decrease, negatively affecting our income. In addition, if we are unable
to renew the liquidity or credit enhancement facilities, we would be forced to
find alternative facilities, to repurchase the underlying bonds or to liquidate
the underlying bonds and our investment in the residual interests. If we were
forced to liquidate our investment, we would recognize gains or losses on the
liquidation, which might be significant depending on market conditions. As of
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December 31, 2004, senior interests with an aggregate amount of $505.5 million
were credit enhanced by an eight-year term facility through MBIA, a large
financial insurer. Of this amount, $405.5 million was subject to annual
"rollover" renewal for liquidity. Also, as of December 31, 2004, Merrill Lynch
provided liquidity and credit enhancement for senior interests with an aggregate
amount of $462.9 million in the P-FLOATs/RITES program. We do not maintain an
ongoing commitment with Merrill Lynch and, therefore, are subject to the risk of
termination of that program on short notice.
OUR REVENUE BONDS MAY BE CONSIDERED USURIOUS
State usury laws establish restrictions, in certain circumstances, on the
maximum rate of interest that may be charged by a lender and impose penalties on
parties making usurious loans, including monetary penalties, forfeiture of
interest and unenforceability of the debt. Although we do not intend to acquire
revenue bonds secured by mortgage loans at usurious rates, there is a risk that
our revenue bonds could be found to be usurious as a result of uncertainties in
determining the maximum legal rate of interest in certain jurisdictions,
especially with respect to revenue bonds that bear participating or otherwise
contingent interest. Therefore, the amount of interest to be charged and the
return on our revenue bonds would be limited by state usury laws. To minimize
the risk of investing in a usurious revenue bond, we obtain an opinion of
counsel that the interest rate on a proposed revenue bond is not usurious under
applicable state law. We also generally obtain an opinion of counsel that the
interest on the proposed mortgage loan is not usurious. To obtain such opinions,
we may have to agree to defer or reduce the amount of interest that can be paid
in any year. Some states may prohibit the compounding of interest, in which case
we may have to agree to forego the compounding feature of our revenue bonds
originated in those states.
OUR INVESTMENTS IN REVENUE BONDS ARE ILLIQUID
Our investments in revenue bonds lack a regular trading market. There is no
limitation in our trust agreement or otherwise as to the percentage of our
investments that may be illiquid and we expect to continue to invest in assets,
substantially all of which will be illiquid securities. If a situation arises
where we require additional cash, we could be forced to liquidate some or all of
our investments on unfavorable terms (if any sale is possible) that could
substantially reduce the amount of distributions available and payments made in
respect of our shares.
REVENUE BONDS MAY GO INTO DEFAULT FROM TIME TO TIME AND NEGATIVELY IMPACT OUR
EARNINGS
Properties underlying our revenue bonds may experience financial difficulties
from time to time, which could cause certain of our revenue bonds to go into
default. Were that to occur, we might take remedial action such as, among other
things, entering into a work-out or forbearance agreement with the owner of the
property or exercising our rights with respect to the collateral securing such
revenue bond, including the commencement of mortgage foreclosure proceedings. In
addition, in the event that we were to successfully foreclose the mortgage on
the underlying property, it is likely that, during the period that we or an
affiliate owned both the property and the defaulted bond, we, as holder of the
defaulted bond, would be deemed to be a related party to a "substantial user" of
the property underlying such bond. As a result, during such period, the interest
we receive on the bond would be taxable. See "SUBSTANTIAL USER" LIMITATION
below.
3. RISKS RELATED TO OUR FUND MANAGEMENT BUSINESS
THERE ARE RISKS ASSOCIATED WITH CREDIT ENHANCEMENT AND INTERNAL RATE OF RETURN
GUARANTEES THAT EXPOSE US TO LOSSES
Through our taxable subsidiaries, we provide credit enhancement to third parties
for a fee. If such third parties default on their obligations for which we
provided credit enhancement, we would be called upon to make the related
payment, which would likely be in an amount far in excess of the fee paid to us
for providing the credit enhancement. We also provide internal rate of return
guarantees to investors in partnerships designed to pass through tax benefits,
including LIHTCs, to investors. In connection with such guarantees we might be
required to advance funds to ensure that the investors do not lose their
expected tax benefits and, if the internal rate of return to investors falls
below the guaranteed level, we would be required to make a payment so that the
guaranteed rate of return will be achieved. Our maximum potential liability
pursuant to those guarantees is detailed in MANAGEMENT'S DISCUSSION AND ANALYSIS
- - OFF BALANCE SHEET ARRANGEMENTS.
THERE IS A RISK OF ELIMINATION OF, OR CHANGES TO, GOVERNMENTAL PROGRAMS THAT
COULD LIMIT OUR PRODUCT OFFERINGS
A significant portion of our Fund Management revenues is derived from the
syndication of partnership interests in properties eligible for LIHTCs. Although
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LIHTCs are a part of the Code, Congress could repeal or modify this legislation
at any time or modify the tax laws so that the value of LIHTC benefits is
reduced. If such legislation is repealed or adversely modified, we would no
longer be able to pursue this portion of our business strategy.
CERTAIN AGREEMENTS PURSUANT TO WHICH WE EARN FEES HAVE FINITE TERMS AND MAY NOT
BE RENEWED WHICH COULD NEGATIVELY AFFECT OUR EARNINGS
We receive fees pursuant to an advisory agreement with AMAC, an affiliated
company. This advisory agreement is subject to annual renewal and approval by
the independent trustees of AMAC and there is no guarantee that the agreement
will be renewed. We also receive fees from investment programs we sponsor (and
may sponsor in the future) that do not provide for annual elections by investors
of their management. With respect to these investment programs, we will
generally acquire controlling interests in the entities which control these
investment programs. However, these interests are subject to the fiduciary duty
of the controlling entity to the investors in those programs, which may affect
our ability to continue to collect fees from those programs. Furthermore, the
organizational documents of certain of these investment programs allow for the
investors, at their option, to remove the entity controlled by us as general
partner or managing member without cause. Although the investment programs will
generally be required to pay fair market value if they exercise this right, our
right to receive future fees would terminate and there can be no assurance that
the payment will fully compensate us for this loss. Finally, many of these
investment programs typically have finite periods in which they are scheduled to
exist, after which they are liquidated. The termination of a program will result
in a termination of the fees we receive from those programs.
OUR ROLE AS A SPONSOR OF INVESTMENT PROGRAMS AND CO-DEVELOPMENTS EXPOSES US TO
RISKS OF LOSS
In connection with the sponsorship of investment programs and joint venture
activities for co-development of LIHTC properties, we act as a fiduciary to the
investors in our syndication programs and are often also required to provide
performance guarantees. We advance funds to acquire interests in property-owning
partnerships for inclusion in investment programs and, at any point in time, the
amount of funds advanced can be material. Recovery of these amounts is subject
to our ability to attract investors to new investment programs or, if investors
are not found, the sale of the partnership interests in the underlying
properties. We could also be liable to investors in investment programs and
third parties as a result of serving as general partner or special limited
partner in various investment programs. In addition, even when we are not
required to do so, we may advance funds to allow investment programs to meet
their expenses and/or generate the expected tax benefits to investors.
FUNDS MAY NOT GENERATE SUFFICIENT CASH TO PAY FEES DUE TO US, WHICH MAY
NEGATIVELY IMPACT OUR CASH FLOWS
Much of the revenues in our Fund Management business are earned from upper-tier
funds we sponsor. These funds are dependent upon the cash flows of lower-tier
partnerships in which they invest to generate their own cash flows that are used
to pay fees for services, such as asset management and advisory services, which
we render to them. As the lower-tier partnerships are susceptible to numerous
operational risks (see THERE ARE RISKS ASSOCIATED WITH THE PROPERTIES OUR
PRODUCTS FINANCE THAT COULD ADVERSELY AFFECT OUR EARNINGS above) the upper-tier
funds may not collect sufficient cash to pay the fees they owe to us. If we do
not collect these fees, the negative impact on our cash flows, and our net
income if we determine the fees are not collectible, could negatively impact our
business.
4. RISKS RELATED TO OUR MORTGAGE BANKING BUSINESS
THERE ARE RISKS OF LOSS ASSOCIATED WITH DUS LENDING WHICH MAY NEGATIVELY IMPACT
OUR EARNINGS
In our DUS program, we originate loans through one of our subsidiaries which are
thereafter purchased by Fannie Mae. We retain a first loss position with respect
to loans that we originate and sell to Fannie Mae. We assume responsibility for
a portion of any loss that may result from borrower defaults, based on the
Fannie Mae loss sharing formulas, Levels I, II, or III. As December 31, 2004,
all of our loans consisted of Level I loans. For such loans, if a default
occurs, we are responsible for the first 5% of the unpaid principal balance and
a portion of any additional losses to a maximum of 20% of the original principal
balance; any remaining loss is borne by Fannie Mae. Level II and Level III loans
carry a higher loss sharing percentage. As of December 31, 2004 our maximum
"first loss" exposure under the DUS program was approximately $362 million.
Under the terms of our Master Loss Sharing Agreement with Fannie Mae, we are
responsible for funding 100% of mortgagor delinquency (principal and interest)
and servicing (taxes, insurance and foreclosure costs) advances until the
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amounts advanced exceed 5% of the unpaid principal balance at the date of
default. Thereafter, for Level I loans, we may request interim loss sharing
adjustments which allow us to fund 25% of such advances until final settlement
under the Master Loss Sharing Agreement. No interim sharing adjustments are
available for Level II and Level III loans.
5. RISKS RELATED TO APPLICATION OF TAX LAWS
OUR CLASSIFICATION AS A PUBLICLY TRADED PARTNERSHIP NOT TAXABLE AS A CORPORATION
IS NOT FREE FROM DOUBT AND COULD BE CHALLENGED
We, and all of our Portfolio Investing subsidiaries, operate as partnerships or
are disregarded for federal income tax purposes. This allows us to pass through
our income, including our federally tax-exempt income, and deductions to our
shareholders. The listing of our common shares on the American Stock Exchange
causes us to be treated as a "publicly traded partnership" for federal income
tax purposes. We and our counsel, Paul, Hastings, Janofsky & Walker LLP ("Paul
Hastings"), believe that we have been and are properly treated as a partnership
for federal income tax purposes. However, the Internal Revenue Service ("IRS")
could challenge our partnership status and we could fail to qualify as a
partnership in years that are subject to audit or in future years. Qualification
as a partnership involves the application of numerous technical legal
provisions. For example, a publicly traded partnership is generally taxable as a
corporation unless 90% or more of its gross income is "qualifying" income (which
includes interest, dividends, real property rents, gains from the sale or other
disposition of real property, gain from the sale or other disposition of capital
assets held for the production of interest or dividends, and certain other
items). We have represented that in all prior years of our existence at least
90% of our gross income was qualifying income and we intend to conduct our
operations in a manner such that at least 90% of our gross income will
constitute qualifying income this year and in the future. In the opinion of Paul
Hastings, although the issue is not free from doubt, we have been and are
properly treated as a partnership for federal income tax purposes.
In determining whether interest is treated as qualifying income under these
rules, interest income derived from a "financial business" and income and gains
derived by a "dealer" in securities are not treated as qualifying income. We
have represented that we are acting as an investor with respect to our revenue
bond investments and that we have not engaged in, and will not engage in, a
financial business, although there is no clear guidance on what constitutes a
financial business under the tax law. We have taken the position that for
purposes of determining whether we are in a financial business, portfolio
investing activities that we are engaged in now and that we contemplate engaging
in prospectively would not cause us to be engaged in a financial business or to
be considered a "dealer" in securities. The IRS could assert that our activities
constitute a financial business. If our activities constitute (or as a result of
increased volume constitute) a financial business or cause us to be treated as a
dealer, there is a substantial risk that more than 10% of our gross income would
not constitute qualifying income. We could also be treated as if we were engaged
in a financial business if the activities of CM Corp. and its subsidiaries were
attributed to us and were determined to constitute a financial business. CM
Corp., including its principal subsidiaries RCC and CMC, is subject to income
tax on its income. Accordingly, we believe the activities and income of CM Corp.
and its subsidiaries will not be attributed to us for purposes of determining
CharterMac's tax status. In addition, in determining whether interest is treated
as qualifying income, interest income that is determined based upon the income
or profits of any person is not treated as qualifying income. A portion of the
interest payable on participating interest bonds owned by us is determined based
upon the income or profits of the properties securing our investments.
Accordingly, if we were to receive more than 10% of our gross income in any
given year from such "contingent interest," the IRS could take the position that
we should be treated as a publicly traded partnership taxable as a corporation.
We carefully monitor the type of interest income we receive to avoid such a
circumstance. However, there can be no assurance that such monitoring would be
effective in all events to avoid the receipt of contingent interest and any
other non-qualifying income in any given year that exceeds 10% of our gross
income because circumstances outside of the control of us and our subsidiaries
could cause such a result.
If, for any reason, less than 90% of our gross income constitutes qualifying
income, items of income and deduction would not pass through to our shareholders
and our shareholders would be treated for federal income tax purposes as
stockholders in a corporation. We would be required to pay income tax at
corporate rates on any portion of our net income that did not constitute
tax-exempt income. In addition, a portion of our federally tax-exempt income may
be included in determining our alternative minimum tax liability. Distributions
by us to our shareholders would constitute ordinary dividend income taxable to
such holders to the extent of our earnings and profits, which would include
tax-exempt income, as well as any taxable income we might have, and the payment
of these distributions would not be deductible by us. These consequences would
have a material adverse effect on us, our shareholders and the price of our
shares.
18
OUR TREATMENT OF INCOME FROM OUR RESIDUAL INTERESTS AS FEDERALLY TAX-EXEMPT
COULD BE CHALLENGED
We hold, indirectly, residual interests in certain federally tax-exempt revenue
bonds through securitization programs, such as the Private Label Tender Option
Program and P-FLOATs/RITESSM program, which entitle us to a share of the
federally tax-exempt interest of such revenue bonds. Special tax counsel have
each rendered an opinion to the effect that the issuer of the RITES and the
issuer of the Private Label Tender Option Program residual certificates,
respectively, will each be classified as a partnership for federal income tax
purposes and the holders of the RITES and the Private Label Tender Option
Program residual certificates will be treated as partners of each partnership.
Consequently, as the holder of the RITES and the Private Label Tender Option
Program residual certificates, we treat our share of the federally tax-exempt
income allocated and distributed to us as federally tax-exempt income. However,
it is possible that the IRS could disagree with those conclusions and an
alternative characterization could cause income from the RITES and the Private
Label Tender Option Program residual certificates to be treated as ordinary
taxable income. If such an assertion of an alternative characterization
prevailed, it would materially adversely affect us and our shareholders.
THERE IS A RISK THAT THE IRS WILL DISAGREE WITH OUR JUDGMENT WITH RESPECT TO
ALLOCATIONS
We use various accounting and reporting conventions to determine each
shareholder's allocable share of income, including any market discount taxable
as ordinary income, gain, loss and deductions. Our allocation provisions will be
respected for federal income tax purposes only if they are considered to have
"substantial economic effect" or are in accordance with the partners' "interest
in the partnership." There is no assurance that the IRS will agree with our
various accounting methods, conventions and allocation provisions, particularly
our allocation of adjustments to shareholders attributable to the differences
between the shareholders' purchase price of common shares and their shares of
our tax basis in our assets, pursuant to an election we made.
THE TAXABILITY OF OUR INCOME DEPENDS UPON THE APPLICATION OF TAX LAWS THAT COULD
BE CHALLENGED
The following discussion relates only to the portion of our investments which
generate federally tax-exempt income.
TAX-EXEMPTION OF OUR REVENUE BONDS
On the date of original issuance or re-issuance of each revenue bond,
nationally recognized bond counsel or special tax counsel rendered its
opinion to the effect that, based on the law in effect on that date,
interest on such revenue bonds is excludable from federally-taxable gross
income, except with respect to any revenue bond (other than a revenue bond,
the proceeds of which are loaned to a charitable organization described in
Section 501(c)(3) of the Code) during any period in which it is held by a
"substantial user" of the property financed with the proceeds of such
revenue bonds or a "related person" of such a "substantial user." Each
opinion speaks only as of the date it was delivered. In addition, in the
case of revenue bonds which, subsequent to their original issuance, have
been reissued for federal tax purposes, nationally recognized bond counsel
or special tax counsel has delivered opinions that interest on the reissued
bond is excludable from federally-taxable gross income of the holder from
the date of re-issuance or, in some cases, to the effect that the
re-issuance did not adversely affect the excludability of interest on the
revenue bonds from the gross income of the holders thereof. However, an
opinion of counsel has no binding effect and there is no assurance that the
IRS will not contest these conclusions reached or, if contested, they will
be sustained by a court.
The Code establishes certain requirements which must be met subsequent to
the issuance and delivery of tax-exempt revenue bonds for interest on such
revenue bonds to remain excludable from federally-taxable gross income.
Among these continuing requirements are restrictions on the investment and
use of the revenue bond proceeds and, for revenue bonds the proceeds of
which are loaned to a charitable organization described in Section
501(c)(3) of the Code, the continued exempt status of such borrower. In
addition, the continuing requirements include tenant income restrictions,
regulatory agreement compliance and compliance with rules pertaining to
arbitrage. Each issuer of the revenue bonds, as well as each of the
underlying borrowers, has covenanted to comply with certain procedures and
guidelines designed to ensure satisfaction of the continuing requirements
of the Code. Failure to comply with these continuing requirements of the
Code may cause the interest on such bonds to be includable in
federally-taxable gross income retroactively to the date of issuance,
regardless of when such noncompliance occurs. Greenberg Traurig, LLP (also
referred to as "Greenberg Traurig") as our bond counsel, and Paul Hastings,
as our securities counsel (Greenberg Traurig and Paul Hastings are
collectively referred to herein as our "Counsel"), have not, in connection
with this filing, passed upon and do not assume any responsibility for, but
19
rather have assumed the continuing correctness of, the opinions of bond
counsel or special tax counsel (including opinions rendered by Greenberg
Traurig) relating to the exclusion from federally-taxable gross income of
interest on the revenue bonds and have not independently verified whether
any events or circumstances have occurred since the date such opinions were
rendered that would adversely affect the conclusions set forth herein.
However, as of the date of this filing, neither we, nor our subsidiaries,
our affiliates or our Counsel have knowledge of any events that might
adversely affect the federally tax-exempt status of our revenue bonds,
including any notice that the IRS considers interest on any of our revenue
bonds to be includable in federally-taxable gross income.
TREATMENT OF PARTICIPATING INTEREST BONDS AS EQUITY INVESTMENTS
At our inception, almost all of our revenue bond investments were
participating interest bonds that had been issued in the late 1980s. Since
August 1996, because of the promulgation of certain tax regulations,
participating interest tax-exempt bonds are rarely issued. Accordingly, and
because the number of participating interest bonds in our portfolio has
been shrinking on account of sales and refinancings, such bonds now
comprise only 5.6% of our total revenue bond portfolio.
Payment of a portion of the interest accruing on a participating interest
bond depends upon the cash flow from, and the proceeds upon the sale or
refinancing of, the property securing such bond. Because of this
participation feature, the IRS could assert that we are not a lender to the
owner of the underlying property, but rather an equity investor. If that
position were sustained, all or part of the interest we receive on
participating interest bonds could be treated as a taxable return on our
investment and not as tax-exempt interest. To our knowledge, neither the
characterization of the participating interest bonds as debt, nor the
characterization of the interest thereon as interest excludable from
federally-taxable gross income of the holders thereof, has been challenged
by the IRS in any judicial or regulatory proceeding.
We or our predecessors received opinions of counsel from Willkie, Farr &
Gallagher LLP or other counsel respecting each of our participating
interest bonds to the effect that, based upon assumptions described in such
opinions, which assumptions included the fair market value of the
respective properties upon completion and economic projections and
guarantees, the participating interest bonds "would" be treated for federal
tax purposes as representing debt. The implicit corollary of these opinions
is that the participating interest bonds do not constitute an equity
interest in the underlying borrower.
Although we assume the continuing correctness of these opinions, and will
treat all interest received with respect to these bonds as tax-exempt
income, there can be no assurance that such assumptions are correct, such
treatment would not be challenged by the IRS, or that intervening facts and
circumstances have not changed the assumptions and bases for providing such
opinions. The opinions discussed above speak only as of their respective
delivery dates, and our Counsel has not passed upon or assumed any
responsibility for reviewing any events that may have occurred subsequent
to the delivery of such opinions which could adversely affect the
conclusions contained therein.
"SUBSTANTIAL USER" LIMITATION
Interest on a revenue bond we own, other than a bond the proceeds of which
are loaned to a charitable organization described in Section 501(c)(3) of
the Code, will not be excluded from gross income during any period in which
we are a "substantial user" of the properties financed with the proceeds of
such revenue bond or a "related person" to a "substantial user."
A "substantial user" generally includes any underlying borrower and any
person or entity that uses the financed properties on other than a de
minimis basis. We would be a "related person" to a "substantial user" for
this purpose if, among other things,
o the same person or entity owned more than a 50% interest in both
us and in the properties financed with the proceeds of a bond
owned by us or one of our subsidiaries; or
o we owned a partnership or similar equity interest in the owner of
a property financed with the proceeds of a bond owned by us or
one of our subsidiaries.
20
Additionally, a determination that we are a partner or a joint venturer
with a mortgagor involving an equity interest, as described above under
TREATMENT OF PARTICIPATING INTEREST BONDS AS EQUITY INVESTMENTS, could
cause us to be treated as a "substantial user" of the properties securing
our investments.
Greenberg Traurig has reviewed the revenue bonds we own, the ownership of
the obligors of our revenue bonds and the ownership of our shares and our
subsidiaries' shares, and concurs in the conclusion that we are not
"substantial users" of the properties financed with the proceeds of the
revenue bonds or related parties thereto. There can be no assurance,
however, that the IRS would not challenge such conclusion. If such
challenge were successful, the interest received on any bond for which we
were treated as a "substantial user" or a "related party" thereto would be
includable in federally-taxable gross income.
SECURITIZATION PROGRAMS AND REVENUE PROCEDURE 2003-84
Many of the senior interests in our securitization programs are held by
tax-exempt money-market funds. For various reasons, money market funds will
only acquire and hold interests in securitization programs that comply with
Revenue Procedure 2003-84, which was published on November 5, 2003. We have
been advised by our counsel, Greenberg Traurig, that the partnerships we
use in our securitizations currently meet the requirements of Revenue
Procedure 2003-84. It is our intention to continue to meet those
requirements, which include an income test and an expense test, on an
ongoing basis. There can be no assurance, however, that unforeseen
circumstances might cause one or more of our securitization partnerships to
fail either the income test or the expense test, which would cause our
securitization partnerships to have to comply with all of the requirements
of subchapter K of the Code. In the event one or more of our securitization
partnerships was forced to comply with the provisions of subchapter K of
the Code, it is likely that all of the tax-exempt money market funds which
hold the senior interests in those securitizations would tender their
positions. This could cause our remarketing agent to locate new purchasers,
which were not tax-exempt money market funds, for those tendered senior
interests. This would probably result in an increase in the distributions
to the holders of the senior interests, which would reduce, dollar for
dollar, the distributions on the residual interests in the securitizations,
which are owned by us through our subsidiaries.
TAXABLE INCOME
In our Portfolio Investing business, we primarily invest in investments
that produce only tax-exempt income. However, the IRS may seek to
re-characterize a portion of our tax-exempt income as taxable income as
described above. If the IRS were successful, a shareholder's distributive
share of such income would be taxable to the shareholder, regardless of
whether an amount of cash equal to such distributive share is actually
distributed. Any taxable income would be allocated pro rata between our CRA
Shares and our common shares. We may also have taxable income in the form
of market discount or gain on the sale or other disposition of our
investments, and we expect to own investments and engage in certain fee
generating activities that will generate taxable income.
IMPACT OF RECENT AND FUTURE TAX LEGISLATION
Recent and future tax legislation could also adversely impact the value of
our investments and the market price of our shares. On May 28, 2003,
President Bush signed into law the Jobs and Growth Tax Relief Act. This law
amends the Code to reduce federal income tax rates for individuals on
long-term capital gains and dividend income and accelerates certain
previously enacted income tax rate reductions for individuals for tax years
ending on or after May 6, 2003. This tax legislation reduces the importance
of a primary advantage of investing in municipal bonds--that the interest
received on these bonds is federally tax-exempt, while other income is
subject to federal income tax at higher rates. It is likely that these tax
law changes, and any similar future tax law changes, could increase the
cost of tax-exempt financings, as interest rates offered by municipal
issuers would rise to compensate investors for the reduced tax advantage.
This could lead to a decrease in tax-exempt multifamily rental housing bond
issuances, which would reduce our opportunities to purchase revenue bonds.
These changes could also reduce the value of our existing investments,
because federally tax-exempt municipal bond income would not enjoy the same
relative tax advantage as provided under prior law.
21
STRUCTURE OF OUR ACQUISITION OF RCC
Our acquisition of RCC was structured to prevent us from realizing active
income from the RCC business and to effectively receive a tax deduction for
payments made to its selling principals. It is possible that the IRS could
challenge this structure, with material adverse consequences to us. First,
the IRS could assert that we, as the parent trust, are the owner of the RCC
business, in which case the parent trust would realize an amount of active
income from the RCC business that would require it to be treated as a
corporation instead of a publicly traded partnership for income tax
purposes. If the IRS prevailed, we would be required to pay taxes on that
income, thereby reducing the amount available for us to make distributions.
As a result, it is possible that the value of our shares would decline.
Second, the IRS might assert that the Special Common Units ("SCUs") held by
the selling principals of RCC and others are actually shares of our
Company. If this position prevailed, the distributions payable on the SCUs
would not result in tax deductions for CM Corp. In such event, CM Corp.
would be subject to increased tax, which could reduce our net after-tax
income and our distributions, which could also result in a decrease in the
portion of our distributions that is excluded from gross income for federal
income tax purposes.
6. RISKS RELATED TO INVESTING IN OUR COMPANY
BECAUSE WE HOLD MOST OF OUR INVESTMENTS THROUGH OUR SUBSIDIARIES, OUR
SHAREHOLDERS ARE EFFECTIVELY SUBORDINATED TO THE LIABILITIES AND EQUITY OF OUR
SUBSIDIARIES
We hold most of our investments through our subsidiaries. Since we own only
common equity of our subsidiaries, we, and therefore holders of our shares, are
effectively subordinated to the debt obligations, preferred equity and SCUs of
our subsidiaries, which at December 31, 2004, aggregated approximately $1.4
billion. In particular, the holders of the preferred shares of our Equity Issuer
subsidiary are entitled to receive preferential distributions with respect to
revenues generated by revenue bonds held directly or indirectly by it, which
constitute a substantial portion of our assets. Similarly, holders of senior
interests created through our securitization programs have a superior claim to
the cash flow from the revenue bonds deposited in such programs. Accordingly, a
portion of the cash flow from our investments will not be available for
distribution on our common shares. Likewise, holders of SCUs issued by our CCC
subsidiary are entitled to receive preferential distributions with respect to
the earnings of RCC which are, therefore, not available for distribution to our
shareholders.
WE DEPEND UPON THE SERVICES OF OUR EXECUTIVE MANAGEMENT TEAM
We and our subsidiaries depend upon the services of three key executive officers
(Mr. Boesky, Mr. Hirmes and Mr. Schnitzer) and other individuals who comprise
our executive management team. All decisions with respect to the management and
control of our Company and our subsidiaries, subject to the supervision of our
board of trustees (or the applicable subsidiary's board), are currently made
exclusively by these three key officers. The departure or the loss of the
services of any of these key officers or a large number of senior management
personnel and other employees could have a material adverse effect on our
ability to operate our business effectively and our future results of
operations.
OUR BOARD OF TRUSTEES CAN CHANGE OUR BUSINESS POLICIES UNILATERALLY
Our board of trustees may amend or revise our business plan and certain other
policies without shareholder approval. Therefore, our shareholders have no
control over changes in our policies, including our business policies with
respect to acquisitions, financing, growth, debt, capitalization and
distributions, which are determined by our board of trustees.
THERE ARE POSSIBLE ADVERSE EFFECTS ARISING FROM SHARES AVAILABLE FOR FUTURE SALE
Our board of trustees is permitted to offer additional equity or debt securities
of our Company and our subsidiaries in exchange for money, property or other
consideration. Our ability to sell or exchange such securities will depend on
conditions then prevailing in the relevant capital markets and our results of
operations, financial condition, investment portfolio and business prospects.
Subject to American Stock Exchange rules which require shareholder approval for
certain issuances of securities and as long as the issuance is made in
accordance with our trust agreement, the issuance of such additional securities
will not be subject to the approval of our shareholders and may negatively
affect any resale price of our shares. Shareholders will not have any preemptive
22
rights in connection with the issuance of any additional securities we or our
subsidiaries may offer, and any of our equity offerings would cause dilution of
a shareholder's investment in us.
THE FORMER OWNERS OF RCC HAVE SIGNIFICANT VOTING POWER ON MATTERS SUBMITTED TO A
VOTE OF OUR SHAREHOLDERS, AND THEIR INTERESTS MAY BE IN CONFLICT WITH THE
INTERESTS OF OUR OTHER SHAREHOLDERS
In connection with our acquisition of RCC, we issued to each of its selling
principals one special preferred voting share for each SCU they received. Our
special preferred voting shares have no economic interest, but entitle each
holder to one vote per special preferred voting share on all matters subject to
a vote of the holders of our common shares. The selling principals of RCC who
received special preferred voting shares include our executive management team
and a subsidiary of The Related Companies, L.P. ("TRCLP"), which is controlled
by the chairman of our board of trustees. As a result of that special preferred
voting share issuance and additional common shares directly or indirectly owned
by them, our executive management team (Mr. Boesky, Mr. Hirmes, Mr. Schnitzer
and Ms. Kiley) in the aggregate directly or indirectly owns voting shares
representing approximately 7.3% of our voting power, and the chairman of our
board of trustees directly or indirectly owns voting shares that represent
approximately 15.7% of our voting power. Ms. Kiley, whose intention to retire we
announced on February 25, 2005, currently owns approximately 1% of our voting
power. As such, if they vote as a block, such shareholders will have significant
voting power on all matters submitted to a vote of our common shareholders.
Also, because five of these selling principals of RCC serve, along with others,
as our managing trustees, there are ongoing conflicts of interest when we are
required to determine whether or not to take actions to enforce our rights under
the various agreements entered into in connection with the RCC acquisition.
While any material decisions involving these persons are subject to the vote of
a majority of our independent trustees, such decisions may create conflicts
between us and these persons.
In addition, we have some obligations to these former owners which will require
us to make choices as to how we operate our business which may affect those
obligations. For example, we have guaranteed the payment to all holders of the
SCUs of all but $5.0 million of the distributions they would otherwise be
entitled to receive under the operating agreement of CCC. In addition, we have
agreed to share cash flow from investment programs so that we and certain of
these former owners can receive payment of deferred fees. Further, TRCLP and its
affiliates currently engage in businesses which compete with us. The
non-competition covenants contained in a future relations agreement entered into
by TRCLP and its affiliates in connection with our acquisition of RCC prohibit
TRCLP and its affiliates from competing with any business currently engaged in
by us other than in specified areas, including:
o providing credit enhancement on debt products secured by "80/20"
multifamily housing properties; and
o providing mezzanine financing to multifamily housing properties other
than so-called "tax credit properties."
There can be no assurance that we and TRCLP and its affiliates will not compete
for similar products and opportunities in these areas in the future.
NO ASSURANCE CAN BE GIVEN THAT OUR SHAREHOLDERS WILL BE ENTITLED TO THE SAME
LIMITATION ON PERSONAL LIABILITY AS STOCKHOLDERS OF PRIVATE CORPORATIONS FOR
PROFIT
We are governed by the laws of the State of Delaware. Under our trust agreement
and the Delaware Statutory Trust Act, as amended ("Delaware Act"), our
shareholders will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware. In general, stockholders of
Delaware corporations are not personally liable for the payment of corporate
debts and obligations, and are liable only to the extent of their investment in
the Delaware corporation. However, a shareholder may be obligated to make
certain payments provided for in our trust agreement and bylaws. The properties
securing our investments are dispersed in numerous states and the District of
Columbia. In jurisdictions which have not adopted legislative provisions
regarding statutory trusts similar to those of the Delaware Act, questions exist
as to whether such jurisdictions would recognize a statutory trust, absent a
state statute, and whether a court in such jurisdiction would recognize the
Delaware Act as controlling. If not, a court in such jurisdiction could hold
that our shareholders are not entitled to the limitation of liability set forth
in our trust agreement and the Delaware Act and, as a result, are personally
liable for our debts and obligations.
23
OUR ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE THIRD-PARTY PROPOSALS
Certain provisions of our trust agreement may have the effect of discouraging a
third party from making an acquisition proposal for our Company. This could
inhibit a change in control of our Company under circumstances that could give
our shareholders the opportunity to realize a premium over then-prevailing
market prices. Such provisions include the following:
ADDITIONAL CLASSES AND SERIES OF SHARES
Our trust agreement permits our board of trustees to issue additional
classes or series of beneficial interests and to establish the preferences
and rights of any such securities. Thus, our board of trustees could
authorize the issuance of beneficial interests with terms and conditions
which could have the effect of discouraging a takeover or other
transaction.
STAGGERED BOARD
Our board of trustees is divided into three classes of managing trustees.
The terms of the first, second and third classes will expire in 2005, 2006
and 2007, respectively. Managing trustees for each class will be chosen for
a three-year term upon the expiration of the current class' term. The use
of a staggered board makes it more difficult for a third-party to acquire
control over us.
SALES IN THE PUBLIC MARKET OF OUR COMMON SHARES ISSUABLE IN EXCHANGE FOR OUR
SCUS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR SHARES
Future sales of substantial amounts of our common shares in the public market
could adversely affect prevailing market prices of our shares. Approximately
15.2 million common shares remain issuable in exchange for the SCUs we issued in
connection with the RCC acquisition and we also granted restricted common shares
of which approximately 541,000 were unvested at December 31, 2004. When these
shares vest, their sale in the public market could, and depending upon the
number of involved, likely would, adversely affect prevailing market prices of
our shares and our ability to raise additional capital through equity markets.
As of December 31, 2004, TRCLP and its owners indirectly held approximately 10.2
million SCUs and approximately 286,000 common shares which, subject to some
exceptions, are not subject to a lock-up agreement.
On March 7, 2005, Mr. Schnitzer and Ms. Kiley each adopted a pre-arranged share
trading plan to sell common shares that can be issued to each of them upon the
conversion of a portion of their respective SCUs. Trades under Mr. Schnitzer's
plan could begin as early as April 12, 2005. Trades under Ms. Kiley's plan could
begin as early as April 15, 2005. Each of the share trading plans was adopted in
accordance with guidelines specified under Rule 10b5-1 of the Securities and
Exchange Act of 1934. Mr. Schnitzer adopted his plan as part of his personal
financial planning for asset diversification and liquidity. Under his Rule
10b5-1 plan, Mr. Schnitzer will sell up to 215,000 common shares (approximately
18.9% of his total holdings) over a period of approximately ten months in
accordance with the plan schedule. These shares will be acquired through the
conversion of a portion of his SCUs. If Mr. Schnitzer completes all the planned
sales of shares under his Rule 10b5-1 plan, he would continue to own
approximately 924,347 shares representing approximately 1.8% of our outstanding
common shares as of the date of this filing. Ms. Kiley adopted her plan as part
of her personal financial planning for asset diversification and liquidity.
Under her Rule 10b5-1 plan, Ms. Kiley will sell up to 131,906 common shares
(approximately 18.7% of her total holdings) over a period of approximately six
months in accordance with the plan schedule. These shares will be acquired
through the conversion of a portion of her SCUs. If Ms. Kiley completes all the
planned sales of shares under her Rule 10b5-1 plan, she would continue to own
approximately 571,870 shares representing approximately 1.1% of our outstanding
common shares as of the date of this filing.
IF WE HAD TO REGISTER UNDER THE INVESTMENT COMPANY ACT, THERE COULD BE NEGATIVE
CONSEQUENCES TO OUR INVESTMENT STRATEGY
Neither we nor our subsidiaries are registered under the Investment Company Act
of 1940, as amended (the "Investment Company Act") and we may not be able to
conduct our activities as we currently do if we were required to so register.
24
At all times, we intend to conduct our activities, and those of our
subsidiaries, so as not to become regulated as an "investment company" under the
Investment Company Act. Even if we are not an investment company under the
Investment Company Act, we could be subject to regulation under the Investment
Company Act if a subsidiary of ours were deemed to be an investment company.
There are a number of possible exemptions from registration under the Investment
Company Act that we believe apply to us and our subsidiaries and which we
believe make it possible for us not to be subject to registration under the
Investment Company Act.
For example, the Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate," which we refer to as "qualifying
interests." Under current interpretations by the SEC staff, one of the ways in
which our subsidiaries can qualify for this exemption is to maintain at least
55% of their assets directly in qualifying interests and the balance in real
estate-type interests. We believe our subsidiaries can rely on this exemption or
another exemption from registration.
The requirement that our subsidiaries maintain 55% of their assets in qualifying
interests (or satisfy another exemption from registration) may inhibit our
ability to acquire certain kinds of assets or to securitize additional interests
in the future. If any of our subsidiaries fail to qualify for exemption from
registration as an investment company and we, in turn, are required to register
as an investment company, our ability to maintain our financing strategies would
be substantially reduced, and we would be unable to conduct our business as
described herein. Such a failure to qualify could have a material adverse effect
upon our ability to make distributions to our shareholders.
AN INABILITY TO RAISE CAPITAL COULD ADVERSELY AFFECT OUR GROWTH
A major aspect of our business plan includes the acquisition of additional
revenue bonds, which requires capital. In addition to funds generated through
operations (including securitizations), we raise capital by periodically
offering securities issued by us or one or more of our subsidiaries. Our ability
to raise capital through securities offerings is subject to risks, including:
o conditions then prevailing in the relevant capital markets;
o our results of operations, financial condition, investment portfolio
and business prospects;
o the timing and amount of distributions to the holders of our shares
which could negatively affect the price of a common share; and
o the amount of securities that are structurally senior to the
securities being sold.
Item 2. Properties
We lease the office space in which our headquarters are located at 625 Madison
Avenue, New York, NY. The lease expires in 2017.
We also lease office space in other location as follows:
o Jersey City, NJ - An office facility; the lease expires in 2010.
o Bethesda, MD - An office facility; the lease expires in 2009.
o Irvine, CA - An office facility; the lease expires in 2008.
o Mineola, NY - An office facility; the lease expires in 2007.
o Dallas, TX - An office facility; the lease expires in 2005.
o Sherman Oaks, CA - An office facility; the lease expires in 2007.
o San Rafael, CA - An office facility; the lease expires in 2005.
o Kansas City, KS - An office facility; the lease expires in 2005.
o Metarie, LA - An office facility; currently being leased on a
month-to-month basis.
We believe that these facilities are suitable for current requirements and
contemplated future operations.
25
Item 3. Legal Proceedings
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted to shareholders for voting during the fourth
quarter of 2004.
26
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market Information
- ------------------
Our common shares have been listed on the American Stock Exchange since October
1, 1997 under the symbol "CHC". Prior to October 1, 1997, there was no
established public trading market for our common shares.
The high and low prices for each quarterly period of the last two years during
which our common shares were traded were as follows:
2004 2003
---------------------- ----------------------
Quarter Ended Low High Low High
- ------------- ---------- ---------- ---------- ----------
March 31 $21.03 $24.85 $16.51 $18.34
June 30 $17.75 $24.70 $17.50 $19.79
September 30 $18.85 $23.15 $16.68 $19.62
December 31 $21.35 $25.42 $18.35 $21.86
The last reported sale price of our common shares on the American Stock Exchange
on March 31, 2005 was $21.50.
Holders
- -------
As of March 31, 2005, there were 3,136 registered shareholders owning 51,323,062
common shares.
Distributions
- -------------
Our earnings are allocated pro rata among the common shares and the Convertible
CRA Shares. The Convertible CRA Shares rank on par with the common shares with
respect to rights upon liquidation, dissolution or winding up of our Company.
Quarterly cash distributions per share for the years ended December 31, 2004 and
2003 were as follows:
Total Amount
Date Per Distributed
Cash Distribution for Quarter Ended Paid Share (In thousands)
- ----------------------------------- -------- -------- --------------
March 31, 2004 5/15/04 $0.370 $19,217
June 30, 2004 8/14/04 0.380 21,929
September 30, 2004 11/14/04 0.410 23,649
December 31, 2004 2/14/05 0.410 23,690
------ -------
Total for 2004 $1.570 $88,485
====== =======
March 31, 2003 5/15/03 $0.325 $14,643
June 30, 2003 8/14/03 0.325 14,667
September 30, 2003 11/14/03 0.350 16,201
December 31, 2003 2/14/04 0.370 18,551
------ -------
Total for 2003 $1.370 $64,062
====== =======
In addition to the distributions set forth in the table above, we paid Related
Charter L.P., as our manager prior to our acquisition of RCC, a special
distribution (equal to .375% per annum of our total invested assets) which
amounted to approximately $5.3 million for the period from January 1, 2003 to
November 17, 2003.
There are no material legal restrictions upon our present or future ability to
make distributions in accordance with the provisions of our Second Amended and
27
Restated Trust Agreement. We do not believe that the financial covenants
contained in our and our subsidiaries' secured indebtedness or in the terms of
the preferred shares issued by Equity Issuer will have any adverse impact on our
ability to make distributions in the normal course of business to our common and
Convertible CRA shareholders. Future distributions will be at the discretion of
the trustees based upon evaluation of our actual cash flow, our financial
condition, capital requirements and such other factors as the trustees deem
relevant.
Securities authorized for issuance under equity compensation plans
- ------------------------------------------------------------------
The following table provides information related to our share incentive plans as
of December 31, 2004:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon exercise Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected in
and rights warrants and rights column a) (1)
-------------------- -------------------- -----------------------
Equity compensation plans 1,075,313 $16.1282 6,348,802
approved by security
holders
Equity compensation plans
not approved by security
holders -- -- --
--------- --------