UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

(Mark One)

For the fiscal year ended December 31, 2016

or

For the transition period from _______to _________

Commission file number 1-14760

 

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (215) 207-2100

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    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 a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

The aggregate market value of the common shares of the registrant held by non-affiliates of the registrant, based upon the closing price of such shares on June 30, 2016 of $3.13, was approximately $283,962,915.

As of April 28, 2017, 92,715,999 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

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TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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EXPLANATORY NOTE

 

This Amendment No. 1 to Form 10-K (this “Amendment”) amends the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of RAIT Financial Trust, as originally filed with the Securities and Exchange Commission (“SEC”) on March 13, 2017 (the “Original Form 10-K”). We are filing this Amendment to present the information required by Part III of Form 10-K that was previously omitted from the Original Form 10-K in reliance on General Instruction G.(3) to Form 10-K.

 

Part IV, Item 15(b) (Exhibits 31.3 and 31.4) have also been amended and restated in their entirety to contain the currently dated certifications from the Company’s principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s principal executive officer and principal financial officer are attached to this Amendment No. 1 as Exhibits 31.3 and 31.4. Because no financial statements have been included in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. The Exhibit Index has also been amended and restated in its entirety to include the certifications as exhibits.

 

Except as described above, no other changes have been made to the Original Form 10-K. This Amendment does not otherwise update information in the Original Form 10-K to reflect facts or events occurring subsequent to the filing date of the Original Form 10-K. This Amendment should be read in conjunction with the Original Form 10-K and with any of our filings made with the SEC subsequent to filing of the Original Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART III

 

 

Names of Trustees, Principal Occupations and Other Information

 

Michael J. Malter, age 59, has served as chairman of the Board of Trustees of RAIT since October 2016 and as a Trustee of RAIT since November 2015. He is a retired investment banker having served in a variety of senior management positions at JPMorgan Chase & Co., or JPM, a financial services firm, and its predecessor firms from 1988 until 2005. He retired as the Co-Head of the Global Financial Institutions Group of JPM in 2005. From 2003 to 2005, he was responsible for oversight of JPM’s banking and investment banking activities with banks and other financial institutions; oversaw mergers and acquisitions assignments, strategic advisory work, capital raising, hedging and derivatives assignments and lending; and was a member of the management committee of JPM’s investment banking division. From 2001 to 2003, he was responsible for JPM’s structured finance businesses in North America and the investment grade capital markets and origination business and was a member of the management committee of the North American Credit Markets Division. In the period from 1988 to 2001, he held a series of management positions with JPM’s predecessors responsible for commercial mortgage loan origination, securitization and trading, asset-backed securities and conduit lending. Mr. Malter currently serves as a director or member of the advisory committee of four investment vehicles that each use Varadero Capital, L.P., an SEC registered investment adviser, as their respective investment manager. Several of these investment vehicles use strategies that focus primarily on investing in asset-backed securities, including investment- and non-investment-grade residential and commercial mortgage-backed securities and collateralized debt obligations.

 

Andrew Batinovich, age 58, has served as a Trustee of RAIT since March 2013. Mr. Batinovich currently serves as President and Chief Executive Officer of Glenborough, LLC, a privately held full service real estate investment and management company focused on the acquisition, management and leasing of institutional quality commercial properties. Since August 2013, an affiliate of Glenborough, LLC has served as the advisor of Strategic Realty Trust, Inc., a public non-traded REIT that owns primarily grocery anchored shopping centers, and Mr. Batinovich has served as CEO and a director of Strategic Realty Trust. In 2010, Mr. Batinovich led a private investor group in acquiring Glenborough, LLC and related real estate assets that were originally part of Glenborough Realty Trust, a NYSE listed real estate investment trust, or REIT, which was sold to affiliates of Morgan Stanley in 2006. From December 2006 to October 2010, Mr. Batinovich served as President and Chief Executive Officer of Glenborough, LLC, a company formed by an affiliate of Morgan Stanley to acquire Glenborough Realty Trust. In connection with the 2006 transaction, Mr. Batinovich and the Glenborough Realty Trust senior management team were retained to operate the new private entity, and the team remains together in the newly re-acquired Glenborough, LLC. In 1996, Mr. Batinovich co-founded Glenborough Realty Trust and was President and Chief Executive Officer and a director at the time of the sale in 2006. Mr. Batinovich was appointed President of Glenborough Realty Trust in 1997 and Chief Executive Officer in 2003. He also served as Chief Operating Officer and Chief Financial Operator during his tenure at Glenborough Realty Trust. Prior to founding Glenborough Realty Trust, Mr. Batinovich served as Chief Operating Officer and Chief Financial Officer of Glenborough Corporation until 1996 when it was merged into Glenborough Realty Trust. Glenborough Corporation was a private real estate investment and management company that completed a number of private placements of office, industrial, residential and hotel properties. Prior to joining Glenborough Corporation in 1983, Mr. Batinovich was an officer of Security Pacific National Bank. Mr. Batinovich is a director of Sunstone Hotel Investors, Inc., a NYSE listed real estate investment trust focused on hotel properties. He also serves as a Trustee of the American University of Paris.

 

Scott L.N. Davidson, age 48, has served as RAIT’s chief executive officer since December 2016 and as RAIT’s president since January 2014 and served as a Managing Director of RAIT from April 2010 to January 2014. Prior to joining RAIT, Mr. Davidson served as a portfolio manager for Carlyle Blue Wave, an asset management firm, from January 2007 to June 2008. From September 2005 to November 2006, Mr. Davidson served as a portfolio manager for Amaranth LLC, an asset management firm. From 1993 to January 2005, Mr. Davidson served as Managing Director and Group Head at JPMorgan and its predecessors, where his responsibilities included running their commercial mortgage backed securities business, asset backed securities business and their respective risk and trading operations.

 

Frank A. Farnesi, age 70, has served as a Trustee of RAIT since December 2006 when he joined the Board in connection with our acquisition of Taberna Realty Finance Trust, or TRFT, in December 2006 (the “TRFT Acquisition”). He was a member of TRFT’s Board from April 2005 until the TRFT Acquisition in December 2006. He is a retired partner of the international accounting firm of KPMG LLP, where he worked from 1969 to 2001. Before retiring from KPMG, he was the Pennsylvania business unit partner in charge of tax. He also served as national partner in charge of tax compliance and worked with a wide variety of clients in the banking, real estate, technology and private equity fields. He currently serves as the non-executive chairman of the Board of directors of Beneficial Bancorp, Inc., a publicly held stock holding company for Beneficial Bank, a Pennsylvania chartered savings bank.  Mr. Farnesi is a Board Leadership Fellow of the National Association of Corporate Directors (NACD).  He also currently serves on the Board of Directors of the Faith in the Future Foundation, a not-for-profit organization.

 

S. Kristin Kim, age 54, has served as a Trustee of RAIT since October 2003. Ms. Kim is the founder of Sansori, which has provided innovative educational programs and offered strategic planning services for social ventures since 2009. Prior to Sansori, Ms. Kim was president of AllLearn, an online education venture among Oxford, Stanford, and Yale Universities from November 2002 until 2006, having joined AllLearn in January 2001 as its general counsel. From 1999 to 2001, Ms. Kim held several senior positions at Harvard University’s John F. Kennedy School of Government, including Director for New Initiatives. From 1989 to 1999, she was an attorney at the law firm of Simpson Thacher & Bartlett.

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Jon C. Sarkisian, age 55, has served as a Trustee of RAIT since December 2011. Mr. Sarkisian has been an executive vice president of CBRE Group, Inc., or CBRE, a publicly traded commercial real estate services firm, since July 2003. Mr. Sarkisian joined CBRE when it acquired Insignia/ESG, or Insignia, a commercial real estate services firm, in July 2003. Mr. Sarkisian was an executive vice president at Insignia from June 1998 to July 2003. Mr. Sarkisian joined Insignia when it acquired Jackson-Cross Company, or Jackson-Cross, a commercial real estate services firm, in June 1998. Mr. Sarkisian was a senior vice president for Jackson-Cross from October 1988 to June 1998.

 

Andrew M. Silberstein, age 49, has served as a Trustee of RAIT since October 2012 when he was designated by ARS VI Investor I, LP (f/k/a ARS VI Investor I, LLC) (the “Investor”) to serve on our Board of Trustees pursuant to the securities purchase agreement, or the purchase agreement, dated as of October 1, 2012 among ourselves, designated subsidiaries of ours and the Investor. We refer to the transactions contemplated by the purchase agreement as the investor transactions. The investor is an affiliate of Almanac Realty Investors, LLC, or Almanac, a provider of capital to real estate companies. Mr. Silberstein is a partner of Almanac and joined the predecessor to Almanac, Rothschild Realty Managers, as a managing director in 2009. From 2004 to 2008, Mr. Silberstein served as the chief investment officer and chief operating officer for Stoltz Real Estate, a real estate company. Prior to that, Mr. Silberstein worked in real estate investment banking and private equity, first at Bear Stearns & Company from 1994 to 1998 as a vice president and then at Morgan Stanley from 1999 to 2004 as an executive director. Mr. Silberstein serves on boards of the following real estate companies: Westcore Properties, Westcore Properties II, Slate Asset Management and Claros REIT Holdings.

 

Murray Stempel, III, age 62, has served as a Trustee of RAIT since December 2006 and served as the Lead Trustee (defined below) of RAIT from January 2014 to October 2016.  Mr. Stempel joined the Board in connection with the TRFT Acquisition. He was a member of TRFT’s Board of Trustees from April 2005 until the TRFT Acquisition in December 2006. Mr. Stempel has served as a director of Royal Bancshares of Pennsylvania, Inc., or Royal Bancshares, a publicly traded bank holding company, since 2008, including service as the vice chairman of Royal Bancshares through 2012. From 2004 until 2008, he served as executive vice president and chief lending officer at Royal Bank America, a wholly-owned bank subsidiary of Royal Bancshares, responsible for the day-to-day management of the bank. From 2000 to 2004, he was a senior vice president at Royal Bank America.

 

Thomas D. Wren, age 65, has served as a Trustee of RAIT since February 2017.  Mr. Wren was a special advisor at Promontory Financial Group, a bank and financial services consulting firm, from March 2006 to October 2011.  Prior to that, Mr. Wren was group head and treasurer of MBNA Corporation, or MBNA, a publicly-held bank holding company, from July 1995 to January 2006. At MBNA, Mr. Wren was responsible for the daily management of the global money market and fixed income investment portfolios and the wholesale funding programs for the $140.0 billion total managed assets credit card bank. From May 1992 to June 1995, Mr. Wren served as executive vice president-chief investment and funding officer of Shawmut National Corporation, a publicly-held bank holding company. From June 1973 to April 1992, Mr. Wren served in numerous roles at the Office of the Comptroller of the Currency, or OCC, a federal banking regulatory agency, ending as manager large bank supervision in the OCC’s Washington D.C. office. Mr. Wren has served on the governing Boards of numerous financial institutions, including service as an independent director of each of ACM Financial Trust, Inc., a privately-held residential mortgage backed securities real estate investment trust, or REIT, since December 2005, and Hatteras Financial Corp., or Hatteras, a publicly-traded mortgage backed securities REIT, from November 2007 until Hatteras was acquired by Annaly Capital Management, Inc. in July 2016.

 

Our Nominating Committee has not adopted specific, minimum qualifications or specific qualities or skills that must be met by a Nominating Committee-recommended nominee. For a discussion of the methods the Nominating Committee uses for identifying and evaluating nominees for Trustee, see “Information Concerning Our Board of Trustees, Committees and Governance-Nominating and Governance Committee.” Set forth below is a brief discussion of the specific experience, qualifications, attributes or skills that led to the conclusion that each person listed above should serve as a Trustee of RAIT:

 

Mr. Malter has significant investment banking and capital markets experience, including commercial real estate lending and financing, and has advised numerous public companies on matters of corporate finance, capital structure, and accessing public and private markets across the capital spectrum.

 

Mr. Davidson has served as an executive officer of RAIT since 2014 and currently serves as our CEO and President.  He has spent the past 25 years with RAIT and other businesses focused on investing in commercial real estate and securitized products, which gives him broad knowledge of, and experience addressing, the operational, financial and strategic issues and opportunities facing specialty finance companies like RAIT.

 

Mr. Batinovich has a significant real estate-related professional background and many years of real estate-related experience, including previously held senior-executive level positions, other public company Board experience, an extensive background and experience with REITs and in real estate and finance transactions.

 

Mr. Farnesi’s experience in leadership roles within KPMG, including his position as national partner in charge of tax compliance, and his years of experience providing advisory services to a wide variety of clients give him a significant financial, accounting and tax background.

 

 

Ms. Kim has significant experience founding, leading or having senior roles in organizations focused on leadership and education. She also has broad legal experience in the international capital markets.

 

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Mr. Sarkisian has over 28 years’ experience in commercial real estate and plays a leading role in the Philadelphia region for a major commercial real estate company.

 

Mr. Silberstein has substantial experience in real estate and finance transactions. Mr. Silberstein was also designated by the Investor to serve on our Board of Trustees pursuant to the purchase agreement.

 

Mr. Stempel is a director, and previously served as a senior officer, of a publicly traded bank holding company with broad finance and operational experience, including real estate and real estate lending experience.

 

Mr. Wren has substantial senior leadership experience at large publicly-traded financial services companies and experience as a federal banking regulator, including extensive and relevant experience serving as an independent director at a publicly-traded mortgage-backed securities REIT.

 

Non-Trustee Executive Officers

 

Information is set forth below regarding the background of each of our executive officers who is not also a Trustee. For our executive officer who is also a Trustee, Scott L.N. Davidson, this information can be found above.

 

Paul W. Kopsky, Jr., age 52, joined RAIT in February 2017 and has served as RAIT’s CFO and Treasurer since March 2017.  Prior to joining RAIT, Mr. Kopsky was executive vice president and chief operating officer for Hunt Companies, Inc., or Hunt, a diversified financial services holding company, from August 2013 to November 2016.  While at Hunt, Mr. Kopsky served as a director and officer of Hunt Investment Management Company, a Hunt affiliate and an SEC registered investment advisor, from September 2013 to November 2016.  From March 2011 to September 2013, Mr. Kopsky was Managing Director- Investment Banking and Project Finance of Jefferies & Company, Inc., a global investment banking company and broker-dealer. In the period from October 1997 to August 2010, Mr. Kopsky  served in various executive finance/accounting leadership roles for companies including Capmark Financial Group, Inc., a publicly listed commercial mortgage company, Reinsurance Group of America, Incorporated, a publicly traded life reinsurance company, Nationwide Insurance Group, a diversified insurance and financial services company, Lincoln Financial Group, a publicly-traded life insurance company, and Conning Corporation, an asset manager, and its majority owners – MetLife, an insurance company, and Swiss Re, a reinsurance company.  From June 1986 to October 1997, Mr. Kopsky worked for KPMG LLP, a public accounting firm where, in his last role, he served as a senior manager.  Mr. Kopsky is a certified public accountant and has the Series 7, 24, 63, and 79 Financial Industry Regulatory Authority securities license designations.

 

Glenn Riis, age 53, has served as our Senior Managing Director-Chief Credit Risk Officer since January 2015 and joined RAIT in June 2013.  Since joining RAIT, Mr. Riis has been primarily responsible for credit and risk management, in addition to alternative investment and lending opportunities.  He began his CMBS career in 1995 at Merrill Lynch and was initially responsible for credit analysis, trading desk risk management and primary issuance deal structuring.  During his tenure at Merrill Lynch, he was a senior CMBS trader, with responsibility for trading and managing risk related to credit products for the commercial real estate business.  In 1999, he moved to a similar role at Chase Bank, and following the Chase merger with JPMorgan in September 2000, he also acted as a senior member of the businesses’ various credit committees.  Until 2009, Mr. Riis was responsible for trading, risk management, loan pricing/structuring and new issue distribution at JPMorgan Chase.  Subsequently, he worked as a CMBS portfolio manager at Treesdale Partners and as head of CMBS Trading at Gleacher & Co.  

 

John J. Reyle, age 38, has served as our General Counsel since February 2017, served as our senior managing director—chief legal officer from January 2015 to February 2017, as our senior vice president—corporate counsel from January 2014 to December 2014, as our vice president—corporate counsel from May 2012 to December 2013 and as our corporate counsel from August 2009 to May 2012. Prior to joining RAIT, Mr. Reyle was an associate in the real estate legal departments of Ledgewood, P.C., a law firm, from October 2005 to February 2009, and Cozen O’Conner, P.C., a law firm, from August 2004 to October 2005. During that time, Mr. Reyle concentrated his practice in the area of commercial real estate representing a variety of clients in connection with real estate-based financing, acquisitions and dispositions of commercial real estate, commercial leasing matters, real estate development and basic corporate transactions related to the foregoing.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our officers, Trustees and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC and to furnish RAIT with copies of all such reports.

 

Based solely on our review of the reports received by us, or representations from certain reporting persons that no Form 5 filings were required for those persons, we believe that during fiscal 2016, no officers, Trustees or beneficial owners failed to file reports of ownership and changes of ownership on a timely basis. As of the date of this proxy statement, we believe that all reports of ownership and changes in ownership required to be filed with the SEC relating to transactions in fiscal 2016 have been filed.

 

Code of Ethics

 

We have also adopted a code of business conduct and ethics (the “Code”) for our Trustees, officers and employees intended to satisfy NYSE listing standards and the definition of a “code of ethics” set forth in applicable SEC rules. This Code is available on our website at http://www.rait.com.

 

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Trustee Candidates Recommended by Shareholders

 

Our Board, through our Nominating and Governance Committee, will consider nominees recommended by shareholders. A shareholder wishing to recommend a candidate must submit the following documents to the Secretary, RAIT Financial Trust, Two Logan Square, 100 N. 18th Street, 23rd Floor, Philadelphia, Pennsylvania, 19103, not less than 120 calendar days before the shareholders meet to elect Trustees:

 

These documents must be received from the candidate before the first day of February preceding the annual meeting of shareholders.

 

The Nominating and Governance Committee evaluates all candidates, regardless of who recommended the candidate, based on the same criteria.

 

Audit Committee

 

The Audit Committee is appointed by the Board to assist Board oversight of:

 

The Audit Committee is comprised of Mr. Farnesi, as Chairman, Mr. Batinovich and Ms. Kim.  The Board has determined that Mr. Farnesi, Mr. Batinovich and Ms. Kim meet the independence standards, including the independence standards for Audit Committee members set forth in the listing standards of the NYSE and those set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, or the Exchange Act, and that Mr. Farnesi qualifies as an “audit committee financial expert” as that term is defined in applicable rules and regulations under the Exchange Act.

 

ITEM 11. EXECUTIVE COMPENSATION

 

EXECUTIVE OFFICER AND TRUSTEE COMPENSATION

 

Compensation Discussion and Analysis

 

Executive Summary

 

The Compensation Discussion and Analysis explains the objectives of our executive compensation programs, outlines the elements of executive officer compensation and describes the factors considered by the compensation committee to determine the amounts of compensation for our Named Executive Officers for 2016 performance.  During 2016, we began a strategic transition to concentrate primarily on our CRE lending business.  This is a strategic transition to a more cost efficient, lower leveraged and focused business model from being a multi-strategy REIT which also owned and managed CRE assets throughout the United States and managed our interest in IRT.  As described below and in the Annual Report, our key accomplishments in 2016 towards implementing our strategic transition included completing the IRT Management Internalization and changes in RAIT’s leadership and Board.  As part of these accomplishments, the Compensation Committee had to consider the importance to RAIT of successfully implementing the succession of a new CEO, Mr. Davidson, and CFO, Mr. Kopsky, for RAIT as Mr. Schaeffer, the former CEO, and Mr. Sebra, the former CFO, each resigned from RAIT to remain with IRT as part of the IRT Management Internalization.  Because Mr. Kopsky became CFO and Mr. Riis was determined to be an executive officer in 2017, they are not included in the Named Executive Officers for 2016.  Our Named Executive Officers and their principal offices during 2016 were:

 

During 2016 and 2017 in this transformative period for RAIT, the Compensation Committee sought to implement compensation arrangements that would both appropriately incentivize RAIT’s new executive management team, recognize achievements by RAIT’s executive team for achievements implementing RAIT’s strategic transition and establish severance arrangements that would ensure a smooth

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transition with respect to RAIT’s departing executives.  In applying our compensation policies to the Named Executive Officers in 2016, the Compensation Committee sought to recognize the executive management’s accomplishments in 2016 described below relating to implementation of our strategic plan that we believe will enhance shareholder value, and respond to changes in RAIT’s executive management team while continuing to maintain significant portion of executive compensation at risk based on our performance and also provide for measuring our success across both short-term and long-term performance periods.  2016 compensation decisions are described in greater detail below.  See “2016 Compensation decisions-Impact of the Leadership Transition on 2016 Compensation” below.

 

In 2016, the Compensation Committee relied on short-term and long-term incentive compensation plans for Messr. Davidson, Schaeffer and Sebra (the “2016 Eligible Officers”) that (i) provide clear objectives and targets, (ii) improve alignment with measurable company performance and shareholder returns, and (iii) recognize and adjust for individual contributions to our success. The Compensation Committee approved 2016 award opportunities pursuant to RAIT’s 2015 Annual Incentive Compensation Plan (the “Annual Cash Bonus Plan”) and RAIT’s 2015 Long Term Incentive Plan (the “Long Term Equity Plan”) for the 2016 Eligible Officers. The Compensation Committee had previously adopted the Annual Cash Bonus Plan and the Long Term Equity Plan as sub-plans of the 2012 IAP, which was previously approved by the shareholders of RAIT. The terms of the awards (the “2016 Target Cash Bonus Awards”) under the Annual Cash Bonus Plan and the awards (the “2016 Long Term Equity Awards”) under the Long Term Equity Plan are described below.  See “2016 Compensation Decisions” below for further description of these incentive plans and the compensation paid thereunder.

 

The role of our Compensation Committee, its use of an independent compensation consultant and the participation of executive officers in the compensation process are discussed above in “Information Concerning Our Board of Trustees, Committees and Governance-Compensation Committee.”

 

2016 RAIT Performance.

 

During 2016, we began to implement our strategy to focus on our core CRE lending business line.  We also managed our own real estate owned (“REO”) portfolio, managed third-party properties and assets and, prior to the IRT Management Internalization, owned the external advisor of IRT, a REIT which owns a portfolio of multifamily properties, and owned approximately 15.5% of the outstanding IRT common stock.   We believe we made significant progress executing our strategy to return to our focus on CRE lending, including the following key accomplishments:  

 

 

 

 

 

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During 2016, we generated GAAP net income (loss) allocable to Common Shares of $(9.8) million, or $(0.11) per Common Share-diluted, as compared to $7.2 million, or $0.08 per Common Share-diluted, during 2015. During 2016, our cash available for distribution (“CAD”) decreased to $40.6 million, or $0.45 per Common Share, from $66.1 million, or $0.77 per Common Share for 2015.  CAD is a non-GAAP financial measure.  For management’s definitions and discussion of the usefulness of CAD to investors and management and a reconciliation of our reported net income (loss) to our CAD, see “Non-GAAP Financial Measures” in our Annual Report. For 2016, our CRE lending business originated $157 million of loans and completed its 6^th floating rate loan securitization in November 2016 (“RAIT FL6”).  RAIT FL6 was a $258 million floating rate loan securitization and issued $217 million of investment grade bonds with a weighted average interest cost of LIBOR plus 2%.

 

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Objectives of Our Compensation Policies

 

Our compensation policies for our Named Executive Officers have the following objectives:

 

We seek to appropriately incentivize RAIT’s new executive team and assure a smooth transition from RAIT’s former executives as RAIT’s leadership changes to encourage the implementation of RAIT’s strategic plan.  As discussed above in “Executive Summary,” the Compensation Committee needed to address the transition of RAIT’s executive management team throughout the year by modifying compensation arrangements to respond to changing circumstances.  Similarly, the IRT Management Internalization was not contemplated at the time the Compensation Committee set the quantitative metrics for the 2016 Target Cash Bonus Awards and the Compensation Committee felt those metrics did not sufficiently reflect the benefits to RAIT from the IRT Management Internalization to adequately reward the 2016 Eligible Officers for their efforts on the IRT Internalization Transactions and so approved an additional discretionary bonus (the “Executive Transaction Bonus”) to each 2016 Eligible Officer relating to the contributions of the 2016 Eligible Officers to completing the IRT Management Internalization.

 

We seek to attract and retain key executives, including the Named Executive Officers, by motivating them to achieve superior performance and rewarding them for that performance. Key elements of compensation may include one or more of the following:

 

 

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We seek to align the interests of our Named Executive Officers with our shareholders through long-term incentives in the form of equity-based compensation. As discussed above in “Executive Summary,” the Compensation Committee believes equity-based compensation is important to align the interests of our Named Executive Officers with our shareholders. The Compensation Committee accordingly has made the 2016 Long Term Equity Awards to Messrs. Davidson, Schaeffer and Sebra and awards of SARs and restricted Common Shares to Mr. Reyle as described below.

 

The Elements of Our Compensation

 

The Named Executive Officers’ 2016 compensation consisted of three principal components:

 

 

 

 

 

 

 

 

 

 

 

 

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 Other Compensation

 

RAIT provides certain other limited forms of compensation and benefits to the Named Executive Officers, including limited perquisites and 401(k) matching contributions, as discussed below. The Compensation Committee has reviewed these other components of compensation in relation to the total compensation of the Named Executive Officers and determined that they are reasonable and appropriate. As discussed above, the Compensation Committee reviewed any proposed compensation directly from IRT to our Named Executive Officers. In 2015, two of our Named Executive Officers received compensation directly from IRT for the Named Executive Officers’ service to IRT. The Compensation Committee considers such service, and any compensation from IRT for such service, in determining each named executive’s compensation from RAIT.

 

Perquisites. Mr. Schaeffer received a car allowance of $9,590 and we paid his membership dues of $8,554 for his membership in an organization in 2016. None of our other Named Executive Officers received perquisites equal to or greater than $10,000 in 2016. In general, we do not emphasize perquisites as part of the compensation packages we offer and seek to emphasize other elements.  

 

401(k) Plan. The RAIT 401(k) plan offers eligible employees the opportunity on the same terms and conditions to make long-term investments on a regular basis through salary contributions, which are supplemented by our matching cash contributions and potential profit sharing payments. RAIT currently provides a cash match equal to each employee’s contributions to the extent the contributions do not exceed 4% of the employee’s compensation and may provide an additional cash match of 2% of eligible compensation as discretionary cash profit sharing payments. No discretionary profit sharing payments were made in 2016. Any matching contribution made by RAIT pursuant to the RAIT 401(k) plan vests immediately. All of the Named Executive Officers participated in the RAIT Financial Trust 401(k) Plan in 2016. RAIT contributed employer matches on behalf of the Named Executive Officers as set forth in footnote 4 in the Summary Compensation Table.

 

Post-Termination Compensation. We have employment agreements or other severance arrangements with our Named Executive Officers. Each of our agreements with 2016 Eligible Officers provides for payments and other benefits if the executive’s employment terminates under specified circumstances. See “Executive Compensation—Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table in 2015—Employment Agreements” and “Executive Compensation—Potential Payments on Termination or Change in Control” for a

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description of these severance benefits with the Named Executive Officers.   In 2016, as described above, the Compensation Committee approved the SD MOU, the SD Employment Agreement, the SS MOU, the SS Separation Agreement, the SS Consulting Agreement, the JS MOU and the JS Separation Agreement to address the transition of RAIT’s executive management team and, in the case of Messrs. Schaeffer and Sebra, to provide for appropriate severance.  The Compensation Committee believes generally that these severance and change in control arrangements can be an important part of overall compensation for RAIT’s executive officers because they help to secure the continued employment and dedication of these executive officers, notwithstanding any concern that they might have regarding their own continued employment in general and prior to or following a change in control. The Compensation Committee also believes that these arrangements are important as a recruitment and retention device, as most of the companies with which we compete for executive talent have customarily had similar agreements in place for their senior employees.

 

The executive employment agreements also contain provisions that prohibit the executive from disclosing RAIT’s confidential information and prohibit the executive from engaging in certain competitive activities or soliciting any of our employees or customers following termination of their employment with RAIT. An executive will forfeit his right to receive post-termination compensation if he breaches these or other restrictive covenants in the employment agreements. We believe that these provisions help ensure the long-term success of RAIT.

 

2016 Compensation Decisions

 

Impact of the Leadership Transition on 2016 Compensation

 

As discussed above in “Executive Summary,” during 2016, we began a strategic transition to concentrate primarily on our CRE lending business and the Compensation Committee had to consider the importance to RAIT of successfully implementing the succession of a new CEO, Mr. Davidson, and CFO, Mr. Kopsky, for RAIT as Mr. Schaeffer, the former CEO, and Mr. Sebra, the former CFO, each resigned from RAIT to remain with IRT as part of the IRT Management Internalization.   In addition, as discussed above in “Executive Summary, the Compensation Committee sought to implement compensation arrangements that would both appropriately incentivize RAIT’s new executive management team, recognize achievements by RAIT’s executive team for achievements implementing RAIT’s strategic transition and establish severance arrangements that would ensure a smooth transition with respect to RAIT’s departing executives.  

 

In applying our compensation policies to the Named Executive Officers in 2016, the Compensation Committee sought to recognize the executive management’s accomplishments in 2016 described below relating to implementation of our strategic plan that we believe will enhance shareholder value, and respond to changes in RAIT’s executive management team while continuing to maintain significant portion of executive compensation at risk based on our performance and also provide for measuring our success across both short-term and long-term performance periods.  The steps taken by the Compensation Committee to address these objectives included those described below.

 

Incentivize Successful Implementation of RAIT’s Strategic Plan

 

Create Appropriate Compensation Arrangements for RAIT’s New Executive Team

 

Ensure a Smooth Transition by Establishing Appropriate Severance Arrangements for RAIT’s Departing Executives

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Annual Base Salary

 

The base salary of each of our executive officers is based on the review of the Compensation Committee described above and the following:  

 

This determination is not formulaic and is not based on specific RAIT or individual performance targets objectives, but rather is subjective and made in light of our compensation philosophy and objectives described above. Mr. Davidson’s base salary was increased from $650,000 to $850,000 upon his appointment as CEO.  Mr. Schaeffer’s, Mr. Sebra’s and Mr. Reyle’s base salary remained the same during 2016.  

 

Annual Incentives and Long-Term Incentives

 

2016 Incentive Awards

 

As described above, effective April 22, 2016, the Compensation Committee approved 2016 award opportunities pursuant to the “Annual Cash Bonus Plan and the Long Term Equity Plan for the 2016 2016 Eligible Officers. The terms of the 2016 Target Cash Bonus Awards under the Annual Cash Bonus Plan and the 2016 Long Term Equity Awards under the Long Term Equity Plan are described below.

 

2016 Target Cash Bonus Awards

 

2016 Target Cash Bonus Award Levels

 

The 2016 Target Cash Bonus Award levels set by the Compensation Committee for each of RAIT’s 2016 Eligible Officers based on 2016 performance were as follows:

 

 

 

 

 

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2016 Quantitative Bonus Award Criteria

The Compensation Committee established the following objective performance metrics to be utilized in determining any payout with respect to the Quantitative Bonus Award portion of the 2016 Target Cash Bonus Award weighted based on these performance measurements:

The actual Quantitative Bonus Award payment realized by a 2016 Eligible Officer for 2016 with respect to each applicable metric would depend on RAIT’s achievement of at least a “Threshold” level of performance established by the Compensation Committee with respect to that metric. There would be no Quantitative Bonus Award payable for that metric in the event RAIT achieved less than the Threshold level for the applicable annual performance period. RAIT’s achievement of the Threshold level for a designated metric would result in a payout of 50% of the proportion of the Quantitative Bonus Award allocated to that metric; the achievement of the Target level for a designated metric would result in a payout of 100% of the proportion of the Quantitative Bonus Award allocated to that metric; and the achievement of the Maximum level for a designated metric would result in a payout of 150% of the proportion of the Quantitative Bonus Award allocated to that metric. If the calculated percentage was between Threshold and Target or between Target and Maximum for an annual performance period, then the earned percentage would be prorated. The number of shares used for any per share metric was the weighted average number of shares outstanding for the relevant period. The achievement of these levels and allocated payments are illustrated by the following table:

 

2016 Qualitative Bonus Award Criteria

The Qualitative Bonus Award portion of each 2016 Eligible Officer’s 2016 Target Cash Bonus, which was the remaining 30% of the overall target cash bonus, was based on the Compensation Committee’s subjective evaluation of the 2016 Eligible Officer’s performance relative to achieving specified individual criteria established for 2016 for each participant, which the Compensation Committee determined were also important elements of each 2016 Eligible Officer’s contribution to the creation of overall shareholder value.

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2016 Target Cash Bonus Award Payments

 

2016 Target Cash Bonus Awards Payments and Performance Metrics and Discretionary Bonus

In March 2017, the Compensation Committee certified payments under the 2016 Target Cash Bonus Awards to each of the eligible officers.

The threshold, target and maximum values, the actual performance and the resulting payout percentage for each performance metric for the quantitative bonus award portion of the 2016 Target Cash Bonus Awards were as follows:

 

The Compensation Committee set the qualitative bonus earned under the 2016 Target Cash Awards between the target and the threshold level at 135.0% for each of Mr. Schaeffer and Mr. Sebra and, as required by the SD MOU, at the 150.0% maximum level for Mr. Davidson.   In determining the appropriate level of the qualitative bonuses, the Compensation Committee used its discretion to identify and analyze the factors to consider. As described above, the Compensation Committee also exercised its discretion to make a separate discretionary Executive Transaction Award to each 2016 Eligible Officer.  

 

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As a result, the 2016 Target Cash Bonus Award and Executive Transaction Award for each of the 2016 Eligible Officers, were as follows:

Long Term Equity Awards

The 2016 Long Term Equity Awards for the 2016 Eligible Officers consist of the following two components:

The actual number of 2016 PSUs earned by a participant may range from 0% to 150% of target based on actual performance for the performance period. The performance based awards vest 50% at December 31, 2018 based on performance for 2016-2018, and the 50% balance, consisting of the same number of shares that were awarded at December 31, 2018, become time vesting and vest one year thereafter, subject to forfeiture in such year only in the event RAIT has terminated the 2016 Eligible Officer’s employment for cause or the 2016 Eligible Officer has resigned without good reason as determined, in each situation, under such 2016 Eligible Officer’s employment agreement. The Compensation Committee currently intends to redeem any vested 2016 PSUs with Common Shares, subject to the availability of Common Shares under the 2012 IAP at the time of vesting.

 

Structure of 2016 PSUs

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The “Threshold,” “Target,” and “Maximum” benchmarks to be established for the TSR achieved by RAIT over each relevant three-year performance period in comparison to the performance metrics listed below and the resulting impact on the number of shares earned by each 2016 Eligible Officer upon the maturity of Performance Share Units at the conclusion of each three-year performance period, is summarized in the following table:

 

No awards will be earned if below threshold performance is achieved for a particular metric. If performance falls between Threshold and Target or Target and Maximum for any performance period, then the number of Performance Share Units earned will be prorated.

Structure of Annual Restricted Share Awards

 

Grant of 2016 Long Term Equity Awards

Effective as of April 22, 2016, each of the 2016 Eligible Officers was granted a 2016 Long Term Equity Award, consisting of both a 2016 PSU, having the target value shown in the table below for the 2016–2018 performance period, and an Annual Restricted Share Award having the target value shown in the table below for fiscal year 2016:

 

 

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Additional Terms of the 2016 Long Term Equity Awards

Dividends will be paid with respect to outstanding Restricted Share Awards, subject to forfeiture prior to vesting. Dividend Equivalents will not be paid on the 50% of the Performance Share Unit Awards that have met the 3 year performance based criteria and have vested, but Dividend Equivalents will be paid on the remaining 50% of the Performance Share Unit Awards only for the year during which they time vest, subject to forfeiture prior to vesting. No Dividend Equivalents will be paid while the Performance Share Unit Awards are subject to performance criteria. Dividend Equivalents will accrue only on the portion of the Performance Share Unit Awards which have met the performance criteria and remain subject only to time vesting.

The Restricted Share Awards will have voting rights and the Performance Share Unit Awards will not have any voting rights.

Any 2016 Eligible Officer whose employment is terminated will forfeit any unvested long term equity awards except with respect to Performance Share Units in the event of a Qualified Termination or Retirement as described below and except where such 2016 Eligible Officer’s employment agreement with RAIT provides for accelerated vesting in defined circumstances upon a change of control of RAIT.

If a 2016 Eligible Officer’s employment is terminated due to death or disability and other than voluntarily or for cause (as defined in the relevant employment agreement for each 2016 Eligible Officer) (a “Qualified Termination”) prior to the conclusion of the 3-year performance period applicable to such 2016 Eligible Officer’s Performance Share Units, then such performance period will be shortened to conclude on the date of such Qualified Termination (a “Shortened Performance Period”). In such event, the Compensation Committee will determine within three months after the date of such Qualified Termination the number of Performance Share Units earned by such 2016 Eligible Officer, if any, for such Shortened Performance Period in accordance with the performance criteria established for such award. The 2016 Eligible Officer’s earned Performance Share Units, if any, will vest as of the date that the Compensation Committee determines the achievement of such performance criteria and will not be subject to the additional time based vesting period. The number of Performance Share Units eligible to be earned shall be determined on a pro rata basis by multiplying the number of Performance Share Units issued to such 2016 Eligible Officer by a fraction, the numerator is the number of days in the Shortened Performance Period and the denominator of which is the number of days in the original 3-year Performance Period. With respect to earned Performance Share Units held by the Officer for which the Performance Period is complete but for which the additional time-based vesting period is incomplete prior to the 2016 Eligible Officer’s Qualified Termination, any restrictions on such earned awards shall lapse and such earned awards shall automatically become fully vested as of the date of such Qualified Termination.

In the event of a 2016 Eligible Officer’s “Retirement” (as defined below), the 2016 PSUs will vest in the following manner. If such Retirement occurs during the performance period, the number of 2016 PSUs vested will be determined on a pro rata basis by multiplying the 2016 PSUs earned in the performance period by a fraction, the numerator is the number of days from the beginning of the performance period to the date of such Retirement and the denominator of which is the total number of days in the 3-year performance period. If a 2016 Eligible Officer’s Retirement occurs after the performance period, 100% of the 2016 PSUs earned in the performance period will vest upon Retirement. The above notwithstanding in no event will any 2016 PSUs vest if the performance targets are not met. “Retirement” is defined in the 2016 PSUs as the 2016 Eligible Officer’s voluntary separation of employment following satisfaction of the “Rule of 70.” The Rule of 70 will be satisfied upon (1) completion of at least fifteen (15) years of service with RAIT or its related entities; (2) attainment of age 55 and (3) such 2016 Eligible Officer’s combined age and service equals at least 70. A 2016 Eligible Officer may separate upon Retirement subject to providing at least six (6) months’ advance notice to RAIT and entering into a separate three-year non-competition and non-solicitation agreement if requested. In the event the 2016 PSUs vest due to Retirement, 50% of the vested 2016 PSUs will be redeemable as of the relevant determination date and the remaining 50% will be redeemable on the first anniversary of the last day of the performance period.

On April 22, 2016, the Compensation Committee adopted amendments to the performance share units granted to the 2016 Eligible Officers in March 2015 to provide for vesting upon a defined retirement on the same terms as those described above for the 2016 PSUs.

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Clawback Policy

 

Awards made under the Annual Cash Bonus Plan and the Long Term Incentive Program for the 2016 Eligible Officers are subject to a clawback policy which will allow RAIT to recover amounts paid to such officer pursuant to such awards to the extent that the Compensation Committee, following an appropriate investigation and consideration of all relevant circumstances, determines that such officer has engaged in fraud or willful misconduct that caused the requirement for a material accounting restatement of RAIT’s financial statements due to material noncompliance with any financial reporting requirement (excluding any restatement due solely to a change in accounting rules).

 

Hypothetical 2015 PSUs and 2016 PSUs Performance

 

The actual three-year performance period applicable to the PSUs (the “2015 PSUs”) issued to the 2016 Eligible Officers in March 2015 runs from 2015 through 2017 and the actual three-year performance period applicable to the 2016 PSUs issued to the 2016 Eligible Officers in April 2016 runs from 2016 through 2018.  The tables below illustrate the manner in which these PSUs serve to align the economic interests of such officers with those of RAIT’s shareholders.  The 2015 PSUs table utilize a hypothetical performance period of 2015 and 2016 only and does not include any Common Shares attributable to the subjective portion of such 2015 PSUs. The 2016 PSUs table utilize a hypothetical performance period of 2016 only and those 2016 PSUs did not have a subjective portion.  

 

2015 PSUs 

 

Based on a comparison of our TSR to that of the three TSR metrics described above for the two year period as set forth below, if the 2015 PSUs granted to the 2016 Eligible Officers had been paid out as of December 31, 2016, based on our relative TSR performance over such hypothetical two year period, they would have had no value and there would have been no additional Common Shares issued to the 2016 Eligible Officers in connection with the payout of such awards.

 

 

2016 PSUs 

 

Based on a comparison of our TSR to that of the three TSR metrics described above for the one year period as set forth below, if the 2016 PSUs granted to the 2016 Eligible Officers last year had been paid out as of December 31, 2016, based on our relative TSR performance over such hypothetical one year period, they would have had a total value of $2,656,401 based on our December 31, 2016 stock price of $3.36 per share and there would have been 790,596 additional Common Shares issued to the 2016 Eligible Officers in connection with the payout of such awards:

 

 

2017 Incentive Awards

 

On April 26, 2017, the Compensation Committee approved 2017 award opportunities pursuant to the Annual Cash Bonus Plan and Long Term Equity Plan for RAIT’s four current executive officers (the “2017 Eligible Officers”):  Mr. Davidson, Mr. Kopsky, Mr. Reyle and Mr. Riis.  The terms of the awards (the “2017 Target Cash Bonus Awards”) under the Annual Cash Bonus Plan and the awards (the “2017 Long Term Equity Awards”) under the Long Term Equity Plan for the two 2017 Eligible Officers who are Named Executive Officers, Mr. Davidson and Mr. Reyle, are described below.

2017 Target Cash Bonus Awards

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2017 Target Cash Bonus Award Levels

The 2017 Target Cash Bonus Award levels set by the Compensation Committee for each of RAIT’s 2017 Eligible Officers who are Named Executive Officers based on 2017 performance are as follows:

 

 

 2017 Quantitative Bonus Award Criteria

The Compensation Committee established the following objective performance metrics to be utilized in determining the payout with respect to the Quantitative Bonus Award portion of the 2017 Target Cash Bonus Award weighted based on all of these performance measurements for Mr. Davidson and all of these performance measurements except Equity Raises for Mr. Reyle:

All of these criteria shall be calculated in a manner consistent with the manner used by RAIT in its public reporting, subject to the adjustments noted above, provided that the Compensation Committee will retain discretion to adjust the calculation of these metrics, to pay additional discretionary amounts, or to reduce amounts derived from such calculations if the Compensation Committee believes that such adjustment, payment or reduction would enhance incentivizing or rewarding actions in the best interests of RAIT’s shareholders. 

2017 Qualitative Bonus Award Criteria

The Qualitative Bonus Award portion of each 2017 Eligible Officer’s 2017 Target Cash Bonus, which will be the remaining 25% of the overall target cash bonus, will be based on the Compensation Committee’s subjective evaluation of each 2017 Eligible Officer’s performance in 2017.  

The actual 2017 Target Cash Bonus Award payment realized by a 2017 Eligible Officer for 2017 with respect to each applicable metric will depend on RAIT’s achievement of at least a “Threshold” level of performance established by the Compensation Committee with respect to that metric. There will be no 2017 Target Cash Bonus Award payable for that metric in the event RAIT achieves less than the Threshold level for the applicable annual performance period.  RAIT’s achievement of the Threshold, Target, Superior or Maximum level for a designated metric will result in a payout of set forth below opposite such level.  If the calculated percentage is between Threshold and Target, Target and Superior or Superior and Maximum for an annual performance period, then the earned percentage will be prorated.

 

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The portion of the Total 2017 Target Cash Bonus Award allocated to each of the Quantitative Metrics and the Qualitative Metric for the 2017 Target Cash Bonus Award are as follows:

 

 

2017 Target Cash Bonus Award Payments

Long Term Equity Awards

The 2017 Long Term Equity Award levels set by the Compensation Committee for each of RAIT’s 2017 Eligible Officers who are Named Executive Officers based on 2017 performance are as follows:

 

The 2017 Long Term Equity Awards for the 2017 Eligible Officers consist of the following two components:

The actual number of 2017 PSUs earned by a participant may range from 0% to 150% of target based on actual performance for the performance period. The performance based awards vest 50% at December 31, 2019 based on performance for 2017-2019, and the 50% balance, consisting of the same number of shares that were awarded at December 31, 2019, become time vesting and vest one year thereafter, subject to forfeiture in such year only in the event RAIT has terminated the 2017 Eligible Officer’s employment for cause or the 2017 Eligible Officer has resigned without good reason as determined, in each situation, under such 2017 Eligible Officer’s employment agreement. The Compensation Committee currently intends to redeem any vested 2017 PSUs with Common Shares, subject to the availability of Common Shares under the 2012 IAP (or the 2017 IAP, if approved by RAIT’s shareholders) at the time of vesting.

 

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Structure of 2017 PSUs

The “Threshold,” “Target,” and “Maximum” benchmarks to be established for the TSR achieved by RAIT over each relevant three-year performance period in comparison to the performance metrics listed below and the resulting impact on the number of shares earned by each 2017 Eligible Officer upon the maturity of Performance Share Units at the conclusion of each three-year performance period, is summarized in the following table:

No awards will be earned if below threshold performance is achieved for a particular metric. If performance falls between Threshold and Target or Target and Maximum for any performance period, then the number of 2017 PSUs earned will be prorated.

Structure of Annual Restricted Share Awards

 

Grant of 2017 Long Term Equity Awards

Effective as of April 26, 2017, each of the 2017 Eligible Officers was granted a 2017 Long Term Equity Award, consisting of both a 2017 PSU, having the target value shown in the table below for the 2017–2019 performance period, and an Annual Restricted Share Award having the target value shown in the table below for fiscal year 2017:

 

 

 

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Additional Terms of the 2017 Long Term Equity Awards

 

Due to the current limited availability of Common Shares under the 2012 IAP, the vesting of Mr. Davidson’s 2017 PSUs is also subject to RAIT’s shareholders approving a sufficient increase in the number of Common Shares available for issuance under RAIT’s 2012 IAP (including the 2017 IAP, successor plan thereto or any alternative plan) to allow for satisfying any such vesting with Common Shares as of the date of such approval.  

 

Dividends will be paid with respect to outstanding Restricted Share Awards, subject to forfeiture prior to vesting. Dividend Equivalents will not be paid on the 50% of the 2017 PSUs that have met the 3 year performance based criteria and have vested, but Dividend Equivalents will be paid on the remaining 50 % of the 2017 PSUs only for the year during which they time vest, subject to forfeiture prior to vesting. No Dividend Equivalents will be paid while the 2017 PSUs are subject to performance criteria. Dividend Equivalents will accrue only on the portion of the 2017 PSUs which have met the performance criteria and remain subject only to time vesting.  

 

The Restricted Share Awards will have voting rights and the 2017 PSUs will not have any voting rights.  

 

Any 2017 Eligible Officer whose employment is terminated will forfeit any unvested long term equity awards except with respect to Performance Share Units in the event of a Qualified Termination or Retirement and except where the JR Employment Agreement with RAIT provides for accelerated vesting in defined circumstances.  

 

Awards made under the Annual Cash Bonus Plan and the Long Term Incentive Program for the 2017 Eligible Officers are subject to the same clawback policy as the 2016 PSUs.

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Implementing Our Objectives

 

Impact of Shareholder Advisory Votes

 

Say on Pay Vote

 

RAIT held its first shareholder advisory vote on executive officer compensation as required under the federal securities laws at its 2011 annual meeting of shareholders held on May 17, 2011. More than 85% of the votes cast on such proposal were in favor of the compensation of the Named Executive Officers. RAIT held its second shareholder advisory vote on executive officer compensation as required under the federal securities laws at its 2014 annual meeting of shareholders held on May 13, 2014. More than 82% of the votes cast on such proposal were in favor of the compensation of the Named Executive Officers. The Compensation Committee considered these voting results as supportive of the Compensation Committee’s general executive compensation practices. The Compensation Committee will also carefully consider the shareholder votes on Proposal 4 at the 2017 annual meeting, along with other expressions of shareholder views it receives on specific policies and desirable actions.

 

Say-on-Pay-Frequency Vote

 

At our 2011 annual meeting of shareholders, our shareholders who cast votes on this proposal recommended by a majority of the votes cast that we hold an advisory shareholder vote on the compensation of our Named Executive Officers every three years. Under SEC rules, we are required to include an advisory vote every six years on whether the frequency of advisory shareholder vote on the compensation of our Named Executive Officers should be every year, every two years or every three years and so we have included Proposal 4 in this Proxy Statement.  We have examined current recommended practices on this matter and have determined to recommend to our shareholders to vote to change the frequency of our advisory shareholder votes on the compensation of our Named Executive Officers to every year.  

 

The Compensation Committee will continue to take into account future shareholder advisory votes on executive compensation in order to determine whether any subsequent changes to RAIT’s executive compensation programs and policies would be warranted to reflect any shareholder concerns reflected in those advisory votes.

 

Peer Groups

As part of its consideration of changes to RAIT’s compensation programs described above, the Compensation Committee, with the assistance of its independent compensation consultant FPL, analyzed the following peer group of companies in relation to setting the amount of future compensation potential (salary, cash bonus and equity) for RAIT’s executive officers since 2015:

These companies were included in this peer group because they may compete with us for business and/or talent. Some of our direct peers are not included in this peer group (though are used in the peer group that we use to measure our TSR performance, further discussed below) because they are externally managed and access to their compensation information is limited.

The companies comprising the peer group, or the TSR performance peers, for the three year performance measure comparing RAIT’s TSR relative to TSR of peers described above are:

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See discussion above for the criteria used to select this peer group. We do not target our executives compensation to a specified percentile of a peer group.

 

Allocation Between Equity Compensation and Cash Payments. The Compensation Committee strives to achieve an appropriate mix between base salary, cash bonuses and equity incentive awards in order to meet RAIT’s compensation objectives. However, any pay mix objective is not applied rigidly and does not control the Compensation Committee’s compensation decisions; it serves as another tool to assess an executive’s total pay opportunities and whether appropriate incentives have been provided in order to accomplish our compensation objectives. The Compensation Committee also seeks to balance compensation elements that are based on individual contributions toward achieving RAIT’s financial, operational and strategic goals with others that are based on the performance of our Common Shares and our dividend record.

 

Allocation Among Types of Equity Compensation. From RAIT’s initial public offering in 1998 until 2004, the Compensation Committee granted stock options under the incentive award plan to RAIT’s executive officers and employees. From 2005 until 2010, the Compensation Committee granted phantom units to RAIT’s executive officers and employees under the incentive award plan. The Compensation Committee made this change because it viewed phantom units with dividend equivalents as a tangible and more effective compensation award. In 2012 the Compensation Committee made equity compensation awards comprised of SARs to the Named Executive Officers. Because of the limited number of Common Shares remaining issuable under the incentive award plan, the Compensation Committee made this change to utilize an available equity-based compensation that could be settled in cash or Common Shares. Since RAIT’s shareholders approved increasing the number of Common Shares issuable under the incentive award plan in May 2012, the Compensation Committee made awards comprised of SARs and restricted Common Shares. A SAR is the right to payment, in cash or in Common Shares in the discretion of the Compensation Committee, of the amount of the appreciation on a Common Share during the period beginning on the date of grant and ending on the date of exercise of the SAR. In this regard, SARs serve both to reward and retain executives, as the value of the SARs is linked to the price of Common Shares on the relevant exercise date. A restricted Common Share award is an award of Common Shares subject to restrictions, primarily time-based vesting.

 

The Compensation Committee evaluates periodically whether to settle vested SARs in cash or Common Shares as they vest, subject to the availability of Common Shares under the incentive award plan. The Compensation Committee expects in general to settle SARs with Common Shares, but plans to make final decisions as vesting dates for SARs approach in order to have the most currently-available information. As discussed above, the Compensation Committee has elected to settle all SARs awarded to date with Common Shares. The Compensation Committee continues to review the allocation among the types of RAIT’s equity compensation based on its analysis of the best way to design awards that meet RAIT’s compensation goals within the parameters of RAIT’s shareholder approved incentive award plan as in effect and based on the number of Common Shares issuable thereunder at the relevant time.

 

In March 2015, the Compensation Committee adopted the Long Term Equity Plan.  Since 2015, the Compensation Committee has made awards under the Long Term Equity Plan of performance share units (“PSUs”) which are earned over a defined period based on actual performance for the performance period and restricted share awards that vest over time. The 2016 Long Term Equity Awards and 2017 Long Term Equity Awards made by the Compensation Committee under the Long Term Equity Plan are described above.  

 

Equity Grant Practices. In October 2009, the Compensation Committee adopted an equity award grant policy providing that awards under the incentive award plan will be made only on a date that corresponds to the date of any quarterly meeting of the Board. The Compensation Committee considers exceptions to this practice when a new non-employee Trustee is appointed to the Board or when an employee or executive officer is hired or promoted by RAIT. In that event, an award may also be made on any date in the period beginning when the appointment, hiring or promotion occurs and ending one month thereafter. The Compensation Committee may waive this policy from time to time where the Compensation Committee feels the adverse consequences to RAIT of delaying outweigh the benefits of adhering to the policy.  For example, the Compensation Committee waived this policy when making the 2016 Long Term Equity Awards and 2017 Long Term Equity Awards in order to complete its evaluation of appropriate performance criteria.

 

Stock Ownership Guidelines. In March 2011, the Compensation Committee adopted stock ownership guidelines, or the stock ownership guidelines, with the intent of encouraging close alignment of the interests of our Trustees and senior management with our shareholders. The stock ownership guidelines apply to the following persons, including the Named Executive Officers:

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The guideline for each Trustee is to own eligible RAIT securities, which are defined to include Common Shares and preferred shares, with a value equal to or exceeding five times the Trustee’s annual cash retainer then in effect. Each Trustee who is also an officer subject to the guidelines is subject to the stock ownership guidelines for officers. The guideline for each officer subject to the guidelines is to own eligible securities with a value equal to or exceeding the multiple of the annual base salary then in effect for the officer set forth below opposite the category the officer is in:

As noted above, Mr. Davidson is our CEO. There are currently four other Section 16 officers. Three of them are identified above in “Non-Trustee Executive Officers” and the fourth was determined by the Board not to be an executive officer of RAIT under the relevant SEC definition. There currently are no designated officers.

The guidelines, which were adopted in March 2011, provide that officers and Trustees who do not meet the stock ownership guidelines have five years to achieve compliance, and must hold 100% of the net shares received from any awards made after the adoption of these stock ownership guidelines, including (a) 100% of net after-tax shares received upon vesting of full value share awards, and (b) 100% of net Common Shares received (in other words, net of exercise price and taxes) upon option exercise. Once achieved, compliance is expected for so long as the individual is subject to the stock ownership guidelines. Upon any increase in the Trustee’s annual retainer, in the case of a Trustee, or a senior officer’s base salary, in the case of such senior officer, the individual will have five years from the date of such increase to achieve compliance based on the increased level of annual retainer or base salary. Any Trustee or senior officer becoming subject to the stock ownership guidelines for the first time after the adoption of the guidelines is expected to achieve compliance within five years. If a Trustee or senior officer achieves his or her guideline at any time during the specified five-year period, then such Trustee or senior officer will be considered to be in compliance as long as he or she continues to own the same number of eligible securities that were sufficient to meet the stock ownership guidelines. Compliance with the stock ownership guidelines is expected, but not mandatory. However, if any senior officer or Trustee does not comply, any subsequent equity-based compensation awarded to such senior officer or Trustee may be structured in a manner that would result in compliance with the stock ownership guidelines.

In April 2017, the CFO, the administrator of the guidelines, determined that all of RAIT’s four current executive officers, Mr. Davidson, Mr. Reyle, Mr. Kopsky and Mr. Riis, and the other Section 16 officer who had become subject to the guidelines in January 2014, February 2015, March 2017, February 2017 and March 2016, respectively, had a five year transition period from the respective date they became subject to the guidelines to do so. The CFO also determined that four of the non-employee Trustees currently serving on the Board met the guidelines. The CFO found that four non-employee Trustees who had joined the Board in October 2012, March 2013, November 2015 and February 2017, respectively, each had a five year transition period from the respective date they joined the Board to do so.

Employment Agreements. The Named Executive Officers all have employment agreements with RAIT. The employment agreements set floor amounts for base salary and, in certain cases, bonus opportunities. In addition, the employment agreements of the Named Executives provide for severance protection in defined circumstances. As described above, Mr. Davidson entered into the SD MOU and SD Employment Agreement as part of his becoming RAIT’s CEO in 2016.  Mr. Reyle entered into the JR Employment Agreement in April 2017.  Mr. Schaeffer entered into the SS MOU, SS Separation Agreement and SS Consulting Agreement to provide for a smooth transition upon his resignation as CEO in connection with the IRT Management Internalization which occurred December 20, 2016.  Mr. Sebra entered into the JS MOU and JS Separation Agreement to provide for a smooth transition upon his resignation as CFO in connection with the IRT Management Internalization which occurred December 20, 2016.  The severance Mr. Schaeffer and Mr. Sebra received upon their respective resignations is described below. See “Executive Compensation—Narrative to Summary Compensation Table and Plan-Based Awards Table—Employment Agreements” and “Executive Compensation—Potential Payments on Termination or Change in Control.”   The committee regularly reviews these employment agreements and severance protections and will periodically seek to make adjustments as circumstances and competitive market practices evolve.

Risk Management and RAIT’s Compensation Policies and Procedures. As part of the Board’s role in risk oversight, the Compensation Committee considers the impact of RAIT’s compensation plans, policies and practices, and the incentives they create, with respect to all employees, including executive officers, on RAIT’s risk profile. Based on this consideration, the Compensation Committee concluded that RAIT’s compensation policies and procedures are not reasonably likely to have a material adverse effect on RAIT. Some of the factors the Compensation Committee considered as mitigating the risks of RAIT’s compensation plans include:

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The Effect of Regulatory Requirements on Our Executive Compensation

 

IRC Section 162(m). The Compensation Committee periodically reviews the potential implications of IRC Section 162(m). This section generally disallows a publicly-held corporation’s tax deduction for compensation paid to its chief executive officer and the next three highest paid executive officers (excluding the chief financial officer) in excess of $1,000,000 in any year unless the compensation is performance-based within the meaning of Section 162(m). Although the Compensation Committee will consider various alternatives for preserving the tax deductibility of compensation payments, the Compensation Committee reserves the right to award compensation to our executives that may not qualify under Section 162(m) as deductible compensation. We do not expect that the payment of compensation that does not satisfy the requirements of IRC Section 162(m) will have a material adverse federal income tax consequence to us. We expect a substantial portion of the performance based awards described above to qualify as performance-based under Section 162(m). See “2015 Compensation Decisions” above.

 

IRC Section 409A. Section 409A of the IRC applies to all forms of nonqualified deferred compensation. The Compensation Committee takes Section 409A into account in determining the form and timing of compensation paid to our executives. RAIT intends to operate and administer its compensation arrangements in accordance with Section 409A.

 

IRC Sections 280G and 4999. IRC Section 280G limits our ability to take a tax deduction for certain “excess parachute payments” (as defined in Section 280G) and IRC Section 4999 imposes excise taxes on each executive that receives “excess parachute payments” paid by RAIT in connection with a change in control. A number of our employment agreements had previously provided for RAIT to pay amounts equal to the sum of any excise taxes payable by the executive officer by reason of the executive officer receiving any excess parachute payments plus the amount necessary to put the executive officer in the same after-tax position as if no excise taxes had been paid. Since 2011, the Compensation Committee has sought to remove these provisions if it was otherwise approving any material amendment of the employment agreements containing these provisions. In 2012, we amended the employment agreement of Mr. Sebra to remove his Section 280G make whole provisions. We entered into a new employment agreement with Mr. Davidson in January 2014 which did not contain these provisions. The Compensation Committee considers the adverse tax liabilities imposed by Sections 280G and 4999, as well as other competitive factors, when it structures compensation payable to our Named Executive Officers in connection with a change of control. The potential adverse tax consequences to RAIT and/or the named executive, however, are not necessarily determinative factors in such decisions.

 

Accounting Rules. Various rules under generally accepted accounting principles determine the manner in which RAIT accounts for grants of equity-based compensation to our employees in our financial statements. The Compensation Committee takes into consideration the accounting treatment of alternative grant proposals under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, “Stock Compensation” (formerly, FASB Statement 123R), when determining the form and timing of equity compensation grants to employees, including our Named Executive Officers. The accounting treatment of such grants, however, is not determinative of the type, timing, or amount of any particular grant of equity-based compensation to our employees.

 

Potential Impact on Compensation from Executive Misconduct. If the Board determines that an executive officer has engaged in fraudulent or intentional misconduct, the Board would take action to remedy the misconduct, prevent its recurrence, and impose such discipline on the officer as would be appropriate. Discipline would vary depending on the facts and circumstances, and may include, without limit, termination of employment, initiating an action for breach of fiduciary duty and, if the misconduct resulted in a significant restatement of RAIT’s financial results, seeking reimbursement of any portion of performance-based or incentive compensation paid or awarded to the executive that is greater than what would have been paid or awarded if calculated based on the restated financial results. These remedies would be in addition to, and not in lieu of, any actions imposed by law enforcement agencies, regulators or other authorities. Under the Dodd-Frank Act, additional guidance may be forthcoming regarding mandatory recoupment of compensation. When, and if, such guidance is available, RAIT intends to adopt additional policies to implement the new requirements.

 

Awards made under the 2015 annual cash bonus plan and the 2015 long term incentive program for the eligible officers are subject to a clawback policy which will allow RAIT to recover amounts paid to such officer pursuant to such awards to the extent that the Compensation Committee, following an appropriate investigation and consideration of all relevant circumstances, determines that such officer has engaged in fraud or willful misconduct that caused the requirement for a material accounting restatement of RAIT’s financial statements due to material noncompliance with any financial reporting requirement (excluding any restatement due solely to a change in accounting rules).

 

Internal Pay Equity

 

In evaluating the internal pay relationship among its executive officers, the Compensation Committee sets the target opportunity for each executive officer under the incentive plans based on their relative respective responsibilities and expected contributions to RAIT’s performance. Generally, the person serving as CEO has had the highest salary and target opportunity amounts, followed by the President at such times as the President is not the CEO, then the CFO and then the General Counsel.  With respect to qualitative or discretionary portions of the executive officer’s compensation, the Compensation Committee evaluates each officer’s performance individually.

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Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to RAIT Financial Trust’s (“RAIT”) Board of Trustees that the Compensation Discussion and Analysis be included in RAIT’s annual report on Form 10-K for 2016 and RAIT’s 2017 proxy statement. This report is provided by the following independent Trustees who comprise the committee:

 

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Executive Officer Compensation

The following table provides summary information about compensation expensed or accrued by RAIT during the fiscal year ended December 31, 2016, for the following persons, who we refer to as the Named Executive Officers:

Summary Compensation Table

 

 

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Grants of Plan-Based Awards in 2016

The following table provides information about equity awards granted to the Named Executive Officers in 2016.

 

 

 

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Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table in 2016

We provide additional disclosure below of factors relating to the Summary Compensation Table and Grants of Plan-Based Awards in 2016, including descriptions of the employment agreements of the Named Executive Officers.

Employment Agreements

RAIT has entered into employment agreements with Messrs. Davidson, Schaeffer, Sebra and Reyle.  RAIT also entered into the SD MOU with Mr. Davidson, the SS MOU, SS Separation Agreement and the SS Consulting Agreement with Mr. Schaeffer and the JS MOU and JS Separation Agreement with Mr. Sebra.  Because Mr. Schaeffer resigned from RAIT on December 20, 2016 before RAIT’s 2016 fiscal year end, the terms of his employment agreement are not described.  Because Mr. Sebra resigned from RAIT on March 31, 2017 after RAIT’s 2016 fiscal year end, the terms of his employment agreement are described below.  The post-termination and severance provisions of these agreements are discussed in “Potential Payments on Termination or Change-In-Control” below.

Scott L.N. Davidson

In connection with planning for the IRT Management Internalization which contemplated Mr. Davidson succeeding Mr. Schaeffer as CEO, the Compensation Committee entered into the SD MOU with Mr. Davidson which became effective upon the completion of the IRT Management Internalization on December 20, 2016.  The SD MOU provided that when the IRT Management Internalization was completed, Mr. Davidson would be elevated to CEO and elected to the Board.  The SD MOU provided that, as CEO, Mr. Davidson would receive an annual base salary of $850,000 and would enter into a new employment agreement with RAIT with terms substantially similar to Mr. Schaeffer’s employment agreement and consistent with Mr. Davidson’s employment agreement then in effect.  RAIT and Mr. Davidson entered into the new SD Employment Agreement on November 1, 2016 and it became effective on December 20, 2016.  The terms of the SD Employment Agreement are described below.  The SD MOU contemplated that Mr. Davidson would receive a new aggregate Share Award (as defined in the 2012 IAP) (the “SD MOU Award”) under the 2012 IAP of 600,000 Common Shares which could be granted in separate awards.  The SD MOU provided that 50% of the SD MOU Award would vest on December 20, 2018, regardless of the date granted, and the remaining 50% of the SD MOU Award would vest on December 20, 2019, regardless of the date granted.  The Compensation Committee approved an SD MOU Award of 255,958 Common Shares on December 23, 2016 and the remaining SD MOU Award of 344,042 Common Shares on January 9, 2017.  The SD MOU provided that RAIT would pay Mr. Davidson by February 1, 2017 a one-time cash payment in the amount of $1,350,000 (the “SD MOU Bonus”).  The Compensation Committee approved making the SD MOU Bonus payment to Mr. Davidson in January 2017 with the intent of incentivizing his performance in 2017.  The SD MOU provided that the Board expected that Executive’s discretionary performance compensation for 2016 would be paid at the maximum target level.   As described above, the discretionary portion of Mr. Davidson’s 2016 Target Cash Award was paid at the maximum level.   The SD MOU provided that RAIT’s cash available for distribution (“CAD”) goals for 2017, as established by the Compensation Committee, would be adjusted for the purpose of determining Mr. Davidson’s 2017 performance compensation to account for payments made to Mr. Schaeffer and Mr. Sebra as part of the terms of their separation from RAIT as a result of the IRT Management Internalization.  See the description of the 2017 Target Cash Awards for a description of the adjustments made to CAD for the purposes of those awards.

The SD Employment Agreement became effective December 20, 2016 and has successive three year terms unless either party provides the other party with notice of non-renewal prior to 90 days before the expiration of the then-current term. It provides that Mr. Davidson would serve as CEO and continue to serve as President of RAIT (the “President”), subject to the Board’s right to elect a different person to serve as President, and that Mr. Davidson would perform all duties incident to such positions reasonably assigned to him by the Board.  The SD Employment Agreement specifies that the appointment by the Board of a different person to serve as President would not constitute “Good Reason” for Mr. Davidson to terminate the SD Employment Agreement so long as Mr. Davidson continued to have his duties assigned to him by the Board and all of RAIT’s executive officers have their duties assigned to them by Mr. Davidson, except as may be required by law.  The SD Employment Agreement provides that RAIT will nominate Mr. Davidson for election to the Board at any meeting of the shareholders of

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RAIT where the election of the members of the Board is included in the purposes of such meeting and that he shall serve as a member of the Board, subject to his election to the Board by the shareholders, during his employment term.

The agreement provides for a base salary for Mr. Davidson of $850,000 and provides that his base compensation must be reviewed annually for appropriate increases but may not be decreased. Mr. Davidson is also eligible for bonuses as determined by the Compensation Committee. Mr. Davidson is entitled to participate in all employee retirement and welfare benefit plans and programs or executive perquisites made available to the our senior level executives as a group or to its employees generally and to participate in any short-term and long-term incentive programs (including the incentive award plan) established for our senior level executives generally, at levels commensurate with the benefits provided to other senior executives and with adjustments appropriate for his position. Mr. Davidson is subject to non-competition, non-solicitation, intellectual property and confidentiality restrictions under the agreement. Mr. Davidson’s base salary, bonuses awarded and equity and other compensation are described above in “2016 Compensation Decisions” and “2017 Compensation Decisions” which also reference compensation paid under the SD MOU described above.

Scott F. Schaeffer

As noted above, Mr. Schaeffer resigned from RAIT effective December 20, 2016 and the terms of his severance, as set forth in the SS MOU, SS Separation Agreement and the SS Consulting Agreement, are described below. See “Potential Payments on Termination or Change-In-Control” below.

James J. Sebra

As noted above, Mr. Sebra resigned from RAIT effective March 31, 2017 and the terms of his severance, as set forth in the JS MOU and JS Separation Agreement, are described below. See “Potential Payments on Termination or Change-In-Control” below.

Mr. Sebra’s employment agreement with RAIT terminated as of March 31, 2017 upon his resignation subject to non-competition, non-solicitation, intellectual property and confidentiality restrictions that survived that termination.  Mr. Sebra’s employment agreement with RAIT had a term of successive one year periods unless either party provided the other party with notice of non-renewal prior to three months before the expiration of the term. It provided that Mr. Sebra would serve as CFO and Treasurer of RAIT. The agreement provided for Mr. Sebra’s base salary and provided that his base compensation must be reviewed annually for appropriate increases but may not be decreased. The employment agreement provided that Mr. Sebra may be eligible for an annual bonus which will be awarded by the Compensation Committee in its discretion. The employment agreement further provided that Mr. Sebra is eligible to participate in any of RAIT’s incentive programs, including any equity compensation plan, and eligible to receive the same benefits to the same extent as other senior executives of RAIT, and such other benefits as are commensurate with his position. Participation in employee benefit plans would be subject to the terms of those benefit plans as in effect from time to time. Mr. Sebra is subject to non-competition, non-solicitation, intellectual property and confidentiality restrictions under the agreement. Mr. Sebra’s base salary, bonuses awarded and equity and other compensation are described above in “2016 Compensation Decisions.”

John J. Reyle

 

Mr. Reyle’s employment agreement with RAIT (the “JR Employment Agreement”) provides for an employment term that continues for an initial period of three years and for two successive one year periods thereafter for a maximum term of five years, unless either party provides the other party with notice of non-renewal prior to three months before the expiration of the term. It provides that Mr. Reyle will serve as RAIT’s General Counsel. The JR Employment Agreement provides for an initial base salary of $300,000 for Mr. Reyle and provides that his base compensation must be reviewed annually for appropriate increases but may not be decreased. The JR Employment Agreement provides that Mr. Reyle may be eligible for an annual bonus which will be awarded by the Compensation Committee in its discretion or under the terms of any annual incentive plan of RAIT maintained for other senior level executives. The JR Employment agreement further provides that Mr. Reyle is eligible to participate in any of RAIT’s incentive programs, including any equity compensation plan, and eligible to receive the same benefits to the same extent as other senior level executives of RAIT, and such other benefits as are commensurate with his position. Participation in employee benefit plans will be subject to the terms of those benefit plans as in effect from time to time. Mr. Reyle is subject to non-competition, non-solicitation, intellectual property and confidentiality restrictions under the agreement. The non-competition provisions do not apply at the expiration of the maximum employment term of five years or in the event RAIT elects not to renew the agreement.  Mr. Reyle’s base salary, bonuses awarded and equity and other compensation are described above in “2016 Compensation Decisions” and “2017 Compensation Decisions.”

2016 Target Date Bonus Awards

The terms of both the quantitative and qualitative components of the bonus arrangements for the 2016 Eligible Officers under the 2016 Annual Incentive Plan are described above in the “Compensation Discussion and Analysis” section.

Terms of Awards made to the Named Executive Officers under the Incentive Award Plan

The terms of the awards made to the Named Executive Officers under the incentive award plan, including the PSUs and restricted share awards, during 2016 pursuant to the performance-based component of stock awards under the incentive award plans are detailed above in the “Compensation Discussion and Analysis” section.

 

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Outstanding Equity Awards at 2016 Fiscal Year-End

The following table provides information on the holdings of outstanding equity awards by the Named Executive Officers at December 31, 2016. These awards are comprised of SARs, restricted Common Share awards, and PSUs. Each award is shown separately for each named executive.

 

 

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Option Exercises and Stock Vested in Fiscal 2016

The following table provides information on the number of shares acquired by the Named Executive Officers upon the vesting of restricted Common Share awards and the value realized at that time before payment of any applicable withholding taxes and brokerage commission in 2016.  No SARs were exercised by the Named Executive Officers in 2016.

 

 

Potential Payments on Termination or Change-In-Control

As noted under “Executive Compensation—Narrative to Summary Compensation Table—Employment Agreements,” we have entered into employment agreements with our Named Executive Officers. These agreements provide for payments and other benefits if a named executive’s employment with us is terminated under circumstances specified in his respective agreement. A named executive’s rights upon the termination of his employment will depend upon the circumstances of the termination. The tables below summarize these rights and the amount of any payments and benefits due under the circumstances specified for the named executive indicated.

 

Scott L.N. Davidson

Under the SD Employment Agreement, if Mr. Davidson’s employment ends for any reason, RAIT will pay accrued salary, bonuses and incentive payments already awarded but not paid (including any pro rata bonus awarded for the year of termination), and other existing obligations. If his employment is terminated without “cause” or he resigns for “good reason” during the term of the SD Employment Agreement, or if RAIT sends a timely notice of non-renewal of the SD Employment Agreement, or if he is terminated after a change of control without cause or resigns for good reason, and he executes and does not revoke a mutual release, he will receive: (i) a lump sum cash severance payment equal to 2.25 times the sum of his base salary as in effect immediately prior to termination of his employment and average annual cash bonus (excluding the SD MOU Bonus) for the three year period immediately prior to his termination of employment, (ii) a pro rata portion of his target bonus for the fiscal year of his termination (if there is no target bonus opportunity for the fiscal year, the target bonus for this purpose will be equal to a pro rata portion of the average annual cash bonus (excluding the SD MOU Bonus) Mr. Davidson received for the three year period immediately prior to his termination of employment), (iii) continued medical coverage for 18 months for himself and his spouse and dependents as if he had continued in employment with RAIT, and (iv) all other amounts earned, accrued and owing but not yet paid to him. If he does not provide a release, Mr. Davidson is entitled to receive only the amount due to him under the RAIT’s then current severance pay plan for employees, if any. RAIT does not currently have a severance plan applicable to its executive officers. No other payments or benefits are due to Mr. Davidson under the agreement, although he is entitled to any benefits accrued and earned in accordance with the terms of any applicable benefit plans and programs of RAIT.

If Mr. Davidson voluntarily terminates his employment other than for good reason, no further payments shall be due him, except that he shall be entitled to any benefits accrued and due in accordance with the terms of any applicable benefit plans and programs of RAIT. RAIT may terminate Mr. Davidson’s employment if Mr. Davidson has been unable to perform the material duties of his employment and has been formally determined to be eligible for disability benefits under RAIT’s long-term disability plan. If his employment is terminated on account of his death or disability, he will receive all amounts earned and accrued as of such date and a pro rated target bonus (calculated as set forth above) for the fiscal year of his death or disability. RAIT may terminate Mr. Davidson’s employment at any time for cause, in which event all

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payments to him cease, except for base salary to the extent already accrued, and for benefits accrued and earned before his termination in accordance with the terms of any of RAIT’s applicable benefit plans and programs.

Under the SD Employment Agreement, Mr. Davidson is responsible for all taxes due with respect to any amount payable to or other benefit receivable by him thereunder, including, without limitation, any excise tax imposed by IRC Section 4999. However, the SD Employment Agreement provides that any amount or benefit deemed to be a parachute payment (as defined in IRC Section 280G) alone or when added to any other amount payable or paid to or other benefit receivable or received by Mr. Davidson which is deemed to constitute a parachute payment, and would result in the imposition on Mr. Davidson of an excise tax under IRC Section 4999, shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by IRC Section 4999, but only if, by reason of such reduction, the net after-tax benefit received by Mr. Davidson exceeds the net after-tax benefit received by Mr. Davidson if no such reduction was made.

“Cause” is defined in The SD Employment Agreement as any of the following grounds for termination of Mr. Davidson’s employment: (a) Mr. Davidson shall have been convicted of a felony; (b) Mr. Davidson shall have been convicted of fraud, misappropriation or embezzlement, (c) Mr. Davidson intentionally and continually fails substantially to perform his reasonably assigned material duties to RAIT (other than a failure resulting from Mr. Davidson’s incapacity due to physical or mental illness), which failure has been materially and demonstrably detrimental to RAIT and has continued for a period of at least 30 days after a written notice of demand for substantial performance, signed by a duly authorized officer of RAIT, has been delivered to Mr. Davidson specifying the manner in which Mr. Davidson has failed substantially to perform; or (d) Mr. Davidson breaches the non-competition, non-solicitation, intellectual property and confidentiality restrictive covenants of the SD Employment Agreement.

 “Good Reason” is defined in The SD Employment Agreement as: (a) a reduction in Mr. Davidson’s annual rate of base salary; (b) a failure of RAIT to pay his base salary; (c) a significant adverse alteration in the nature or status of Mr. Davidson’s responsibilities (the non-election of Mr. Davidson to the Board, the removal of Mr. Davidson from the position of CEO or President or requiring Mr. Davidson to report to any employee of RAIT, including an executive chairman, shall be deemed to be a significant adverse alteration in the nature or status of Mr. Davidson’s responsibilities); provided, however, that the appointment by the Board of a different person to serve as President shall not be deemed to be such an alteration so long as (i) Mr. Davidson continues to have his duties assigned to him by the Board and (ii), except as may be required by law, all executive officers of RAIT shall have their duties assigned to them by Mr. Davidson; or (d) any other material breach by RAIT of the SD Employment Agreement.

“Change of Control” means the occurrence of any of the following: (a) the acquisition of the beneficial ownership, as defined under the Exchange Act, of 25% or more of RAIT’s voting securities or all or substantially all of the assets of RAIT by a single person or entity or group of affiliated persons or entities other than by a related entity (described below); provided, however, that, if such acquisition is approved by the Board and, if after such acquisition, at least two-thirds of the trustees comprising the Board immediately prior to such acquisition continue to serve in such capacity and RAIT’s CEO immediately prior to such acquisition continues as the CEO after such acquisition, no Change of Control shall be deemed to have occurred; or (b) the merger, consolidation or combination of RAIT with an unaffiliated entity, other than a related entity in which the trustees of RAIT immediately prior to such merger, consolidation or combination constitute less than a majority of the Board of Trustees of the surviving, new or combined entity unless one-half of the Board of Trustees of the surviving, new or combined entity, were trustees of RAIT immediately prior to such transaction and RAIT’s chief executive officer immediately prior to such transaction continues as the chief executive officer of the surviving, new or combined entity; or (c) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the Board cease for any reason to constitute at least two-thirds thereof, unless the election or nomination for the election by RAIT’s shareholders of each new trustee was approved by a vote of at least two-thirds of the trustees then still in office who were trustees at the beginning of the period; or (d) the transfer of all or substantially all of RAIT’s assets or all or substantially all of the assets of its primary subsidiaries to an unaffiliated entity, other than to a related entity. A related entity means an entity that is an “affiliate” of Mr. Davidson, or any member of Mr. Davidson’s immediate family, as determined in accordance with Rule 12b-2 of the Exchange Act. If a Change of Control occurs and Mr. Davidson’s employment is terminated without cause or Mr. Davidson may terminates his employment for good reason and receive the compensation below.

The SD Employment Agreement provides that during Mr. Davidson’s employment term and for eight months thereafter with respect to clause (a) below and 12 months thereafter with respect to clauses (b) and (c) below, without regard to its termination for any reason which does not constitute a breach of the SD Employment Agreement by RAIT or a resignation for good reason by Mr. Davidson,  he will not: (a) directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Mr. Davidson’s name to be used in connection with any competing business within any state in which RAIT currently engages in any substantial business activity or any state in which RAIT engaged in any substantial business activity during the thirty-six (36) month period preceding the date Mr. Davidson’s employment terminates; provided, however, that notwithstanding the foregoing, this provision shall not be construed to prohibit the passive ownership by Mr. Davidson of not more than five percent (5%) of the capital stock of any corporation which is engaged in any competing business having a class of securities registered pursuant to the Exchange Act; or  (b) solicit or divert to any competing business any individual or entity which is an active or prospective customer of RAIT or was such an active or prospective customer at any time during the preceding twelve (12) months; or (c) employ, attempt to employ, solicit or assist any competing business in employing any employee of RAIT whether as an employee or consultant. The agreement also contains restrictions regarding RAIT’s intellectual property and a requirement to maintain the confidentiality of RAIT’s confidential information.

 The table below summarizes these rights and the amount of any payments and benefits due under the indicated circumstances for Mr. Davidson assuming the circumstances occurred as of December 31, 2016:

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Additionally, Mr. Davidson may vest in certain ancillary benefits provided to all employees if he is terminated, including but not limited to any unvested portion of our matching contributions to his 401(k) account.

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Scott F. Schaeffer

RAIT and Mr. Schaeffer entered into the SS MOU on September 26, 2016 and the SS Separation Agreement and the SS Consulting Agreement on December 14, 2016 which set forth the term of Mr. Schaeffer’s severance compensation in preparation for his resignation as RAIT’s CEO and a Trustee which occurred on December 20, 2016 upon the completion of the IRT Management Internalization.  Pursuant to the SS MOU and the SS Separation Agreement, Mr. Schaeffer received the following severance compensation on or after December 20, 2016:

 

 

 

In addition, as contemplated by the SS MOU and the SS Separation Agreement, upon his resignation, Mr. Schaeffer entered into the SS Consulting Agreement with RAIT.  The SS Consulting Agreement provides that Mr. Schaeffer will provide advisory and consulting services to RAIT and its subsidiaries as are reasonably requested for a one-year period beginning on December 20, 2016. In respect of such services, Mr. Schaeffer will be paid a fixed sum of $375,000 for the one year term, and will be reimbursed for all reasonable out-of-pocket expenses in accordance with RAIT’s reimbursement policies. Mr. Schaeffer will continue to be bound by the intellectual property, development and confidentiality terms of his employment agreement with RAIT during and after the consulting term.

Mr. Schaeffer will continue to be bound by the provisions relating to non-competition, non-solicitation, intellectual property, developments and confidentiality of his employment agreement with RAIT for the periods stated therein, except that RAIT will waive certain restrictions relating to non-competition and non-solicitation, solely with respect to Mr. Schaeffer’s employment with IRT. Mr. Schaeffer also signed a general release of RAIT.

 

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James J. Sebra

 

RAIT and Mr. Sebra entered into the JS MOU on September 26, 2016 and the JS Separation Agreement on December 14, 2016 which set forth the term of Mr. Sebra’s severance compensation in preparation for his resignation as RAIT’s CFO.  The JS MOU and JS Separation Agreement provided that Mr. Sebra would remain CFO of RAIT until the later to occur of March 31, 2017, or the filing of RAIT’s Annual Report on Form 10-K for the fiscal year ending December 31, 2016 with the SEC.  Mr. Sebra resigned as RAIT’s CFO and Treasurer on March 31, 2017 and Mr. Kopsky succeeded him in those positions on that date.  Pursuant to the JS MOU and the JS Separation Agreement, Mr. Sebra received the following severance compensation:

 

 

 

 

Mr. Sebra will continue to be bound by provisions relating to non-competition, non-solicitation, intellectual property, developments and confidentiality of his employment agreement with RAIT for the periods stated therein, except that RAIT will waive certain restrictions relating to non-competition and non-solicitation, solely with respect to Mr. Sebra’s employment with IRT. Mr. Sebra also signed a general release of RAIT.

 

RAIT’s obligations to Mr. Sebra in connection with his resignation are set forth above and RAIT’s obligations under the employment agreement with Mr. Sebra are terminated.  However, SEC guidance indicates that disclosure of severance arrangements for all potential triggering events under Mr. Sebra’s employment agreement should be provided because he resigned after the end of RAIT’s 2016 fiscal year.  The disclosure below is provided in response to this guidance. Under Mr. Sebra’s employment agreement, if his employment ended for any reason, RAIT was to pay accrued salary, bonuses and incentive payments already awarded but not paid (including any pro rata bonus awarded for the year of termination), and other existing obligations. If his employment was terminated without “cause” or he resigned for “good reason” during the term of the employment agreement, or if RAIT sent a timely notice of non-renewal of the employment agreement, or if he was terminated after a change of control without cause or resigns for good reason, and he executes and does not revoke a mutual release, he would receive: (a) a lump sum payment of an amount equal to 1.5 times the sum of (x) his annual salary (at the rate in effect immediately prior to his termination) plus (y) the average annual cash bonus received in the three year period immediately prior to his termination, (b) a lump sum cash payment equal to a pro rata portion of Mr. Sebra’s target annual cash bonus for the fiscal year of his termination (or, in the absence of a target bonus opportunity for the fiscal year, a pro rata portion of the average annual cash bonus Mr. Sebra received for the three year period immediately prior to his termination of employment), and (c) for a period of 18 months following the date of termination, Mr. Sebra would continue to receive the medical coverage in effect at the date of his termination (or generally comparable coverage) for himself and, where applicable, his spouse and dependents, at the same premium rate as may be charged from time to time for employees generally, as if Mr. Sebra had continued in employment with RAIT during such period. If he does not provide a release, Mr. Sebra was entitled to receive only the amount due to him under the RAIT’s then current severance pay plan for employees, if any. RAIT does not currently have a severance plan applicable to its executive officers. No other payments or benefits were due to Mr. Sebra under the agreement, although he is entitled to any benefits accrued and earned in accordance with the terms of any applicable benefit plans and programs of RAIT.

 

Upon a “change of control” of RAIT, Mr. Sebra would become fully vested in all his outstanding unvested equity-based awards. In addition, if he terminates employment within six months after a change of control, for any reason, the termination would be deemed to be for good reason.

 

If Mr. Sebra voluntarily terminated his employment other than for good reason, no further payments would be due him, except that he would be entitled to any benefits accrued and due in accordance with the terms of any applicable benefit plans and programs of RAIT.

 

RAIT may terminate Mr. Sebra’s employment if Mr. Sebra has been unable to perform the material duties of his employment and has been formally determined to be eligible for disability benefits under RAIT’s long-term disability. If RAIT terminated Mr. Sebra’s employment for disability, Mr. Sebra is entitled to receive the following: (a) a lump sum cash payment equal to a pro rata portion of Mr. Sebra’s cash bonus described in clause (b) above, determined by multiplying such cash bonus by a fraction, the numerator of which is the number of days during which Mr. Sebra was employed by RAIT, prior to his termination of employment, in RAIT’s fiscal year in which his termination of employment occurs and the denominator of which is 365; and (b) any amounts earned, accrued and owing but not yet paid under his employment agreement and any other benefits accrued and earned in accordance with the terms and conditions of any applicable benefit plans and programs of RAIT in which Mr. Sebra participated prior to his termination of employment. If Mr. Sebra dies while employed by RAIT,

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RAIT shall pay to Mr. Sebra’s executor, legal representative, administrator or designated beneficiary, as applicable, the same amounts due upon his termination for disability.

 

RAIT may terminate Mr. Sebra’s employment at any time for cause, in which event all payments under the agreement will cease, except for base salary to the extent already accrued. Mr. Sebra would be entitled to any benefits accrued and earned before his termination in accordance with the terms and conditions of any applicable benefit plans and programs of RAIT in which Mr. Sebra participated prior to his termination of employment.

 

Under his employment agreement, Mr. Sebra was responsible for all taxes due with respect to any payments received under the agreement.

 

“Cause” was defined as (a) Mr. Sebra’s commission of, or indictment for, or formal admission to a felony, or any crime of moral turpitude, dishonesty, or breach of RAIT’s code of ethics, or any crime involving RAIT; (b) Mr. Sebra’s engagement in fraud, misappropriation or embezzlement; (c) Mr. Sebra’s continual failure to substantially perform his reasonably assigned material duties to RAIT (other than a failure resulting from Mr. Sebra’s incapacity due to physical or mental illness), and such failure has continued for a period of at least 30 days after a written notice of demand, signed by a duly authorized officer of RAIT, has been delivered to Mr. Sebra specifying the manner in which Mr. Sebra has failed to substantially perform; or (d) Mr. Sebra’s breach of the non-competition, non-solicitation, intellectual property or confidentiality restrictions of his employment agreement.

 

“Change of control” was defined in the same manner as in Mr. Schaeffer’s employment agreement.

 

“Good reason” was defined as (i) the material reduction of Mr. Sebra’s title, authority, duties and responsibilities or the assignment to Mr. Sebra of duties materially inconsistent with Mr. Sebra’s position or positions with RAIT; (ii) a reduction in Mr. Sebra’s base salary; or (iii) RAIT’s material and willful breach of Mr. Sebra’s employment agreement.

 

Mr. Sebra’s employment agreement provided that during his employment term and for a period of eight (8) months after his termination, without regard to its termination for any reason which does not constitute a breach of his employment agreement by RAIT or a resignation for good reason by Mr. Sebra, Mr. Sebra will not directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Mr. Sebra’s name to be used in connection with any competing business within any state in which RAIT, and/or its affiliates, currently engage in any substantial business activity (defined below) or any state in which RAIT, and/or its affiliates, engaged in any substantial business activity during the thirty-six month period preceding the date Mr. Sebra’s employment terminates; provided, however, that notwithstanding the foregoing, this provision shall not be construed to prohibit the passive ownership by Mr. Sebra of not more than five percent of the capital stock of any corporation which is engaged in any competing business having a class of securities registered pursuant to the Exchange Act. The phrase “competing business” is defined as any entity or enterprise actively engaged in any business or businesses RAIT and/or its affiliates, are actively engaged in (or are expected to be actively engaged in within 12 months) at the time of termination. The phrase “substantial business activity” means that RAIT, and/or its affiliates (i) has a business office, (ii) owns, services or manages real estate, or (iii) has a recorded and unsatisfied mortgage or other lien upon real estate or personal property.

 

Mr. Sebra’s employment agreement also provides that during his employment term and for a period of 12 months after his termination, without regard to a termination for any reason which does not constitute a breach of his employment agreement by RAIT or a resignation for good reason by Mr. Sebra, Mr. Sebra will not (a) solicit or divert to any competing business, any individual or entity which is an active or prospective customer of RAIT and/or its affiliates, or was such an active or prospective customer at any time during the preceding 12 months; or (b) employ, attempt to employ, solicit or assist any competing business in employing any employee of RAIT, and/or its affiliates, whether as an employee or consultant. The agreement also contains restrictions regarding RAIT’s intellectual property and a requirement to maintain the confidentiality of RAIT’s confidential information.

 

The table below summarizes these rights and the amount of any payments and benefits that would have been due under the indicated circumstances for Mr. Sebra assuming the circumstances occurred as of December 31, 2016:

 

 

 

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Additionally, Mr. Sebra would vest in certain ancillary benefits provided to all employees if he is terminated, including any unvested portion of our matching contributions to his 401(k) account.

 

John J. Reyle

 

Under the JR Employment Agreement, if Mr. Reyle’s employment ends for any reason, RAIT will pay accrued salary, bonuses and incentive payments already earned but not paid (including any pro rata bonus awarded for the year of termination), and other existing obligations.

 

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If Mr. Reyle’s employment is terminated without “cause” or he resigns for “good reason” during the term of the employment agreement, and he executes and does not revoke a mutual release, he will receive: (a) a lump sum cash payment equal to 1.5 times the sum of (x) Mr. Reyle’s base salary, as in effect immediately prior to his termination of employment and (y) the average annual cash bonus Mr. Reyle received for and applicable to RAIT’s three completed fiscal years immediately prior to Mr. Reyle’s last day of employment (or, if he was not employed for the entire period covered by such fiscal years, the average annual cash bonus Mr. Reyle received for and applicable to those completed fiscal years of RAIT for which he was employed for the entire fiscal year)(the “JR Cash Bonus”); (b) a lump sum cash payment equal to a pro rata portion of Mr. Reyle’s target annual cash bonus for and applicable to the fiscal year of his termination (or, in the absence of a target bonus opportunity for and applicable to the fiscal year of his termination, the lump sum cash payment will be equal to a pro rata portion of the average annual cash bonus Mr. Reyle received for RAIT’s three completed fiscal years immediately prior to Mr. Reyle’s last day of employment or, in the event that Mr. Reyle was not employed for the entire period covered by the three completed fiscal years of RAIT immediately prior to his termination, the cash bonus will be calculated on the basis of the annual cash bonus received for and applicable to those completed fiscal years of RAIT for which he was employed for the entire fiscal year), and (c) for a period of 18 months following the date of termination, Mr. Reyle will continue to receive the medical coverage in effect at the date of his termination (or generally comparable coverage) for himself and, where applicable, his spouse and dependents, at the same premium rate as may be charged from time to time for employees generally, as if Mr. Reyle had continued in employment with RAIT during such period. For the avoidance of doubt, neither non-renewal of the JR Employment Agreement by either party nor the expiration of the term of the JR Employment Agreement will entitle Mr. Reyle to the foregoing payments and benefits set forth in this paragraph.  Upon (1) a termination without cause by RAIT, (2) RAIT elects not to renew Mr. Reyle’s Employment Term, or (3) a resignation for good reason by Mr. Reyle, all outstanding equity-based compensation awards that are not intended to qualify as “performance-based compensation” under Section 162(m)(4)(C) of the IRC will become fully vested, immediately exercisable and any restrictions thereon will lapse, as the case may be; provided, that any delays in the settlement or payment of such awards that are set forth in the applicable award agreement and that are required under Section 409A of the IRC will remain in effect, and all outstanding equity-based compensation awards that are intended to constitute “performance-based compensation” under Section 162(m)(4)(C) of the IRC will remain outstanding and will vest or be forfeited in accordance with the terms of the applicable award agreements, if the applicable performance goals are satisfied.

 

If Mr. Reyle does not provide a release, he is entitled to receive only the amount due to him under the RAIT’s then current severance pay plan for employees, if any. RAIT does not currently have a severance plan applicable to its executive officers. No other payments or benefits are due to Mr. Reyle under the JR Agreement, although he is entitled to any benefits accrued and earned in accordance with the terms of any applicable benefit plans and programs of RAIT.

 

RAIT may terminate Mr. Reyle’s employment, to the extent permitted by applicable law, if Mr. Reyle has been unable to perform the material duties of his employment and has been formally determined to be eligible for disability benefits under RAIT’s long-term disability plan (“Disability”).  RAIT will continue to pay Mr. Reyle’s base salary until RAIT acts to terminate Mr. Reyle’s employment.  If RAIT terminates Mr. Reyle’s employment for Disability, Mr. Reyle will be entitled to receive the following:  (a) a lump sum cash payment equal to a pro rata portion of the JR Cash Bonus equivalent to the portion of the year he was employed prior to his termination.  

 

If Mr. Reyle dies while employed by RAIT, RAIT will pay to Mr. Reyle’s executor, legal representative, administrator or designated beneficiary, as applicable, a lump sum cash payment equal to a pro rata portion of the JR Cash Bonus equivalent to the portion of the year he was employed prior to his death.    

 

RAIT may terminate Mr. Reyle’s employment at any time for “cause” upon written notice to Mr. Reyle, in which event all payments under this Agreement will cease, except for base salary to the extent already accrued. Mr. Reyle will be entitled to any benefits accrued and earned before his termination in accordance with the terms and conditions of any applicable benefit plans and programs of RAIT in which Mr. Reyle participated prior to his termination of employment.

 

“Cause” is defined as (a) Mr. Reyle’s commission of, or indictment for, or formal admission to a felony, or any crime of moral turpitude, dishonesty, or breach of RAIT’s code of ethics and other referenced policies of RAIT, or any crime involving RAIT; (b) Mr. Reyle’s engagement in fraud, misappropriation or embezzlement; (c) Mr. Reyle’s continual failure to substantially perform his reasonably assigned material duties to RAIT (other than a failure resulting from Mr. Reyle’s incapacity due to physical or mental illness), and such failure has continued for a period of at least 30 days after a written notice of demand, signed by a duly authorized officer of RAIT, has been delivered to Mr. Reyle specifying the manner in which Mr. Reyle has failed to substantially perform; or (d) Mr. Reyle’s breach of the non-competition, non-solicitation, intellectual property or confidentiality restrictions of his employment agreement.

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“Good reason” is defined as (a) the material reduction of Mr. Reyle’s title, authority, duties and responsibilities or the assignment to Mr. Reyle of duties materially inconsistent with Mr. Reyle’s position or positions with RAIT; (b) a reduction in Mr. Reyle’s base salary; (c) a relocation of Mr. Reyle’s regular office location at Two Logan Square, 100 N. 18th Street, 23rd Floor, Philadelphia, PA 19103 for the performance of his duties to a location more than thirty (30) miles from such office; or (d) RAIT’s material and willful breach of the JR Employment  Agreement.

 

The JR Employment Agreement provides that during his employment with RAIT and, with respect to clause (a) below, for a period of nine months after the termination of Mr. Reyle’s employment under any circumstances (other than at the expiration of the maximum employment term of five (5) years or in the event that RAIT elects not to renew Mr. Reyle’s employment term, in which case clause (a) will not be applicable) and, with respect to clauses (b) and (c) below, for a period of nine months after the termination of Mr. Reyle’s employment under any circumstances, Mr. Reyle (without regard to the state in which Mr. Reyle lives or works) will not, unless acting pursuant to his employment agreement or with the prior written consent of the Board: (a) directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Mr. Reyle’s name to be used, or perform work in connection with or on behalf of any competing business with respect to the activities of a competing business within any state in which RAIT, and/or its affiliates, then currently engages in any substantial business activity or with respect to any state in which RAIT, and/or its affiliates, engaged in any substantial business activity during the 12 month period preceding Mr. Reyle’s last day of employment with RAIT; provided, however, that notwithstanding the foregoing, this provision will not be construed to prohibit the passive ownership by Mr. Reyle of not more than five percent of the capital stock of any entity which is engaged in any competing business having a class of securities registered pursuant to the Exchange Act; or (b) solicit or divert, or attempt to solicit or divert, to any competing business, any individual or entity which is an active or prospective customer, agent, mortgage broker, loan originator or borrower of, with or from RAIT, and/or its affiliates, or was such an active or prospective customer, agent, mortgage broker, loan originator or borrower at any time during the twelve (12) month period immediately preceding Mr. Reyle’s termination of employment; or (c) employ, attempt to employ, solicit or assist any competing business in employing (or engaging as a consultant) any individual who is a current employee of or consultant to RAIT, and/or its affiliates, or who was an employee or consultant to RAIT and/or its affiliates during the 12 month period immediately preceding Mr. Reyle’s termination of employment; provided, that this restriction will not prohibit Mr. Reyle from (i) making general employment solicitations, such as through advertisements in publicly available media, so long as such advertisements are not specifically targeted at employees of RAIT or any of its affiliates and/or (ii) engaging lawyers or law firms that then currently represent or previously represented RAIT to represent Mr. Reyle and/or any new employer of Mr. Reyle, subject to there being no conflicts of interest as to RAIT that may arise as a result of such representation.

 

The phrase “competing business” is defined as any entity or enterprise actively engaged or planning to engage in any business or businesses RAIT and/or its affiliates are actively engaged in (or are expected to be actively engaged in within 12 months) at the time of Mr. Reyle’s termination of employment (the “Company Business”). Without limiting the scope of the preceding sentence, the phrase “competing business” includes the solicitation, origination, aggregation, pricing, negotiation and/or sale of (1) loans secured by mortgages on commercial real estate, and/or (2) loans to entities engaged in the real estate business, whether to hold these assets for investment or for sale individually or by combining them in one or more entities for sale as an investment (the process referred to as “securitization”). The securitizations, depending upon the make-up of the assets, are often referred to by their acronyms such as “CMBS” (commercial mortgage backed securities), “CDO (collateralized debt obligations), “CLO” (collateralized loan obligations) or other current or future similar acronyms. Notwithstanding the foregoing, an entity or enterprise shall be deemed not to be a competing business if Mr. Reyle recuses himself from participating in the management by such entity or enterprise of any business substantially similar to the Company Business and provides reasonable assurances to the Company of the same, upon request by the Company.  

 

The phrase “substantial business activity” means that RAIT, and/or its affiliates: (i) has, has had, or is taking action to establish a business office; (ii) solicits, has solicited, makes or has made, loans secured by real estate, or is or has reviewed applications by borrowers or brokers to engage in these activities; (iii) solicits, has solicited, makes or has made, loans to real estate developers and/or owners, or is or has reviewed applications by borrowers or brokers to engage in these activities; (iv) owns, services or manages real estate, or has owned, serviced or managed real estate; and/or (v) has or has had a recorded and unsatisfied mortgage or other lien upon real estate or personal property. The agreement also contains restrictions regarding RAIT’s intellectual property and a requirement to maintain the confidentiality of RAIT’s confidential information.

 

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The table below summarizes these rights and the amount of any payments and benefits that would have been due under the indicated circumstances for Mr. Reyle assuming the circumstances occurred as of December 31, 2016:

 

 

Additionally, Mr. Reyle would vest in certain ancillary benefits provided to all employees if he is terminated, including the vested portion of our matching contributions to his 401(k) account.

Trustee Compensation

For the period from January 1, 2016 through December 31, 2016, the Compensation Committee approved the following cash compensation for each non-employee Trustee of RAIT:

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In addition, in February 2016, the Compensation Committee awarded each of the eight non-employee Trustees serving at the time 21,097 immediately vested Common Shares pursuant to the incentive award plan. These awards each had a grant date fair value of $50,000.

 

The following table sets forth information regarding the compensation paid or accrued by RAIT during 2016 to each of our non-employee Trustees:

Trustee Compensation in 2016

 

 

 

For the period from January 1, 2017 through December 31, 2017, the Compensation Committee approved the following cash compensation for each non-employee Trustee of RAIT:

 

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Compensation Committee Interlocks and Insider Participation

 

None of RAIT’s Named Executive Officers serves, nor at any time during 2016 served, as a member of the board or Compensation Committee of any other entity whose executive officer(s) serve as a member of RAIT’s Board or Compensation Committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information regarding RAIT’s equity compensation plans as of December 31, 2016.

 

 

 

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the number and percentage owned by each person who, to the knowledge of RAIT as of March 31, 2017, is the beneficial owner of more than 5% of the outstanding Common Shares. This information is reported in accordance with the beneficial ownership rules of the SEC under which a person is deemed to be the beneficial owner of a security if that person has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within 60 days. Common Shares issuable pursuant to warrants or convertible notes are deemed to be outstanding for purposes of computing the percentage ownership of the person or group holding such options or warrants but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated in footnotes to the table, each person listed has sole voting and dispositive power with respect to the securities owned by such person.

 

 

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(7)     Information obtained from the Schedule 13D/A filed by the Highland Group with the SEC on February 26, 2017.  This Schedule 13D/A identifies the reporting persons (the “Highland Reporting Persons”) as  (1) Highland Global Allocation Fund, a series of Highland Funds II (the “Global Fund”), (2) Highland Small-Cap Equity Fund, a series of Highland Funds II (the “Small-Cap Fund”), (3) Highland Capital Management Fund Advisors, L.P. (“Highland Fund Advisors”), (4) Strand Advisors XVI, Inc., (“Strand XVI”), (5) NexPoint Real Estate Strategies Fund (“NRESF”), (6) NexPoint Advisors, L.P. (“NexPoint Advisors”), (7) NexPoint Advisors GP, LLC (“NexPoint Advisors GP”), (8) Highland Select Equity Master Fund, L.P. (“Select Fund”), (9) Highland Select Equity Fund GP, L.P. (“Select GP”), (10) Highland Select Equity GP, LLC (“Select LLC”), (11) Highland Capital Management, L.P. (“Highland Capital”), (12) Strand Advisors, Inc. (“Strand”), (13) NexPoint Real Estate Advisors, L.P. (“NRE Advisors”), (14) NexPoint Real Estate Advisors GP, LLC (“NRE Advisors GP”), (15) James D. Dondero, (16) Matt McGraner, (17) Nancy Jo Kuenstner, (18) John M. Pons, (19) Andrew C. Richardson and (20) Edward S. Friedman The address of the principal business office of Ms. Kuenstner is 317 Madison Avenue, Spring Lake, New Jersey 07762. The address of the principal business office of Mr. Pons is 11811 N. Tatum Blvd., Suite P-177,  Phoenix, Arizona 85028. The address of the principal business office of Mr. Friedman is 705 Edgehill Road, Wilmington, Delaware 19807.  The address of the principal business office for each other Highland Reporting Person is 300 Crescent Court, Suite 700, Dallas, Texas 75201.  This Schedule 13D/a states that it reports beneficial ownership of an aggregate of 5,773,242 Common Shares and reports the following beneficial ownership of Common Shares for the Highland Reporting Persons:

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The following tables set forth the number and percentage owned as of March 31, 2017 by each of our present Trustees, each of our present Named Executive Officers, as defined in “Executive Officer Compensation” below, and all of our present executive officers (whether or not deemed to be Named Executive Officers) and Trustees as a group of:

 

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND TRUSTEE INDEPENDENCE

Our trust governance guidelines provide that our Board must maintain a conflicts committee, consisting of no fewer than three members and consisting entirely of independent Trustees (as defined in the trust governance guidelines). The conflicts committee is responsible, and has the sole authority and full power of the Board, to approve or reject all related party transactions on behalf of RAIT. The trust governance guidelines define a related party transaction as any transaction that we would be required to disclose in our financial statement footnotes under FASB ASC Topic 850, “Related Party Disclosures”, or in our proxy statement under Item 404 of Regulation S-K, “Transactions with Related

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Persons, Promoters and Certain Control Persons,” as amended or interpreted. As permitted by our trust governance guidelines, the Board has designated the Audit Committee to serve as the conflicts committee in the Audit Committee’s charter.

Our code of business conduct and ethics provides that all related party transactions will be reviewed and approved or rejected by the Audit Committee. The Code provides that the Board has determined that no conflict of interest exists with respect to any investment acquisition, services arrangement, transaction or other matter, including, without limitation, any related party transaction, which is approved by the Audit Committee and which is determined by the Audit Committee to be on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest. If the Audit Committee finds a conflict of interest to exist with respect to a particular matter, including a related party transaction, that matter is prohibited unless a waiver of this policy is approved under the waiver process described in the Code. Subject to this Audit Committee review process, the Code provides that the Board has determined that RAIT may enter into any contract or transaction of any kind with any person subject to the Code or agent of RAIT or any of their affiliates, whether or not any of them has a financial interest in the transaction, as permitted by Article IX, Section 5 of our declaration of trust. The Code provides that any waiver of the Code may be made only by the Audit Committee. Any such waiver for executive officers, those persons described in Item 5.05 of Form 8-K or Trustees will be promptly publicly disclosed to the extent required by law or stock exchange regulation.

The Audit Committee may, in its discretion, engage independent advisors and legal counsel to assist it in its review when it deems it advisable. Our internal financial and legal staff are primarily responsible for the development and implementation of processes and controls to obtain information from the Trustees and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the transaction needs to be reviewed under the processes described above.

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with the related entities described below. We describe in this section relationships or transactions in which the amount involved exceeds $120,000 since January 1, 2015. All of these relationships and transactions were approved or ratified by the Audit Committee as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

 

Almanac

 

On October 1, 2012, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), with ARS VI Investor I, LLC (the “Investor”), an affiliate of Almanac Realty Investors, LLC (“Almanac”). Andrew M. Silberstein serves as a Trustee on our Board, as designated pursuant to the Purchase Agreement. Mr. Silberstein is an equity owner of Almanac and an officer of the Investor and holds indirect equity interests in the Investor. During the period from the effective date of the Purchase Agreement through March 2014,  we sold to the Investor on a private placement basis in four separate sales between October 2012 and March 2014 for an aggregate purchase price of $100,000,000 or the total commitment, the following securities: (i) 4,000,000 of our Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (the “Series D Preferred Shares”), (ii) Common Share purchase Warrants (the “Warrants”) initially exercisable for 9,931,000 of our Common Shares and (iii) Common Share appreciation rights (the “Investor SARs”) with respect to 6,735,667 Common Shares. We are not obligated to issue any Common Shares upon exercise of the Warrants if the issuance of such Common Shares would exceed that number of Common Shares which we may issue upon exercise of the Warrants without requiring shareholder approval under the NYSE listing requirements. We will pay cash or issue a 180 day unsecured promissory note, or a combination of the foregoing, equal to the market value of any Common Shares we cannot issue as a result of this prohibition. The Investor SARs are settled only in cash and not in Common Shares. These securities are issuable on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the Purchase Agreement. We used the proceeds received under the Purchase Agreement to fund our loan origination and investment activities, including CMBS and bridge lending.

 

We are subject to covenants under the Purchase Agreement when the Investor and its permitted transferees hold specified amounts of the securities issuable under the Purchase Agreement. These covenants include defined leverage limits on defined financing assets. In addition, commencing on the first draw down and for so long as the Investor and its affiliates which are permitted transferees continue to own at least 10% of the outstanding Series D Preferred Shares or Warrants and Common Shares issued upon exercise of the Warrants representing at least 5% of the aggregate amount of Common Shares issuable upon exercise of the Warrants actually issued, the board will include one person designated by the Investor. This right is held only by the Investor and is not transferable by it. The Investor designated Andrew M. Silberstein to serve on our board. The covenants also include our agreement not to declare any extraordinary dividend except as otherwise required for us to continue to satisfy the requirements for qualification and taxation as a REIT. An extraordinary dividend is defined as any dividend or other distribution (a) on Common Shares other than regular quarterly dividends on the Common Shares or (b) on our preferred shares other than in respect of dividends accrued in accordance with the terms expressly applicable to the preferred shares.

 

On December 7, 2016, we entered into a securities repurchase agreement whereby we agreed to repurchase and cancel 464,000 Series D Preferred Shares at par for a purchase price of $11,600,000 which resulted in a decrease from 4,000,000 Series D Preferred Shares issued to 3,536,000 Series D Preferred Shares issued and outstanding.

 

As of December 31, 2016, the following RAIT securities are outstanding pursuant to the Purchase Agreement, in the aggregate: (i) 3,536,000 Series D Preferred Shares; (ii) Warrants exercisable for 9,931,000 Common Shares (which have subsequently adjusted to 11,035,875 shares as of the date of the filing of the Annual Report with the SEC); and (iii) Investor SARs exercisable with respect to 6,735,667 Common Shares (which have subsequently adjusted to 7,485,045 shares as of the filing of the Annual Report with the SEC). The number of Common Shares underlying the Warrants and Investor SARs and relevant exercise price are subject to further adjustment in defined circumstances.      

 

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The Series D Preferred Shares initially bore a cash coupon rate of 7.5%, which increased to 8.5% on October 1, 2015 and will increase again on October 1, 2018 and each anniversary thereafter by 50 basis points. They rank on parity with our existing outstanding preferred shares. Their liquidation preference is equal to $26.25 per share prior to October 1, 2017 and $25.00 per share thereafter. In defined circumstances, the Series D Preferred Shares are exchangeable for Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (the “Series E Preferred Shares”). The rights and preferences of the Series E Preferred Shares will be similar to those of the Series D Preferred Shares except, among other differences, the Series E Preferred Shares will be mandatorily redeemable upon a change of control, will have no put right, will not have the right to designate one trustee to the board except in the event of a payment default under the Series E Preferred Shares and have defined registration rights.

 

We have the right in limited circumstances to redeem the Series D Preferred Shares prior to the October 1, 2017 at a redemption price of $26.25 per share. On or after October 1, 2017, we may redeem all or a portion of the Series D Preferred Shares at any time at a redemption price of $25.00 per share. We may satisfy all or a portion of the redemption price for an optional redemption with an unsecured promissory note, or a preferred note, with a maturity date of 180 days from the applicable redemption date. From and after the occurrence of a defined mandatory redemption triggering event, each holder of Series D Preferred Shares may elect to have all or a portion of such holder’s Series D Preferred Shares redeemed by us at a redemption price of $26.25 per share prior to October 1, 2017 and $25.00 per share on or after October 1, 2017. We may satisfy all or a portion of the redemption price for certain of the mandatory redemption triggering events with a preferred note. We must redeem the Series D Preferred Shares with up to $44,200,000 of net proceeds received from the loans and other investments made with proceeds of the sales under the Investor Purchase Agreement from and after October 1, 2017, in the case of net proceeds from loans and investments other than CMBS loans, and from and after October 1, 2019, in the case of net proceeds from CMBS loans. Each case is at a redemption price of $25.00 per share. All amounts paid in connection with liquidation or for all redemptions of the Series D Preferred Shares must also include all accumulated and unpaid dividends to, but excluding, the redemption date.

 

The Warrants had an initial strike price of $6.00 per Common Share, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.39. The Warrants are exercisable until October 1, 2027. From and after the earlier of (i) October 1, 2017 or (ii) the occurrence of a defined mandatory redemption triggering event on the Series D Preferred Shares, the holders of Warrants may put their Warrants to us for a put redemption price equal to $1.23 per Common Share until October 1, 2018 and increasing to set amounts at set intervals thereafter. We may settle the exercise of the put in cash or, in the event of certain defined mandatory redemption triggering events, by way of a three year unsecured promissory note, or a combination of the foregoing. The Investor’s rights to put the Warrants to us as described above are at a price of $1.23 per Warrant prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter.

 

The Investor SARs had an initial strike price of $6.00, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.39. The Investor SARs are exercisable until October 1, 2027. From and after the earlier of (i) October 1, 2017 or (ii) the occurrence of a defined mandatory redemption triggering event on the Series D Preferred Shares, the holders of Investor SARs may put their Investor SARs to us for a put redemption price equal to $1.23 per Common Share prior to October 1, 2018 and increasing to set amounts at set intervals thereafter. We may settle the exercise of the put in cash or, in the event of certain defined mandatory redemption triggering events, by way of a three year unsecured promissory note, or a combination of the foregoing.  The Investor’s rights to put the SARs to us as described above are at a price of $1.23 per Investor SAR prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter. The Investor SARs are callable at our option beginning on October 1, 2014 at a price of $5.00 per Investor SAR, increasing to set amounts at set intervals thereafter. We may settle the call in cash or by way of a one year unsecured promissory note, or with a combination of the foregoing.

 

Accounting Treatment

 

The accounting treatment for the Series D Preferred Shares differs from the accounting treatment of our other preferred share instruments. Based on accounting standards, the Series D Preferred Shares were determined not to be classified as equity as they contain redemption features that are not solely in our control. In addition, the Series D Preferred Shares were considered not to be classified as a liability because they are not mandatorily redeemable. As a result, the Series D Preferred Shares are presented in the mezzanine section of the balance sheet, between liabilities and equity. Any costs and the initial value of the Warrants and Investor SARs are recorded as a discount on the Series D Preferred Shares and that discount will be amortized to earnings over the respective term.

 

The Warrants and Investor SARs were both determined to be classified as liabilities and had a combined fair value of $30,400,000 as of December 31, 2016. The Warrants contain a put feature which can only be settled by paying cash or issuing a note (i.e. transferring assets). This put feature is a distinguishing characteristic for liability classification. The Investor SARs, according to their terms, can only be settled in cash or the issuance of a note payable to the Investor. This requirement for cash settlement is also a distinguishing characteristic for liability classification. As a result, the initial fair value of the Warrants and Investor SARs are recorded as a liability and re-measured at each reporting period until the Warrants and Investor SARs are settled. Changes in fair value will be recorded in earnings as a component of the change in fair value of financial instruments in the consolidated statement of operations.

 

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The following table summarizes the sales activity of the Series D Preferred Shares from the effective date of the agreement through December 31, 2016 (in 000s):

 

 

IRT

 

On December 20, 2016, the IRT Management Internalization was completed pursuant to the September 27, 2016 securities and asset purchase agreement (the “IRT Internalization Agreement”).  The IRT Management Internalization consisted of two parts: (i) the sale of Independence Realty Advisors, LLC (the “IRT Advisor”), which was our subsidiary and IRT’s external advisor, and (ii) the sale of certain assets and the assumption of certain liabilities relating to our multifamily property management business which we referred to as RAIT Residential, including property management contracts relating to apartment properties owned by ourselves, IRT, and third parties.  The purchase price paid by IRT for the IRT Management Internalization was $43,000,000 subject to certain pro rations at closing.  As part of the same agreement, we sold all of the 7,269,719 shares of IRT’s common stock owned by certain of our subsidiaries on October 5, 2016, realizing gross proceeds of approximately $62,200,000.  As the IRT Internalization Agreement resulted in our probable disposal of our investment in IRT, our advisory agreement with IRT and our multifamily property management business as well as a strategic shift in our operations and financial results, we concluded that these entities or distinguishable components of RAIT should be reported as discontinued operations as of September 30, 2016.  We deconsolidated IRT as of October 5, 2016.  While IRT was consolidated by RAIT, IRT was not considered a related party.  Subsequent to deconsolidation, IRT became a related party.  RAIT’s relationships with IRT are discussed below.

 

Fees and Expenses Received as IRT’s External Advisor

 

On December 20, 2016, in connection with the IRT Management Internalization, we sold IRT’s Advisor and, therefore, fees and expenses are no longer earned.

 

On September 25, 2015, we entered into the Second Amendment to the Second Amended and Restated Advisory Agreement.  The Second Amendment amended the advisory agreement to extend its term to October 1, 2020, and to provide for compensation to us for periods subsequent to October 1, 2015, as follows:

 

 

For the year ended December 31, 2016, we earned $7,092,000 of asset management fees.  It is noted that the quarterly asset management fee for the period ended December 31, 2016 was calculated by adjusting for the effect of the repurchase of IRT’s shares held by RAIT as well as the purchase price for IRT’s management internalization.  For the year ended December 31, 2016, we earned $350,000 of incentive fees, respectively. For the year ended December 31, 2016, $5,584,000 of these fees earned were eliminated in consolidation.  These fees are included within fees and other income in our consolidated statements of operations.

As of December 31, 2016, we had no receivables from IRT for asset management fees and incentive fees.

 

Property Management Fees Paid to Our Property Manager

 

On December 20, 2016, in connection with the IRT Management Internalization, we sold our multifamily property management business to IRT, which included all of the property management agreements for IRT’s properties.

 

We had entered into property management agreements with IRT with respect to each of IRT’s properties.  Pursuant to these property management agreements, IRT paid our multifamily property manager property management and construction management fees on a monthly basis up to 4.0% of the gross revenues from a property for each month. For the year ended December 31, 2016, we earned $4,769,000 of property management and construction management fees. For the year ended December 31, 2016, $3,776,000 of these fees earned were eliminated in consolidation. These fees are included within fees and other income in our consolidated statements of operations.

 

As of December 31, 2016, we had no receivables from IRT for property management and leasing fees.

 

IRT Dividends and IRT Repurchase of its Common Stock

 

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On October 5, 2016, we sold all 7,269,719 shares of IRT’s common stock that we owned to IRT for approximately $62,200,000 in aggregate gross proceeds.

 

As of December 31, 2016, RAIT owned none of the outstanding shares of IRT’s common stock.  For the year ended December 31, 2016, we earned and subsequently received dividends of $3,926,000 related to shares of common stock owned by RAIT.  All of these dividends were eliminated in consolidation.

 

Indebtedness

 

During the year ended December 31, 2016, IRT repaid $38,075,000 of mortgage indebtedness held by us with proceeds from two property dispositions.  For the years ended December 31, 2016, we received $486,000 in exit fees pursuant to the contractual terms of the mortgage indebtedness.  Also for the year ended December 31, 2016, we received $361,000 of interest from IRT. All of the debt, fees and interest eliminated in consolidation.  There was no accrued interest receivable outstanding as of December 31, 2016.

 

Other Transactions with IRT Subsequent to the IRT Management Internalization (December 20, 2016 to December 31, 2016)

 

IRT paid RAIT $50,000 pursuant to a shared services agreement for the period ended December 31, 2016.  RAIT paid IRT $23,000 of property management fees.  IRT reimbursed RAIT $253,000 for compensation expense that RAIT paid to IRT employees.

 

Other

 

On December 20, 2016, Scott F. Schaeffer resigned from his position as Chief Executive Officer of RAIT and became the full-time Chief Executive Officer of IRT.  On the same date, Scott F. Schaeffer entered into a one year consulting agreement with RAIT for which he will receive compensation of $375,000.  In accordance with the Memorandum of Understanding dated September 26, 2016, which memorialized the terms of his resignation, RAIT granted to Scott F. Schaeffer an award of 150,000 Common Shares on December 23, 2016, and made a $500,000 cash payment in January 2017.  The shares subject to the award have restrictions on transfer that lift as to 50% on the six month anniversary and as to 50% on the one year anniversary of the grant date.  

 

Trustee Independence  

 

Our trust governance guidelines provide that, at all times, a majority of the Board must be comprised of persons who shall be independent within the meaning of RAIT’s Trustee independence standards, or the independence standards, set forth in our trust governance guidelines, which are available on our website at the address given above. Among the requirements in our independence standards is the requirement that the Trustee must meet all applicable requirements for independence under the listing standards of the primary exchange on which the Common Shares trade and that the Trustee must be an independent Trustee as that term is defined in our declaration of trust. The Board has determined that Mr. Malter, Mr. Batinovich, Mr. Farnesi, Ms. Kim, Mr. Sarkisian, Mr. Stempel and Mr. Wren each satisfy the independence standards, including the requirements for independence set out in Section 303A.02 of the rules of the NYSE, and that each of these Trustees has no material relationships with RAIT (other than being a Trustee and/or a shareholder of RAIT).

 

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Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

The following table presents the aggregate fees billed by KPMG for each of the services listed below for each of our last two fiscal years.

 

 

 

Exchange Act rules generally require any engagement by a public company of an accountant to provide audit or non-audit services to be pre-approved by the Audit Committee of that public company. This pre-approval requirement is waived with respect to the provision of services other than audit, review or attest services if certain conditions set forth in Rule 2-01(c)(7)(i)(C) under the Exchange Act are met. All of the audit and audit- related services described above were pre-approved by the Audit Committee and, as a consequence, such services were not provided pursuant to a waiver of the pre-approval requirement set forth in this Rule. The Audit Committee has adopted the audit and non-audit services pre-approval guidelines copied below.

GUIDELINES OF RAIT FINANCIAL TRUST AUDIT COMMITTEE

FOR PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES

 

The Audit Committee (the “Committee”) of RAIT Financial Trust (“RAIT”) has adopted the following guidelines regarding the engagement of RAIT’s independent auditor to perform services for RAIT:

 

For audit services, the independent auditor will provide the Committee with an engagement letter with respect to any fiscal year sufficiently in advance of the fourth quarterly meeting of the Committee immediately preceding the end of that fiscal year, if practicable, and otherwise by the first quarterly meeting of the Committee in the following fiscal year outlining the scope of the audit services proposed to be performed relating to the fiscal year to be audited, together with a fee proposal which may include a range of fees. If agreed to by the Committee, this engagement letter and associated fee(s) will be formally accepted by the Committee at or before either its fourth or first quarterly Committee meeting.

 

For non-audit services, RAIT management will submit to the Committee for approval any non-audit services that it recommends the Committee engage the independent auditor to provide for any fiscal year. RAIT management and the independent auditor will each confirm to the Committee that any non-audit service so submitted is permissible under all applicable legal requirements, including the listing requirements of the NYSE. In addition to these planned non-audit services, a budget estimating the expense of any such non-audit service for that fiscal year will be provided. The Committee will approve both the permissible non-audit services and the budget for such services. The Committee will be informed routinely as to the non-audit services actually provided by the independent auditor pursuant to this pre-approval process.

 

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To ensure prompt handling of unexpected matters, the Committee delegates to its Chairman or, if the Chairman is not reasonably available, any other member of the Committee, the authority to amend or modify the list of approved permissible non-audit services and fees. The Chairman or such other member, as the case may be, will report action taken to the Committee at the next Committee meeting.

 

The independent auditor must ensure that all audit and non-audit services provided to RAIT have been approved by the Committee. The Chief Financial Officer will be responsible for tracking all independent auditor fees against the budget for such services and report at least quarterly to the audit committee.

 

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PART IV

 

 

 

 

All other schedules are not applicable or are omitted since either (i) the required information is not material or (ii) the information required is included in the consolidated financial statements and notes thereto in the Original Form 10-K.

(2) Exhibits

The Exhibits furnished as part of this Form 10-K/A are identified in the Exhibit Index immediately following the signature pages of this Report. Such Exhibit Index is incorporated herein by reference.

 

 

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

May 1, 2017

 

 

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EXHIBIT INDEX

 

 

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61

 

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62

 

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63

 

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64

 

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65

 

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66

 

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67

 

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