SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
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(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 317-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
------------------------------------------
Shares of Beneficial Interest
Name of each exchange on which registered:
------------------------------------------
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No ___
The approximate aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant as of December 31, 2004
was approximately $1,231,926,000, based on a price of $24.44 per share, the
closing sales price for the Registrant's shares of beneficial interest on the
American Stock Exchange on that date.
As of March 31, 2005 there were 51,323,062 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Index to exhibits may be found on page 119
Page 1 of 148
TABLE OF CONTENTS
CHARTERMAC
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business 4
Risk Factors 11
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Shareholders 26
PART II
Item 5. Market for Registrant's Common Equity and Related Share Matters 27
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 45
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 99
Item 9A. Disclosures Controls and Procedures 99
PART III
Item 10. Directors and Executive Officers of the Registrant 100
Item 11. Executive Compensation 107
Item 12. Security Ownership of Certain Beneficial Owners and Management 114
Item 13. Certain Relationships and Related Transactions 116
Item 14. Principal Accounting Fees and Services 117
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 119
SIGNATURES 123
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements. These
forward-looking statements are not historical facts, but rather our beliefs and
expectations and are based on our current expectations, estimates, projections,
beliefs and assumptions about our Company and industry. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. Some of
these risks include, among other things:
o adverse changes in the real estate markets including, among other
things, competition with other companies;
o interest rate fluctuations;
o general economic and business conditions, which will, among other
things, affect the availability and credit worthiness of prospective
tenants, lease rents and the terms and availability of financing for
properties financed by revenue bonds owned by us;
o risk of real estate development and acquisition;
o environment/safety requirements;
o changes in applicable laws and regulations;
o our tax treatment, the tax treatment of our subsidiaries and the tax
treatment of our investments; and
o risk of default associated with the revenue bonds and other securities
held by us or our subsidiaries.
We caution you not to place undue reliance on these forward-looking
statements, which reflect our view only as of the date of this annual report.
PART I
Item 1. Business.
General
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CharterMac (which may be referred to as the "Company", "we" or "us"), through
its subsidiaries, is one of the nation's leading full-service real estate
finance companies, providing capital solutions to developers and owners of
properties as well as quality investment products to institutional and retail
investors. Through our subsidiary operations, we offer financing for every part
of a property's capital structure with a core focus on multifamily rental
housing. We commenced operations in October 1997 and have since expanded through
several acquisitions.
Additional Information
- ----------------------
Additional information about CharterMac beyond what is included in this Form
10-K is available at www.chartermac.com. We make available, free of charge, on
or through our website:
o our annual report on Form 10-K;
o our quarterly reports in Form 10-Q;
o our current reports of Form 8-K; and
o amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act,
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the Securities and Exchange Commission ("SEC"). Materials
we file with the SEC may also be read and copied at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. This information may also be
obtained by calling the SEC at 1-800-SEC-0300. The SEC also maintains an
Internet website that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at
www.sec.gov. We will provide a copy of any of the foregoing documents upon
request.
None of the information on our website that is not otherwise expressly set forth
or incorporated by reference in the Form 10-K is a part of this Form 10-K.
Business Overview
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Through our subsidiaries, we are a full-service real estate finance company,
with a strong core focus on the multifamily sector. We have direct financing
relationships with over 800 real estate developers and owners throughout the
country. We operate from a fully integrated real estate platform, which enables
us to originate, underwrite and manage the risk of every transaction in which we
provide debt or equity financing. Our platform offers us several competitive
advantages, including:
o The ability to cross sell our financing products. Frequently on
transactions, we are able to offer one or more pieces of the
property's capital structure.
o The ability to originate the financing wholesale. Our "one stop
shopping" capability enables us to capture substantially all of the
financing fees associated with the transaction.
o The ability to control the credit quality of the underlying property.
By working directly with the property's owner and by risk managing the
underlying asset, our credit losses are extremely low.
Operating Segments
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We operate in four business segments:
1. Portfolio Investing, which includes subsidiaries that invest in
primarily tax-exempt first mortgage revenue bonds issued by various
state or local governments, agencies or authorities and other
investments designed to produce federally tax-exempt income. The
revenue bonds are used to finance the new construction, substantial
rehabilitation, acquisition, or refinancing of affordable multifamily
housing throughout the United States.
4
2. Fund Management, which includes:
o subsidiaries that sponsor real estate equity investment funds
that primarily invest in Low-Income Housing Tax Credit ("LIHTC")
properties. In exchange for sponsoring and managing these funds,
we receive fee income for providing asset management,
underwriting, origination and other services;
o a subsidiary which provides advisory services to other
subsidiaries of ours and to American Mortgage Acceptance Company
("AMAC"), an affiliated, publicly traded real estate investment
trust; and
o subsidiaries that par ticipate in credit enhancement
transactions, including guaranteeing mortgage loans and specified
returns to investors in LIHTC equity funds, in exchange for
guarantee fees.
3. Mortgage Banking, which includes subsidiaries that originate and
service mostly multifamily mortgage loans on behalf of third parties,
primarily:
o the Federal National Mortgage Association ("Fannie Mae");
o the Federal Home Loan Mortgage Corporation ("Freddie Mac");
o the Federal Housing Authority ("FHA"); and
o insurance companies and conduits.
In exchange for these origination and servicing activities, we receive
origination and servicing fees.
4. Variable Interest Entities ("VIEs"), which includes primarily the
LIHTC equity funds we sponsor through the Fund Management segment's
subsidiaries, for which we are the primary beneficiary. For more
information regarding these VIEs, refer to Note 2 to the consolidated
financial statements.
Comparative segment revenues, profits and other financial information for 2004,
2003 and 2002 are presented in Note 19 to the consolidated financial statements.
1. PORTFOLIO INVESTING
We conduct most of our portfolio investing through CharterMac Equity Issuer
Trust ("Equity Issuer"), a subsidiary we formed in 1999.
As of December 31, 2004, our revenue bond portfolio included direct or indirect
interests in revenue bonds with an aggregate fair value of approximately $2.1
billion, secured by affordable multifamily properties containing 46,360 units
located in 27 states and the District of Columbia.
Portfolio Investing generates cash flow from the spread between the interest
earned from our revenue bond portfolio and the cost of capital we use to
purchase the bonds.
We believe we have a competitive advantage in our Portfolio Investing business
due to our "Direct Purchase Program". The traditional methods of financing
affordable multifamily housing with tax-exempt bonds are complex and time
consuming and involve the participation of many intermediaries. Through the
Direct Purchase Program we have streamlined the process by removing all
intermediaries (except for the governmental issuer of the revenue bond) and
enabling the developer to deal directly with one source. Because we purchase our
revenue bonds directly from the governmental issuer, our program eliminates the
need for underwriters and their counsel, rating agencies and costly
documentation. This reduces the financing life cycle, often by several months,
and also reduces the bond issuance costs, usually by 30% or more. By dealing
directly with us, we believe developers feel more confident about the terms and
timing of their financing.
The acquisition of revenue bonds requires capital. In addition to using a
portion of our operating cash flows, we obtain such capital by:
o securitizing many of the bonds we purchase for our portfolio;
o utilizing commercial bank borrowings; and
o issuing equity securities.
5
For more information on our securitization activity, see Note 9 to our
consolidated financial statements. For information regarding issuances of
preferred shares of Equity Issuer and our common and preferred shares, see Notes
13 and 14 to our consolidated financial statements.
2. FUND MANAGEMENT
Our Fund Management segment includes:
o Tax Credit Fund Sponsorship;
o Advisory Services; and
o Credit Enhancement.
TAX CREDIT FUND SPONSORSHIP
- ---------------------------
We conduct our tax credit fund sponsorship activities through Related Capital
Company LLC ("RCC"), which we acquired in November 2003 (see Note 3 to our
consolidated financial statements).
RCC is one of the nation's largest sponsors of LIHTC investment funds, having
raised nearly $7 billion in equity from institutional and retail investors. As a
sponsor of over 270 public and private real estate investment programs, RCC has
provided financing for over 1,100 properties in 45 states, Puerto Rico and the
District of Columbia.
In a typical LIHTC tax credit fund sponsorship program, investors acquire a
direct limited partnership interest in an "upper-tier" investment partnership
through which such investments are made. The investment partnership, in turn,
invests as a limited partner in one or more "lower-tier" operating partnerships
which own and operate the housing projects. Limited partners in the upper-tier
partnerships are most often corporations who are able to utilize the tax
benefits and usually derive limited economic benefit from the investment other
than the expected tax credits and tax losses from the operations of the
lower-tier partnership properties. In some cases, in conjunction with the final
disposition of the property, the limited partners may receive an additional
return.
We often borrow the cash to acquire investments from a warehouse lender. This
arrangement enables us to obtain and hold suitable investments for a fund until
it has admitted investors and obtained investment capital. As a result, we are
better able to provide investment opportunities to the funds we sponsor when
investment capital is available. When we admit investors to a fund, the fund
simultaneously pays us an amount sufficient to enable us to repay the funds we
borrowed from the warehouse lender, and the fund is either admitted as a limited
partner of the lower-tier operating partnership in our place or the warehouse
lender releases its lien on the fund's assets.
Tax credit fund sponsorship generates cash flow predominantly from:
o organization and offering fees we earn in connection with the capital
raising and sponsorship of investment programs, which we receive upon
the closing of a fund;
o fees associated with acquisition activity of each fund we sponsor,
which we receive at the time of the acquisition; and
o partnership management and asset management fees associated with
ongoing administration of investment programs we advise, which we
receive either at the time a fund closes or over several years.
ADVISORY SERVICES
- -----------------
A subsidiary of RCC provides management and advisory services to sister
subsidiaries of CharterMac as well as to AMAC.
Providing services to CharterMac subsidiaries generates cash flows in this
segment from:
o fees associated with acquisition of revenue bonds by the Portfolio
Investing segment, which fees are paid by the borrower and received by
us when we acquire the revenue bond;
o fees associated with asset management services provided to the
Portfolio Investing segment with regard to the investments it holds;
and
o fees associated with the origination of certain mortgages by CMC.
6
While some of these fees are eliminated in consolidation, our segment results
presented elsewhere in this document reflect these fees as earned.
AMAC is a publicly traded real estate investment trust that focuses on providing
mezzanine and bridge financing to commercial real estate properties. In addition
to providing bridge and mezzanine loans, AMAC also invests in government-insured
debt securities that are predominantly secured by first mortgages on multifamily
properties. As of December 31, 2004, AMAC had $349.0 million in assets and a
total market capitalization of approximately $366.0 million.
Providing management to AMAC generates cash flow predominantly from:
acquisition fees paid by the borrowers upon the closing of a loan that AMAC
originates; asset management fees based upon AMAC's total assets, which are
paid on an annual basis; and incentive management fees received annually if
AMAC achieves certain earnings and distribution benchmarks.
CREDIT ENHANCEMENT
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We conduct our credit enhancement business primarily through CharterMac
Corporation ("CM Corp."), a subsidiary we formed in July 2001. Guarantees we
issue fall into several categories:
o guaranteeing a specified rate of return during the life of an LIHTC
fund for which we receive a fee (payable in three installments) that
we recognize over the guarantee period. These guarantees may be for
the construction period or the operation period of a pool of
properties. This normally involves backing up a primary guarantors'
obligations;
o guaranteeing a developer's credit during the construction phase of a
property, for which we receive a fee at the inception of the deal
which we recognize over the construction phase of the property;
o guaranteeing a developer's credit following the stabilization of a
property for the operational period for the pool of properties, for
which we receive a fee at the inception of the deal and recognize over
the estimated operational period of the property; and
o guaranteeing borrowers' obligations on either individual or mortgage
pools for a fee.
We will continue to seek new sources of revenue using our financial guarantee
capabilities and expanding our credit enhancement activities.
3. MORTGAGE BANKING
We conduct our mortgage-banking activity through CharterMac Mortgage Capital
Corp. ("CMC"), previously named PW Funding Inc. As of December 31, 2004, we
owned 87% of CMC, having first acquired 80% in 2001. In the first quarter of
2005, we acquired the remaining 13%.
CMC is a full-service, direct mortgage banking firm specializing in originating,
underwriting, and servicing mortgage loans for conventional apartment
properties, affordable housing, senior housing, and commercial properties
nationwide.
CMC is one of 26 approved Delegated Underwriters and Servicers ("DUSTM") in
Fannie Mae's principal multifamily loan program. Fannie Mae delegates the
responsibility for originating, underwriting, closing and delivering multifamily
mortgages to the DUS lenders and the DUS lenders share the risk of loss with
Fannie Mae and service the loans for a fee. Under the DUS program, upon
obtaining a commitment from Fannie Mae with regard to a particular loan, Fannie
Mae commits to acquire the mortgage loan based upon our underwriting, and we
agree to bear a portion of the risk of potential losses in the event of a
default. Fannie Mae commitments may be made to acquire and/or credit enhance the
mortgage loan from CMC for cash or in exchange for a mortgage-backed security
backed by the mortgage loan.
In addition to DUS originations, our mortgage banking activities include:
o closing and delivering multifamily mortgages to Freddie Mac as a
Freddie Mac Program Plus(R) Seller/Servicer. Similar to the DUS
program with Fannie Mae, as a Program Plus lender, we originate
mortgages based on commitments from Freddie Mac, and we then sell
those loans to Freddie Mac. Unlike the DUS program, however, there is
not a loss sharing aspect to the transactions;
7
o acting as an approved seller/servicer for the Government National
Mortgage Association ("Ginnie Mae");
o originating and servicing loans as a leading commercial loan
correspondent for Wall Street conduits and life insurance companies;
o acting as an approved loan processor/servicer for the FHA; and
o sub-servicing loans originated by other firms.
Mortgage loans we originate for Fannie Mae, Freddie Mac or Ginnie Mae are closed
in CMC's name, using cash borrowed from a warehouse lender. Approximately one
week to one month following closing of a loan, the loan documentation and an
assignment are delivered to the mortgagor, or a document custodian on its
behalf, and the cash purchase price or mortgage-backed security is delivered to
us. We use the cash received to repay the warehouse loans or we sell the
mortgage-backed securities for cash pursuant to prior agreements and use that
cash to repay the warehouse loans. We do not retain any interest in any of the
mortgage loans except for mortgage servicing rights ("MSRs") and certain
contingent liabilities under the loss-sharing arrangement with Fannie Mae.
Our mortgage banking activities generate cash flow predominantly from:
o origination fees;
o ongoing fees for servicing a majority of the loans we originate as
well as other loans that we sub-service. Servicing fees include a risk
sharing premium for loans originated for Fannie Mae;
o trading profits upon sale of the mortgage loans; and
o the interest rate spread during the periods prior to settlement of the
sale of mortgage loans.
During 2004, we originated loans totaling approximately $1.0 billion and, at
December 31, 2004, serviced a loan portfolio of approximately $4.1 billion.
In the first quarter of 2005, we acquired Capri Capital Finance ("CCF") and
combined CCF with CMC. For a description of this transaction, see Note 21 to the
consolidated financial statements and MANAGEMENT'S DISCUSSION AND ANALYSIS -
SUBSEQUENT EVENTS.
4. VARIABLE INTEREST ENTITIES ("VIES")
In accordance with accounting rules requiring the consolidation of VIEs, we
consolidate the balance sheets and operations of numerous funds that we sponsor
and other partnerships that we indirectly manage. While we have no equity
interest in these VIEs, we are considered to control them (according to
accounting rules) for reasons associated with our role in managing them and the
nominal equity interests of our executive officers. While our Fund Management
and Portfolio Investing segments earn fees or interest from these VIEs, we
consider them separately for management purposes. For a more detailed
discussion, see Note 2 to the consolidated financial statements.
Competition
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From time to time, we may be in competition with private investors, regional
investment banks, mortgage banking companies, lending institutions,
quasi-governmental agencies such as Fannie Mae and Freddie Mac, mutual funds,
domestic and foreign credit enhancers, bond insurers, investment partnerships
and other entities with objectives similar to ours. Although we operate in a
competitive environment, competitors focused on providing all of our
custom-designed programs are relatively few. Specifically:
o our Portfolio Investing business competes directly with regional
investment banks, other real estate finance companies and others
seeking to invest in tax-exempt revenue bonds;
o our Fund Management business competes directly with others seeking to
raise capital for tax advantaged funds, some of which offer credit
enhancement for their funds, regional and national banks that directly
acquire LIHTC investments and other real estate fund management
companies; and
o our Mortgage Banking business is in competition with 25 other licensed
DUS lenders which originate multifamily mortgages on behalf of Fannie
Mae, 34 other Freddie Mac Program Plus lenders, as well as numerous
banks, finance companies and others that originate mortgages for
resale.
8
We face many competitors, some of whom have substantially greater financial and
operational resources than we do. In addition, affiliates of some of our
managing trustees have formed, and may continue to form, various entities to
engage in businesses that may be competitive with us, but, at this time, there
is no other such business that has all of our financing products. See RISKS
RELATED TO INVESTING IN OUR COMPANY below. However, we feel we can effectively
compete due to our on-going relationships with certain developers. Due to our
unified product platform, we believe we are better positioned to offer a full
range of financing programs on both affordable and market-rate multifamily
housing. Our origination groups are able to cross market all of our financing
products, thereby offering developers a single, streamlined execution.
We face increasing levels of competition both in terms of new competitors and
new competing products. We continually seek to develop new products that will
complement our real estate financing products.
Financing and Equity
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As noted in the segment descriptions above, we typically fund the expansion of
our business through a combination of operating cash flows, short-term
borrowings, securitizations, long-term borrowings and equity issuances. These
funding vehicles are described in detail in MANAGEMENT'S DISCUSSION AND ANALYSIS
- - LIQUIDITY AND CAPITAL RESOURCES and in Notes 9, 10, 13 and 14 to our
consolidated financial statements.
Tax Matters
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We are a Delaware statutory trust and a significant portion of our revenue is
non-taxable. Further, we (the parent trust) and many of our subsidiaries
(including all that constitute our Portfolio Investing segment) are partnerships
that are not subject to income taxes. We pass along our income, including
federally tax-exempt income to our shareholders for inclusion in their tax
returns. We derive a substantial portion of our income from ownership of first
mortgage "Private Activity Bonds." The interest from these bonds is generally
tax-exempt from regular federal income tax. However, the Tax Reform Act of 1986
classified this type of interest for bonds issued after August 7, 1986 as a tax
preference item for alternative minimum tax ("AMT") purposes. The percentage of
our tax-exempt interest income subject to AMT was approximately 93% for the year
ended December 31, 2004, compared to 88% in 2003 and 85% in 2002. As a result of
AMT, the percentage of our income that is exempt from federal income tax may be
different for each shareholder.
With regard to our revenue bond investing and tax credit fund sponsorship, we
operate in a regulatory environment governed primarily by two sections of the
Internal Revenue Code of 1986 (the "Code") relating to affordable housing:
o Section 142(d), which governs the issuance of federally tax-exempt
revenue bonds for affordable multifamily housing to be owned by
private, for-profit developers; and
o Section 42, which authorizes federal LIHTCs for qualifying affordable
housing properties.
TAX-EXEMPT FINANCING
Section 142(d) provides for the issuance of federally tax-exempt revenue bonds,
the proceeds of which are to be loaned to private developers for the new
construction or acquisition and rehabilitation of multifamily rental housing.
Under the Code, in order to qualify for federally tax-exempt financing, certain
ongoing requirements must be complied with on a continual basis. The principal
requirement is that the property be operated as a rental property and that
during the Qualified Project Period (defined below) at least either
o 20% of the units must be rented to individuals or families whose
income is less than 50% of the area median gross income (the "20/50
test"); or
o 40% of the units must be rented to individuals or families whose
income is less than 60% of the area median gross income (the "40/60
test");
in each case with adjustments for family size. The Qualified Project Period
begins when 10% of the units in the property are first occupied and ends on the
latest of the date:
(i) which is 15 years after 50% of the units are occupied;
(ii) on which all the bonds have been retired; or
9
(iii)on which any assistance provided under Section 8 of the U.S. Housing
Act of 1937 terminates.
If these requirements are not complied with on a continual basis interest on the
revenue bonds could be determined to be includable in gross income,
retroactively to the date such bonds were issued. There is no federal statutory
or regulatory limit on the amount of rent that may be charged. The availability
of federally tax-exempt financing for affordable multifamily housing to be owned
by private, for-profit developers in each state is limited by an annual volume
cap contained in Section 146 of the Code. At the end of 2000, Congress enacted
legislation which increased the volume cap by 25% in both 2001 and 2002 and
thereafter as indexed for inflation.
Bonds issued for affordable multifamily housing properties must compete with all
other types of private activity bonds (other than private activity bonds issued
for qualifying Section 501(c)(3) organizations) for an allocation of a state's
available volume cap. Non-profit organizations described in Section 501(c)(3) of
the Code whose charitable purpose is to provide low income housing may also
avail themselves of federally tax-exempt financing to construct or acquire and
rehabilitate affordable multifamily housing properties. Revenue bonds for such
charities are governed by Section 145 of the Code and may be issued without
regard to the statewide volume cap that applies to for-profit developers. Under
Section 145 of the Code at least 95% of the proceeds of the bond issue must be
used in a manner that furthers the charitable purpose of the Section 501(c)(3)
organization, or a related purpose. In Revenue Procedure 96-32, the IRS
promulgated a non-exclusive safe harbor for Section 501(c)(3) organizations
whose charitable purpose is to provide affordable housing: if either the 20/50
or 40/60 tests described above are met and, in addition, at least 75% of all
units are rented to families whose income does not exceed 80% of area median
gross income (adjusted for family size) and the Section 501(c)(3) organization
charges tenants "affordable rents", the proceeds of a revenue bond issue will be
treated as being used to further the Section 501(c)(3) organization's charitable
purpose.
FEDERAL LIHTCS
Section 42 of the Code authorizes federal LIHTCs for affordable multifamily
rental housing. Under this program, a project either receives an allocation of
federal LIHTCs from an agency designated by the government of the state in which
the project is located or the project is entitled to the LIHTCs by reason of its
being financed by volume cap revenue bonds. There are two types of credits:
o 4% credits - for new buildings and existing buildings financed with
revenue bonds that receive an allocation of volume cap, or for new and
existing buildings financed with below-market federal financing that
receive an allocation of federal LIHTCs from state agencies; and
o 9% credits - for new buildings that receive an allocation of federal
LIHTCs from state agencies.
The credits are taken over a period of 10 years, which can span over an 11-year
operating period. The credit amount is based on the qualified basis of each
building, which is based upon the adjusted basis of the building multiplied by
the percentage of units in the building leased to low-income tenants.
In order to qualify for the federal LIHTC, the property must comply with either
of the 20/50 or 40/60 tests that apply to tax-exempt bonds (see TAX-EXEMPT
FINANCING above). However, in addition, the amount of rent that may be charged
to qualifying low-income tenants cannot exceed 30% of the "imputed income" for
each unit, i.e., 30% of the imputed income of a family earning 50% or 60% of
area median income, as adjusted for family size. Failure to comply continuously
with these requirements throughout the fifteen year recapture period could
result in a recapture of the federal LIHTCs. In addition, if the rents from the
property are not sufficient to pay debt service on the revenue bonds or other
financing secured by the property and a default ensues, the initial borrower
could lose ownership of the project as the result of foreclosure of the mortgage
securing the bonds. In such event, the initial equity investors would no longer
be entitled to claim the federal LIHTCs, but the foreclosing lender could claim
the remaining LIHTCs provided the project continues to be operated in accordance
with the requirements of Section 42. As a result, there is a strong incentive
for the federal LIHTC investor to ensure that the development is current on debt
service payments by making additional capital contributions or otherwise.
With respect to most of the properties that secure our revenue bonds, all the
multifamily units are rented to individuals or families at 60% of area median
income and, thus, 100% of the qualified basis may be used to determine the
amount of the federal LIHTC. This maximizes the amount of equity raised from the
purchasers of the federal LIHTCs for each development and provides for the
maximum amount of rent that can be obtained from tenants where there is
currently strong occupancy demand.
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Investors in RCC sponsored funds are usually Fortune 500 corporations that have
projected long-term positive tax positions. These investors generally become
limited partners in the RCC sponsored fund which, in turn, invests as a limited
partner in the developer/owner of the affordable housing property. The RCC
sponsored fund contributes to the developer/owner an amount equal to the present
value of the projected credits and other tax benefits in the form of an up-front
equity contribution to the developer. In the case of properties utilizing 4%
credits, this contribution will usually provide between 25% and 35% of the costs
of the development. For properties utilizing 9% credits, this payment will
usually provide between 45% and 55% of the cost of the development.
Governance
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We are governed by a board of trustees comprised of fifteen managing trustees,
eight of whom are independent. Our board of trustees has six committees:
(1) Audit;
(2) Compensation;
(3) Nominating/Governance;
(4) Capital Markets;
(5) Conflicts; and
(6) Investment.
The Audit, Compensation, Nominating/Governance and Capital Markets committees
consist entirely of independent trustees.
Employees
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We had approximately 300 employees at December 31, 2004, none of whom were
parties to any collective bargaining agreement.
Regulatory Matters
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Our Mortgage Banking business is subject to various governmental and
quasi-governmental regulations. As noted above, CMC is licensed or approved to
service and/or originate and sell mortgage loans under Fannie Mae, Freddie Mac,
Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal
government and Fannie Mae and Freddie Mac are federally-chartered public
corporations. These agencies require CMC to meet minimum net worth and capital
requirements and to comply with other requirements. Mortgage loans made under
these programs are also required to meet the requirements of these programs. In
addition, under Fannie Mae's DUS program, CMC has the authority to originate
loans without a prior review by Fannie Mae and is required to share in the
losses on loans originated under this program. If CMC fails to comply with the
requirements of these programs, the agency can terminate its license or
approval. In addition, Fannie Mae and Freddie Mac have the authority under their
guidelines to terminate a lender's authority to originate and service their
loans for any reason. If CMC's authority is terminated under any of these
programs, it would prevent CMC from originating or servicing loans under that
program. We were required to guarantee the obligations under these programs as a
condition for receiving Fannie Mae and Freddie Mac's approval of our
acquisitions of CMC and CCF.
Risk Factors
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As with any business, our Company faces a number of risks. If any of the
following risks occur, our business, prospects, results of operations and
financial condition would likely suffer. We have grouped these risk factors into
several categories, as follows:
1. General Risks Related to Our Business
2. Risks Related to Our Portfolio Investing Business
3. Risks Related to Our Fund Management Business
4. Risks Related to Our Mortgage Banking Business
5. Risks Related to Application of Tax Laws
6. Risks Related to Investing in Our Company
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1. GENERAL RISKS RELATED TO OUR BUSINESS
THERE ARE RISKS ASSOCIATED WITH THE PROPERTIES OUR PRODUCTS FINANCE THAT COULD
ADVERSELY AFFECT OUR EARNINGS
Through our taxable and tax-exempt subsidiaries, we derive a large portion of
our income by financing real estate through:
o investing in taxable and tax-exempt bonds secured by residential and
rental properties;
o sponsoring funds that provide equity to such properties; and
o originating and servicing mortgages on such properties.
In many cases, we are both the sponsor of the fund and the holder of the debt
which is secured by the property which is indirectly owned by the fund. In
addition, we also issue guarantees on behalf of developers, guarantee investment
returns to the investors in certain equity funds we sponsor and issue other
guarantees associated with the performance of a property.
Our success depends in large part on the performance of the properties which are
the subject of our businesses and, therefore, subjects us to various types and
degrees of risk, including the following:
o the property securing debt might not generate sufficient income to
meet its operating expenses and payments on its related debt;
o the failure of a mortgage obligor to make principal payments on a loan
originated for Fannie Mae could expose us to losses under our risk
sharing agreement;
o local, regional or national economic conditions may limit the amount
of rent that can be charged for rental units at the properties and may
result in a reduction in rent payments or the timeliness of rent
payments or a reduction in occupancy levels;
o federal LIHTCs and local, state and federal housing subsidy or similar
programs which apply to many of the properties impose rent limitations
that could adversely affect the ability to increase rents to generate
the funds necessary to maintain the properties in proper condition,
which is particularly important during periods of rapid inflation or
declining market value of such properties;
o if a bond defaults, the value of the property securing such bond
(plus, for properties that have availed themselves of the federal
LIHTC, the remaining value of such LIHTC) may be less than the
unamortized principal amount of such bond.
o there are certain types of losses (generally of a catastrophic nature,
such as toxic mold or other environmental conditions, earthquakes,
floods, terrorism and wars) which are either uninsurable or not
economically insurable.
o under various laws, ordinances and regulations, an owner or operator
of real estate is liable for damages caused by or the costs of removal
or remediation of certain hazardous or toxic substances released on,
above, under or in such real estate. These laws often impose liability
whether or not the owner knew of, or was responsible for, the presence
of such hazardous or toxic substances. As a result, the entities we
sponsor which own real estate, and the owners of the real estate
securing our investments, could be required to pay for such damages or
removal or remediation costs.
All of these conditions and events may increase the possibility that, among
other things:
o a property owner may be unable to meet its obligations to us as holder
of its debt;
o a fund may not be able to pay our fees;
o a fund may not generate the return that we have guaranteed and we may
be called upon to satisfy the guarantee; and
o we could lose our invested capital and/or anticipated future revenue.
This could decrease the value of our investments, lower the value of assets we
pledge as collateral and affect our net income and cash available for
distribution to shareholders.
WE MAY SUFFER ADVERSE CONSEQUENCES FROM CHANGING INTEREST RATES
Because a large portion of our debt is variable rate, an increase in interest
rates could negatively affect our net income and cash available for distribution
to our shareholders. Additionally, increasing interest rates may:
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o reduce the carrying value of our investments, particularly our
fixed-rate revenue bonds and residual interests in tax-exempt
securitization transactions;
o decrease the amount we could realize on the sale of those investments;
o result in a reduction in the number of properties which are
economically feasible to finance through either tax-exempt financing
or tax credit equity;
o reduce the demand for multifamily tax-exempt and taxable financing,
which could limit our ability to invest in revenue bonds or to
structure transactions;
o increase our borrowing costs;
o restrict our access to capital;
o cause investors to find alternative investments that are more
attractive than the equity funds we sponsor; and
o adversely affect the amount of cash available for distribution to
shareholders.
Since a significant portion of our investments are residual interests in revenue
bonds or other securities whose cash flow is first used to pay senior securities
with short-term floating interest rates, any increase in short-term interest
rates will increase the amount of interest paid on the senior securities and
reduce the cash flow in our Portfolio Investing business. Further, increasing
interest rates may reduce the likelihood of property development or mortgage
refinancing, thereby deceasing the origination volume of in our Mortgage Banking
business.
Conversely, a decrease in interest rates may lead to the refinancing of some of
the debt we own if lockout periods have ended. We may not be able to reinvest
the proceeds of any such refinancing at the same interest rates as the debt
refinanced. Additionally, falling interest rates may prompt historical renters
to become homebuyers, in turn potentially reducing the demand for multifamily
housing.
If a change in interest rates causes the consequences described above, or
otherwise negatively affects us, the result could adversely affect our ability
to generate income or cash flows to make distributions and other payments in
respect of our shares.
THE INABILITY TO MAINTAIN OUR RECURRING FEE ARRANGEMENTS AND TO GENERATE NEW
TRANSACTION FEES COULD HAVE A NEGATIVE IMPACT ON OUR EARNINGS
Two taxable revenue sources in our Fund Management segment are the transaction
fees generated by our sponsorship of new investment programs and recurring fees
payable by existing and future programs. Transaction fees are generally
"up-front" fees that are generated by:
o the sponsorship of new investment programs; and
o upon investment of the capital raised in an investment program.
Recurring fees are generated by the ongoing operation of investment programs we
sponsor. The termination of one or more of these recurring fee arrangements, or
the inability to sponsor new programs which will generate new recurring and
transaction fees, would adversely affect our results of operations and reduce
earnings. There can be no assurance that existing recurring fee arrangements
will not be reduced or terminated or that we will be able to realize revenues
from new investment programs.
Likewise, the two principal revenue streams in our Mortgage Banking business are
fees we earn for originating loans and ongoing fees we earn for servicing loans.
A decline in origination volume or the loss or termination of a servicing
arrangement could adversely affect our results of operations and reduce our
earnings. There can be no assurance that existing recurring fee arrangements
will not be reduced or terminated or that we will be able to realize revenues
from new business.
WE RELY UPON RELATIONSHIPS WITH KEY INVESTORS AND CUSTOMERS WHICH MAY NOT
CONTINUE
We rely upon relationships with key investors and developers. If these
relationships do not continue, or if we are unable to form new relationships,
our ability to generate revenue will be adversely affected. In 2004, five key
investors provided approximately 69.2% of the equity capital raised by tax
credit syndication programs we sponsored, with Fannie Mae and Freddie Mac
together providing approximately 44.9% of the capital. In addition, ten key
developers provided approximately 46.8% of the LIHTC properties for which we
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arranged equity financing in 2004. Further, Fannie Mae and Freddie Mac were the
purchasers of 72.9% of the loans originated by our Mortgage Banking business in
2004.
There can be no assurance that we will be able to continue to do business with
these key investors and developers or that new relationships will be formed. By
reason of their regulated status, certain of our investors have incentives to
invest in our sponsored investment programs in addition to the economic return
from such investments. A change in such regulations could result in
determinations to seek other investment opportunities.
REVENUES FROM OUR FEE-GENERATING ACTIVITIES ARE LESS PREDICTABLE THAN THOSE FROM
OUR REVENUE BOND INVESTMENTS AND COULD RESULT IN A DECREASE IN CASH FLOW,
FLUCTUATIONS IN OUR SHARE PRICE AND A REDUCTION IN THE PORTION OF OUR INCOME
THAT IS TAX-EXEMPT
As of December 31, 2004 in excess of 30% of our GAAP revenue recognized was
derived from fee-generating service activities through our taxable subsidiaries.
Although we expect that these fee-generating businesses will generate
significant growth for us, they are inherently less predictable than the
ownership of interests in revenue bonds, and there can be no assurance that the
fee-generating activities will be profitable. In addition, the earnings and cash
generated by the fund sponsorship portion of our Fund Management business has
historically fluctuated between quarters due to the variability and seasonality
inherent in investments in tax credit partnerships. These fluctuations could be
perceived negatively and, therefore, adversely affect our share price.
In addition, the portion of our distributions that is excludable from gross
income for federal income tax purposes could decrease based on the size of our
future taxable business. Our taxable subsidiaries do not currently distribute
dividend income to us but rather reinvest it in their businesses. If we invest
in a larger percentage of taxable investments, or if our taxable subsidiaries
were to distribute dividend income to us, the result would likely be that the
taxable portion of our overall income would increase, and, therefore, the
percentage of our net income distributed to shareholders that is federally
tax-exempt to them would likely decrease.
2. RISKS RELATED TO OUR PORTFOLIO INVESTING BUSINESS
WE HAVE NO RECOURSE AGAINST STATE OR LOCAL GOVERNMENTS OR PROPERTY OWNERS UPON
DEFAULT OF OUR REVENUE BONDS OR UPON THE BANKRUPTCY OF AN OWNER OF PROPERTIES
SECURING OUR REVENUE BONDS
Although state or local governments or their agencies or authorities issue the
revenue bonds we purchase, the revenue bonds are not general obligations of any
state or local government. No government, as an issuer of these bonds, is liable
to make payments on the revenue bonds, nor is the taxing power of any government
pledged for the payment of principal of or interest on the revenue bonds. An
assignment by the issuing government agency or authority of the mortgage loan in
favor of a bond trustee on behalf of us, or in some cases, an assignment
directly to the bondholder, secures each revenue bond we own. The mortgage loan
is also secured by an assignment of rents. Following the time that the
properties securing the mortgage loans are placed into service and achieve
stabilized occupancy, the underlying mortgage loans are non-recourse to the
property owner, other than customary recourse carve-outs for bad acts, such as
fraud and breach of environmental representations and covenants. Accordingly,
the revenue derived from the operation of the properties securing the revenue
bonds that we own and amounts derived from the sale, refinancing or other
disposition of the properties are the sole sources of funds for payment of
principal and interest on the revenue bonds.
Our revenue may also be adversely affected by the bankruptcy of an owner of
properties securing the revenue bonds that we directly or indirectly own. An
owner of properties under bankruptcy protection may be able forcibly to
restructure its debt service payments and stop making debt service payments to
us, temporarily or otherwise. Our rights in this event would be defined by
applicable law.
WE ARE SUBJECT TO CONSTRUCTION COMPLETION AND REHABILITATION RISKS THAT COULD
ADVERSELY AFFECT OUR EARNINGS
As of December 31, 2004, revenue bonds with an aggregate carrying value of
approximately $335.5 million were secured by affordable multifamily housing
properties which are still in various stages of construction and revenue bonds
with an aggregate carrying value of approximately $218.6 million were secured by
affordable multifamily housing properties which are undergoing substantial
rehabilitation. Construction and/or substantial rehabilitation of such
properties generally lasts approximately 12 to 24 months. The principal risk
associated with this type of lending is the risk of non-completion of
construction or rehabilitation which may arise as a result of:
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o underestimated initial construction or rehabilitation costs;
o cost overruns;
o delays;
o failure to obtain governmental approvals; and
o adverse weather and other unpredictable contingencies beyond the
control of the developer.
If a mortgage loan is called due to construction and/or rehabilitation not being
completed as required in the mortgage loan documents, we, as the holder of the
revenue bonds secured by such mortgage, may incur certain costs and be required
to invest additional capital in order to preserve our investment.
THE PROPERTIES SECURING CERTAIN OF OUR REVENUE BONDS, WHICH ARE CURRENTLY IN
CONSTRUCTION OR LEASE-UP STAGES, MAY EXPERIENCE FINANCIAL DISTRESS IF THEY DO
NOT MEET OCCUPANCY AND DEBT SERVICE COVERAGE LEVELS SUFFICIENT TO STABILIZE SUCH
PROPERTIES, NEGATIVELY AFFECTING OUR ASSETS AND EARNINGS
As of December 31, 2004, revenue bonds in our portfolio with a carrying value of
approximately $1.1 billion were secured by mortgages on properties in
construction or lease-up stages. The lease-up of these underlying properties may
not be completed on schedule or at anticipated rent levels, resulting in a
greater risk that they may go into default than bonds secured by mortgages on
properties that are fully leased-up. Moreover, there can be no assurance that
the underlying property will achieve expected occupancy or debt service coverage
levels.
CERTAIN OF OUR REVENUE BONDS WE AND OUR SUBSIDIARIES HOLD HAVE BEEN PLEDGED
A significant portion of our revenue bond portfolio has been pledged as
collateral in connection with our securitizations, credit enhancement activities
and warehouse borrowing and we may not have full access to them until we exit
the related programs. The carrying value of the pledged bonds varies from time
to time. As of December 31, 2004, the carrying value of all pledged bonds was
approximately $743 million.
OTHER PARTIES HAVE THE FIRST RIGHT TO CASH FLOW FROM OUR SECURITIZED REVENUE
BOND INVESTMENTS
Because of our utilization of securitization, a substantial portion of our
revenue bond investments are subordinated or may be junior in right of payment
to other bonds, notes or instruments. There are risks in investing in
subordinated revenue bonds and other junior residual interests that could
adversely affect our net income, including:
o the risk that borrowers may not be able to make payments on both the
senior and the subordinated revenue bonds or interests, resulting in
us, as the holder of the subordinated revenue bond, receiving less
than the full and timely payments of interest and principal;
o the risk that short-term interest rates may rise significantly,
increasing the amounts payable to the holders of the floating-rate
senior interests created through our securitizations and reducing the
amounts payable to us as holders of the junior residual interests; and
o the risk that the holders of the senior revenue bonds or senior
interests may control the ability to enforce remedies, limiting our
ability to take actions that might protect our interests.
RISK ASSOCIATED WITH SECURITIZATION COULD ADVERSELY AFFECT OUR NET INCOME
Through securitizations, we seek to enhance our overall return on our
investments and to generate proceeds that, along with equity offering proceeds,
facilitate the acquisition of additional investments. In our debt
securitizations, a bank or another type of financial institution stands ready to
provide liquidity to the purchasers of senior interests in our revenue bonds.
They also provide certain credit enhancements with respect to the underlying
revenue bond, which enables the senior interests to be sold to investors seeking
investments with credit ratings of at least "A" short term and "AA" long term.
The liquidity facilities are generally for one-year terms and are renewable
annually. If the credit strength of either the liquidity or credit enhancement
providers deteriorates, we anticipate that the return on the residual interests
would decrease, negatively affecting our income. In addition, if we are unable
to renew the liquidity or credit enhancement facilities, we would be forced to
find alternative facilities, to repurchase the underlying bonds or to liquidate
the underlying bonds and our investment in the residual interests. If we were
forced to liquidate our investment, we would recognize gains or losses on the
liquidation, which might be significant depending on market conditions. As of
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December 31, 2004, senior interests with an aggregate amount of $505.5 million
were credit enhanced by an eight-year term facility through MBIA, a large
financial insurer. Of this amount, $405.5 million was subject to annual
"rollover" renewal for liquidity. Also, as of December 31, 2004, Merrill Lynch
provided liquidity and credit enhancement for senior interests with an aggregate
amount of $462.9 million in the P-FLOATs/RITES program. We do not maintain an
ongoing commitment with Merrill Lynch and, therefore, are subject to the risk of
termination of that program on short notice.
OUR REVENUE BONDS MAY BE CONSIDERED USURIOUS
State usury laws establish restrictions, in certain circumstances, on the
maximum rate of interest that may be charged by a lender and impose penalties on
parties making usurious loans, including monetary penalties, forfeiture of
interest and unenforceability of the debt. Although we do not intend to acquire
revenue bonds secured by mortgage loans at usurious rates, there is a risk that
our revenue bonds could be found to be usurious as a result of uncertainties in
determining the maximum legal rate of interest in certain jurisdictions,
especially with respect to revenue bonds that bear participating or otherwise
contingent interest. Therefore, the amount of interest to be charged and the
return on our revenue bonds would be limited by state usury laws. To minimize
the risk of investing in a usurious revenue bond, we obtain an opinion of
counsel that the interest rate on a proposed revenue bond is not usurious under
applicable state law. We also generally obtain an opinion of counsel that the
interest on the proposed mortgage loan is not usurious. To obtain such opinions,
we may have to agree to defer or reduce the amount of interest that can be paid
in any year. Some states may prohibit the compounding of interest, in which case
we may have to agree to forego the compounding feature of our revenue bonds
originated in those states.
OUR INVESTMENTS IN REVENUE BONDS ARE ILLIQUID
Our investments in revenue bonds lack a regular trading market. There is no
limitation in our trust agreement or otherwise as to the percentage of our
investments that may be illiquid and we expect to continue to invest in assets,
substantially all of which will be illiquid securities. If a situation arises
where we require additional cash, we could be forced to liquidate some or all of
our investments on unfavorable terms (if any sale is possible) that could
substantially reduce the amount of distributions available and payments made in
respect of our shares.
REVENUE BONDS MAY GO INTO DEFAULT FROM TIME TO TIME AND NEGATIVELY IMPACT OUR
EARNINGS
Properties underlying our revenue bonds may experience financial difficulties
from time to time, which could cause certain of our revenue bonds to go into
default. Were that to occur, we might take remedial action such as, among other
things, entering into a work-out or forbearance agreement with the owner of the
property or exercising our rights with respect to the collateral securing such
revenue bond, including the commencement of mortgage foreclosure proceedings. In
addition, in the event that we were to successfully foreclose the mortgage on
the underlying property, it is likely that, during the period that we or an
affiliate owned both the property and the defaulted bond, we, as holder of the
defaulted bond, would be deemed to be a related party to a "substantial user" of
the property underlying such bond. As a result, during such period, the interest
we receive on the bond would be taxable. See "SUBSTANTIAL USER" LIMITATION
below.
3. RISKS RELATED TO OUR FUND MANAGEMENT BUSINESS
THERE ARE RISKS ASSOCIATED WITH CREDIT ENHANCEMENT AND INTERNAL RATE OF RETURN
GUARANTEES THAT EXPOSE US TO LOSSES
Through our taxable subsidiaries, we provide credit enhancement to third parties
for a fee. If such third parties default on their obligations for which we
provided credit enhancement, we would be called upon to make the related
payment, which would likely be in an amount far in excess of the fee paid to us
for providing the credit enhancement. We also provide internal rate of return
guarantees to investors in partnerships designed to pass through tax benefits,
including LIHTCs, to investors. In connection with such guarantees we might be
required to advance funds to ensure that the investors do not lose their
expected tax benefits and, if the internal rate of return to investors falls
below the guaranteed level, we would be required to make a payment so that the
guaranteed rate of return will be achieved. Our maximum potential liability
pursuant to those guarantees is detailed in MANAGEMENT'S DISCUSSION AND ANALYSIS
- - OFF BALANCE SHEET ARRANGEMENTS.
THERE IS A RISK OF ELIMINATION OF, OR CHANGES TO, GOVERNMENTAL PROGRAMS THAT
COULD LIMIT OUR PRODUCT OFFERINGS
A significant portion of our Fund Management revenues is derived from the
syndication of partnership interests in properties eligible for LIHTCs. Although
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LIHTCs are a part of the Code, Congress could repeal or modify this legislation
at any time or modify the tax laws so that the value of LIHTC benefits is
reduced. If such legislation is repealed or adversely modified, we would no
longer be able to pursue this portion of our business strategy.
CERTAIN AGREEMENTS PURSUANT TO WHICH WE EARN FEES HAVE FINITE TERMS AND MAY NOT
BE RENEWED WHICH COULD NEGATIVELY AFFECT OUR EARNINGS
We receive fees pursuant to an advisory agreement with AMAC, an affiliated
company. This advisory agreement is subject to annual renewal and approval by
the independent trustees of AMAC and there is no guarantee that the agreement
will be renewed. We also receive fees from investment programs we sponsor (and
may sponsor in the future) that do not provide for annual elections by investors
of their management. With respect to these investment programs, we will
generally acquire controlling interests in the entities which control these
investment programs. However, these interests are subject to the fiduciary duty
of the controlling entity to the investors in those programs, which may affect
our ability to continue to collect fees from those programs. Furthermore, the
organizational documents of certain of these investment programs allow for the
investors, at their option, to remove the entity controlled by us as general
partner or managing member without cause. Although the investment programs will
generally be required to pay fair market value if they exercise this right, our
right to receive future fees would terminate and there can be no assurance that
the payment will fully compensate us for this loss. Finally, many of these
investment programs typically have finite periods in which they are scheduled to
exist, after which they are liquidated. The termination of a program will result
in a termination of the fees we receive from those programs.
OUR ROLE AS A SPONSOR OF INVESTMENT PROGRAMS AND CO-DEVELOPMENTS EXPOSES US TO
RISKS OF LOSS
In connection with the sponsorship of investment programs and joint venture
activities for co-development of LIHTC properties, we act as a fiduciary to the
investors in our syndication programs and are often also required to provide
performance guarantees. We advance funds to acquire interests in property-owning
partnerships for inclusion in investment programs and, at any point in time, the
amount of funds advanced can be material. Recovery of these amounts is subject
to our ability to attract investors to new investment programs or, if investors
are not found, the sale of the partnership interests in the underlying
properties. We could also be liable to investors in investment programs and
third parties as a result of serving as general partner or special limited
partner in various investment programs. In addition, even when we are not
required to do so, we may advance funds to allow investment programs to meet
their expenses and/or generate the expected tax benefits to investors.
FUNDS MAY NOT GENERATE SUFFICIENT CASH TO PAY FEES DUE TO US, WHICH MAY
NEGATIVELY IMPACT OUR CASH FLOWS
Much of the revenues in our Fund Management business are earned from upper-tier
funds we sponsor. These funds are dependent upon the cash flows of lower-tier
partnerships in which they invest to generate their own cash flows that are used
to pay fees for services, such as asset management and advisory services, which
we render to them. As the lower-tier partnerships are susceptible to numerous
operational risks (see THERE ARE RISKS ASSOCIATED WITH THE PROPERTIES OUR
PRODUCTS FINANCE THAT COULD ADVERSELY AFFECT OUR EARNINGS above) the upper-tier
funds may not collect sufficient cash to pay the fees they owe to us. If we do
not collect these fees, the negative impact on our cash flows, and our net
income if we determine the fees are not collectible, could negatively impact our
business.
4. RISKS RELATED TO OUR MORTGAGE BANKING BUSINESS
THERE ARE RISKS OF LOSS ASSOCIATED WITH DUS LENDING WHICH MAY NEGATIVELY IMPACT
OUR EARNINGS
In our DUS program, we originate loans through one of our subsidiaries which are
thereafter purchased by Fannie Mae. We retain a first loss position with respect
to loans that we originate and sell to Fannie Mae. We assume responsibility for
a portion of any loss that may result from borrower defaults, based on the
Fannie Mae loss sharing formulas, Levels I, II, or III. As December 31, 2004,
all of our loans consisted of Level I loans. For such loans, if a default
occurs, we are responsible for the first 5% of the unpaid principal balance and
a portion of any additional losses to a maximum of 20% of the original principal
balance; any remaining loss is borne by Fannie Mae. Level II and Level III loans
carry a higher loss sharing percentage. As of December 31, 2004 our maximum
"first loss" exposure under the DUS program was approximately $362 million.
Under the terms of our Master Loss Sharing Agreement with Fannie Mae, we are
responsible for funding 100% of mortgagor delinquency (principal and interest)
and servicing (taxes, insurance and foreclosure costs) advances until the
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amounts advanced exceed 5% of the unpaid principal balance at the date of
default. Thereafter, for Level I loans, we may request interim loss sharing
adjustments which allow us to fund 25% of such advances until final settlement
under the Master Loss Sharing Agreement. No interim sharing adjustments are
available for Level II and Level III loans.
5. RISKS RELATED TO APPLICATION OF TAX LAWS
OUR CLASSIFICATION AS A PUBLICLY TRADED PARTNERSHIP NOT TAXABLE AS A CORPORATION
IS NOT FREE FROM DOUBT AND COULD BE CHALLENGED
We, and all of our Portfolio Investing subsidiaries, operate as partnerships or
are disregarded for federal income tax purposes. This allows us to pass through
our income, including our federally tax-exempt income, and deductions to our
shareholders. The listing of our common shares on the American Stock Exchange
causes us to be treated as a "publicly traded partnership" for federal income
tax purposes. We and our counsel, Paul, Hastings, Janofsky & Walker LLP ("Paul
Hastings"), believe that we have been and are properly treated as a partnership
for federal income tax purposes. However, the Internal Revenue Service ("IRS")
could challenge our partnership status and we could fail to qualify as a
partnership in years that are subject to audit or in future years. Qualification
as a partnership involves the application of numerous technical legal
provisions. For example, a publicly traded partnership is generally taxable as a
corporation unless 90% or more of its gross income is "qualifying" income (which
includes interest, dividends, real property rents, gains from the sale or other
disposition of real property, gain from the sale or other disposition of capital
assets held for the production of interest or dividends, and certain other
items). We have represented that in all prior years of our existence at least
90% of our gross income was qualifying income and we intend to conduct our
operations in a manner such that at least 90% of our gross income will
constitute qualifying income this year and in the future. In the opinion of Paul
Hastings, although the issue is not free from doubt, we have been and are
properly treated as a partnership for federal income tax purposes.
In determining whether interest is treated as qualifying income under these
rules, interest income derived from a "financial business" and income and gains
derived by a "dealer" in securities are not treated as qualifying income. We
have represented that we are acting as an investor with respect to our revenue
bond investments and that we have not engaged in, and will not engage in, a
financial business, although there is no clear guidance on what constitutes a
financial business under the tax law. We have taken the position that for
purposes of determining whether we are in a financial business, portfolio
investing activities that we are engaged in now and that we contemplate engaging
in prospectively would not cause us to be engaged in a financial business or to
be considered a "dealer" in securities. The IRS could assert that our activities
constitute a financial business. If our activities constitute (or as a result of
increased volume constitute) a financial business or cause us to be treated as a
dealer, there is a substantial risk that more than 10% of our gross income would
not constitute qualifying income. We could also be treated as if we were engaged
in a financial business if the activities of CM Corp. and its subsidiaries were
attributed to us and were determined to constitute a financial business. CM
Corp., including its principal subsidiaries RCC and CMC, is subject to income
tax on its income. Accordingly, we believe the activities and income of CM Corp.
and its subsidiaries will not be attributed to us for purposes of determining
CharterMac's tax status. In addition, in determining whether interest is treated
as qualifying income, interest income that is determined based upon the income
or profits of any person is not treated as qualifying income. A portion of the
interest payable on participating interest bonds owned by us is determined based
upon the income or profits of the properties securing our investments.
Accordingly, if we were to receive more than 10% of our gross income in any
given year from such "contingent interest," the IRS could take the position that
we should be treated as a publicly traded partnership taxable as a corporation.
We carefully monitor the type of interest income we receive to avoid such a
circumstance. However, there can be no assurance that such monitoring would be
effective in all events to avoid the receipt of contingent interest and any
other non-qualifying income in any given year that exceeds 10% of our gross
income because circumstances outside of the control of us and our subsidiaries
could cause such a result.
If, for any reason, less than 90% of our gross income constitutes qualifying
income, items of income and deduction would not pass through to our shareholders
and our shareholders would be treated for federal income tax purposes as
stockholders in a corporation. We would be required to pay income tax at
corporate rates on any portion of our net income that did not constitute
tax-exempt income. In addition, a portion of our federally tax-exempt income may
be included in determining our alternative minimum tax liability. Distributions
by us to our shareholders would constitute ordinary dividend income taxable to
such holders to the extent of our earnings and profits, which would include
tax-exempt income, as well as any taxable income we might have, and the payment
of these distributions would not be deductible by us. These consequences would
have a material adverse effect on us, our shareholders and the price of our
shares.
18
OUR TREATMENT OF INCOME FROM OUR RESIDUAL INTERESTS AS FEDERALLY TAX-EXEMPT
COULD BE CHALLENGED
We hold, indirectly, residual interests in certain federally tax-exempt revenue
bonds through securitization programs, such as the Private Label Tender Option
Program and P-FLOATs/RITESSM program, which entitle us to a share of the
federally tax-exempt interest of such revenue bonds. Special tax counsel have
each rendered an opinion to the effect that the issuer of the RITES and the
issuer of the Private Label Tender Option Program residual certificates,
respectively, will each be classified as a partnership for federal income tax
purposes and the holders of the RITES and the Private Label Tender Option
Program residual certificates will be treated as partners of each partnership.
Consequently, as the holder of the RITES and the Private Label Tender Option
Program residual certificates, we treat our share of the federally tax-exempt
income allocated and distributed to us as federally tax-exempt income. However,
it is possible that the IRS could disagree with those conclusions and an
alternative characterization could cause income from the RITES and the Private
Label Tender Option Program residual certificates to be treated as ordinary
taxable income. If such an assertion of an alternative characterization
prevailed, it would materially adversely affect us and our shareholders.
THERE IS A RISK THAT THE IRS WILL DISAGREE WITH OUR JUDGMENT WITH RESPECT TO
ALLOCATIONS
We use various accounting and reporting conventions to determine each
shareholder's allocable share of income, including any market discount taxable
as ordinary income, gain, loss and deductions. Our allocation provisions will be
respected for federal income tax purposes only if they are considered to have
"substantial economic effect" or are in accordance with the partners' "interest
in the partnership." There is no assurance that the IRS will agree with our
various accounting methods, conventions and allocation provisions, particularly
our allocation of adjustments to shareholders attributable to the differences
between the shareholders' purchase price of common shares and their shares of
our tax basis in our assets, pursuant to an election we made.
THE TAXABILITY OF OUR INCOME DEPENDS UPON THE APPLICATION OF TAX LAWS THAT COULD
BE CHALLENGED
The following discussion relates only to the portion of our investments which
generate federally tax-exempt income.
TAX-EXEMPTION OF OUR REVENUE BONDS
On the date of original issuance or re-issuance of each revenue bond,
nationally recognized bond counsel or special tax counsel rendered its
opinion to the effect that, based on the law in effect on that date,
interest on such revenue bonds is excludable from federally-taxable gross
income, except with respect to any revenue bond (other than a revenue bond,
the proceeds of which are loaned to a charitable organization described in
Section 501(c)(3) of the Code) during any period in which it is held by a
"substantial user" of the property financed with the proceeds of such
revenue bonds or a "related person" of such a "substantial user." Each
opinion speaks only as of the date it was delivered. In addition, in the
case of revenue bonds which, subsequent to their original issuance, have
been reissued for federal tax purposes, nationally recognized bond counsel
or special tax counsel has delivered opinions that interest on the reissued
bond is excludable from federally-taxable gross income of the holder from
the date of re-issuance or, in some cases, to the effect that the
re-issuance did not adversely affect the excludability of interest on the
revenue bonds from the gross income of the holders thereof. However, an
opinion of counsel has no binding effect and there is no assurance that the
IRS will not contest these conclusions reached or, if contested, they will
be sustained by a court.
The Code establishes certain requirements which must be met subsequent to
the issuance and delivery of tax-exempt revenue bonds for interest on such
revenue bonds to remain excludable from federally-taxable gross income.
Among these continuing requirements are restrictions on the investment and
use of the revenue bond proceeds and, for revenue bonds the proceeds of
which are loaned to a charitable organization described in Section
501(c)(3) of the Code, the continued exempt status of such borrower. In
addition, the continuing requirements include tenant income restrictions,
regulatory agreement compliance and compliance with rules pertaining to
arbitrage. Each issuer of the revenue bonds, as well as each of the
underlying borrowers, has covenanted to comply with certain procedures and
guidelines designed to ensure satisfaction of the continuing requirements
of the Code. Failure to comply with these continuing requirements of the
Code may cause the interest on such bonds to be includable in
federally-taxable gross income retroactively to the date of issuance,
regardless of when such noncompliance occurs. Greenberg Traurig, LLP (also
referred to as "Greenberg Traurig") as our bond counsel, and Paul Hastings,
as our securities counsel (Greenberg Traurig and Paul Hastings are
collectively referred to herein as our "Counsel"), have not, in connection
with this filing, passed upon and do not assume any responsibility for, but
19
rather have assumed the continuing correctness of, the opinions of bond
counsel or special tax counsel (including opinions rendered by Greenberg
Traurig) relating to the exclusion from federally-taxable gross income of
interest on the revenue bonds and have not independently verified whether
any events or circumstances have occurred since the date such opinions were
rendered that would adversely affect the conclusions set forth herein.
However, as of the date of this filing, neither we, nor our subsidiaries,
our affiliates or our Counsel have knowledge of any events that might
adversely affect the federally tax-exempt status of our revenue bonds,
including any notice that the IRS considers interest on any of our revenue
bonds to be includable in federally-taxable gross income.
TREATMENT OF PARTICIPATING INTEREST BONDS AS EQUITY INVESTMENTS
At our inception, almost all of our revenue bond investments were
participating interest bonds that had been issued in the late 1980s. Since
August 1996, because of the promulgation of certain tax regulations,
participating interest tax-exempt bonds are rarely issued. Accordingly, and
because the number of participating interest bonds in our portfolio has
been shrinking on account of sales and refinancings, such bonds now
comprise only 5.6% of our total revenue bond portfolio.
Payment of a portion of the interest accruing on a participating interest
bond depends upon the cash flow from, and the proceeds upon the sale or
refinancing of, the property securing such bond. Because of this
participation feature, the IRS could assert that we are not a lender to the
owner of the underlying property, but rather an equity investor. If that
position were sustained, all or part of the interest we receive on
participating interest bonds could be treated as a taxable return on our
investment and not as tax-exempt interest. To our knowledge, neither the
characterization of the participating interest bonds as debt, nor the
characterization of the interest thereon as interest excludable from
federally-taxable gross income of the holders thereof, has been challenged
by the IRS in any judicial or regulatory proceeding.
We or our predecessors received opinions of counsel from Willkie, Farr &
Gallagher LLP or other counsel respecting each of our participating
interest bonds to the effect that, based upon assumptions described in such
opinions, which assumptions included the fair market value of the
respective properties upon completion and economic projections and
guarantees, the participating interest bonds "would" be treated for federal
tax purposes as representing debt. The implicit corollary of these opinions
is that the participating interest bonds do not constitute an equity
interest in the underlying borrower.
Although we assume the continuing correctness of these opinions, and will
treat all interest received with respect to these bonds as tax-exempt
income, there can be no assurance that such assumptions are correct, such
treatment would not be challenged by the IRS, or that intervening facts and
circumstances have not changed the assumptions and bases for providing such
opinions. The opinions discussed above speak only as of their respective
delivery dates, and our Counsel has not passed upon or assumed any
responsibility for reviewing any events that may have occurred subsequent
to the delivery of such opinions which could adversely affect the
conclusions contained therein.
"SUBSTANTIAL USER" LIMITATION
Interest on a revenue bond we own, other than a bond the proceeds of which
are loaned to a charitable organization described in Section 501(c)(3) of
the Code, will not be excluded from gross income during any period in which
we are a "substantial user" of the properties financed with the proceeds of
such revenue bond or a "related person" to a "substantial user."
A "substantial user" generally includes any underlying borrower and any
person or entity that uses the financed properties on other than a de
minimis basis. We would be a "related person" to a "substantial user" for
this purpose if, among other things,
o the same person or entity owned more than a 50% interest in both
us and in the properties financed with the proceeds of a bond
owned by us or one of our subsidiaries; or
o we owned a partnership or similar equity interest in the owner of
a property financed with the proceeds of a bond owned by us or
one of our subsidiaries.
20
Additionally, a determination that we are a partner or a joint venturer
with a mortgagor involving an equity interest, as described above under
TREATMENT OF PARTICIPATING INTEREST BONDS AS EQUITY INVESTMENTS, could
cause us to be treated as a "substantial user" of the properties securing
our investments.
Greenberg Traurig has reviewed the revenue bonds we own, the ownership of
the obligors of our revenue bonds and the ownership of our shares and our
subsidiaries' shares, and concurs in the conclusion that we are not
"substantial users" of the properties financed with the proceeds of the
revenue bonds or related parties thereto. There can be no assurance,
however, that the IRS would not challenge such conclusion. If such
challenge were successful, the interest received on any bond for which we
were treated as a "substantial user" or a "related party" thereto would be
includable in federally-taxable gross income.
SECURITIZATION PROGRAMS AND REVENUE PROCEDURE 2003-84
Many of the senior interests in our securitization programs are held by
tax-exempt money-market funds. For various reasons, money market funds will
only acquire and hold interests in securitization programs that comply with
Revenue Procedure 2003-84, which was published on November 5, 2003. We have
been advised by our counsel, Greenberg Traurig, that the partnerships we
use in our securitizations currently meet the requirements of Revenue
Procedure 2003-84. It is our intention to continue to meet those
requirements, which include an income test and an expense test, on an
ongoing basis. There can be no assurance, however, that unforeseen
circumstances might cause one or more of our securitization partnerships to
fail either the income test or the expense test, which would cause our
securitization partnerships to have to comply with all of the requirements
of subchapter K of the Code. In the event one or more of our securitization
partnerships was forced to comply with the provisions of subchapter K of
the Code, it is likely that all of the tax-exempt money market funds which
hold the senior interests in those securitizations would tender their
positions. This could cause our remarketing agent to locate new purchasers,
which were not tax-exempt money market funds, for those tendered senior
interests. This would probably result in an increase in the distributions
to the holders of the senior interests, which would reduce, dollar for
dollar, the distributions on the residual interests in the securitizations,
which are owned by us through our subsidiaries.
TAXABLE INCOME
In our Portfolio Investing business, we primarily invest in investments
that produce only tax-exempt income. However, the IRS may seek to
re-characterize a portion of our tax-exempt income as taxable income as
described above. If the IRS were successful, a shareholder's distributive
share of such income would be taxable to the shareholder, regardless of
whether an amount of cash equal to such distributive share is actually
distributed. Any taxable income would be allocated pro rata between our CRA
Shares and our common shares. We may also have taxable income in the form
of market discount or gain on the sale or other disposition of our
investments, and we expect to own investments and engage in certain fee
generating activities that will generate taxable income.
IMPACT OF RECENT AND FUTURE TAX LEGISLATION
Recent and future tax legislation could also adversely impact the value of
our investments and the market price of our shares. On May 28, 2003,
President Bush signed into law the Jobs and Growth Tax Relief Act. This law
amends the Code to reduce federal income tax rates for individuals on
long-term capital gains and dividend income and accelerates certain
previously enacted income tax rate reductions for individuals for tax years
ending on or after May 6, 2003. This tax legislation reduces the importance
of a primary advantage of investing in municipal bonds--that the interest
received on these bonds is federally tax-exempt, while other income is
subject to federal income tax at higher rates. It is likely that these tax
law changes, and any similar future tax law changes, could increase the
cost of tax-exempt financings, as interest rates offered by municipal
issuers would rise to compensate investors for the reduced tax advantage.
This could lead to a decrease in tax-exempt multifamily rental housing bond
issuances, which would reduce our opportunities to purchase revenue bonds.
These changes could also reduce the value of our existing investments,
because federally tax-exempt municipal bond income would not enjoy the same
relative tax advantage as provided under prior law.
21
STRUCTURE OF OUR ACQUISITION OF RCC
Our acquisition of RCC was structured to prevent us from realizing active
income from the RCC business and to effectively receive a tax deduction for
payments made to its selling principals. It is possible that the IRS could
challenge this structure, with material adverse consequences to us. First,
the IRS could assert that we, as the parent trust, are the owner of the RCC
business, in which case the parent trust would realize an amount of active
income from the RCC business that would require it to be treated as a
corporation instead of a publicly traded partnership for income tax
purposes. If the IRS prevailed, we would be required to pay taxes on that
income, thereby reducing the amount available for us to make distributions.
As a result, it is possible that the value of our shares would decline.
Second, the IRS might assert that the Special Common Units ("SCUs") held by
the selling principals of RCC and others are actually shares of our
Company. If this position prevailed, the distributions payable on the SCUs
would not result in tax deductions for CM Corp. In such event, CM Corp.
would be subject to increased tax, which could reduce our net after-tax
income and our distributions, which could also result in a decrease in the
portion of our distributions that is excluded from gross income for federal
income tax purposes.
6. RISKS RELATED TO INVESTING IN OUR COMPANY
BECAUSE WE HOLD MOST OF OUR INVESTMENTS THROUGH OUR SUBSIDIARIES, OUR
SHAREHOLDERS ARE EFFECTIVELY SUBORDINATED TO THE LIABILITIES AND EQUITY OF OUR
SUBSIDIARIES
We hold most of our investments through our subsidiaries. Since we own only
common equity of our subsidiaries, we, and therefore holders of our shares, are
effectively subordinated to the debt obligations, preferred equity and SCUs of
our subsidiaries, which at December 31, 2004, aggregated approximately $1.4
billion. In particular, the holders of the preferred shares of our Equity Issuer
subsidiary are entitled to receive preferential distributions with respect to
revenues generated by revenue bonds held directly or indirectly by it, which
constitute a substantial portion of our assets. Similarly, holders of senior
interests created through our securitization programs have a superior claim to
the cash flow from the revenue bonds deposited in such programs. Accordingly, a
portion of the cash flow from our investments will not be available for
distribution on our common shares. Likewise, holders of SCUs issued by our CCC
subsidiary are entitled to receive preferential distributions with respect to
the earnings of RCC which are, therefore, not available for distribution to our
shareholders.
WE DEPEND UPON THE SERVICES OF OUR EXECUTIVE MANAGEMENT TEAM
We and our subsidiaries depend upon the services of three key executive officers
(Mr. Boesky, Mr. Hirmes and Mr. Schnitzer) and other individuals who comprise
our executive management team. All decisions with respect to the management and
control of our Company and our subsidiaries, subject to the supervision of our
board of trustees (or the applicable subsidiary's board), are currently made
exclusively by these three key officers. The departure or the loss of the
services of any of these key officers or a large number of senior management
personnel and other employees could have a material adverse effect on our
ability to operate our business effectively and our future results of
operations.
OUR BOARD OF TRUSTEES CAN CHANGE OUR BUSINESS POLICIES UNILATERALLY
Our board of trustees may amend or revise our business plan and certain other
policies without shareholder approval. Therefore, our shareholders have no
control over changes in our policies, including our business policies with
respect to acquisitions, financing, growth, debt, capitalization and
distributions, which are determined by our board of trustees.
THERE ARE POSSIBLE ADVERSE EFFECTS ARISING FROM SHARES AVAILABLE FOR FUTURE SALE
Our board of trustees is permitted to offer additional equity or debt securities
of our Company and our subsidiaries in exchange for money, property or other
consideration. Our ability to sell or exchange such securities will depend on
conditions then prevailing in the relevant capital markets and our results of
operations, financial condition, investment portfolio and business prospects.
Subject to American Stock Exchange rules which require shareholder approval for
certain issuances of securities and as long as the issuance is made in
accordance with our trust agreement, the issuance of such additional securities
will not be subject to the approval of our shareholders and may negatively
affect any resale price of our shares. Shareholders will not have any preemptive
22
rights in connection with the issuance of any additional securities we or our
subsidiaries may offer, and any of our equity offerings would cause dilution of
a shareholder's investment in us.
THE FORMER OWNERS OF RCC HAVE SIGNIFICANT VOTING POWER ON MATTERS SUBMITTED TO A
VOTE OF OUR SHAREHOLDERS, AND THEIR INTERESTS MAY BE IN CONFLICT WITH THE
INTERESTS OF OUR OTHER SHAREHOLDERS
In connection with our acquisition of RCC, we issued to each of its selling
principals one special preferred voting share for each SCU they received. Our
special preferred voting shares have no economic interest, but entitle each
holder to one vote per special preferred voting share on all matters subject to
a vote of the holders of our common shares. The selling principals of RCC who
received special preferred voting shares include our executive management team
and a subsidiary of The Related Companies, L.P. ("TRCLP"), which is controlled
by the chairman of our board of trustees. As a result of that special preferred
voting share issuance and additional common shares directly or indirectly owned
by them, our executive management team (Mr. Boesky, Mr. Hirmes, Mr. Schnitzer
and Ms. Kiley) in the aggregate directly or indirectly owns voting shares
representing approximately 7.3% of our voting power, and the chairman of our
board of trustees directly or indirectly owns voting shares that represent
approximately 15.7% of our voting power. Ms. Kiley, whose intention to retire we
announced on February 25, 2005, currently owns approximately 1% of our voting
power. As such, if they vote as a block, such shareholders will have significant
voting power on all matters submitted to a vote of our common shareholders.
Also, because five of these selling principals of RCC serve, along with others,
as our managing trustees, there are ongoing conflicts of interest when we are
required to determine whether or not to take actions to enforce our rights under
the various agreements entered into in connection with the RCC acquisition.
While any material decisions involving these persons are subject to the vote of
a majority of our independent trustees, such decisions may create conflicts
between us and these persons.
In addition, we have some obligations to these former owners which will require
us to make choices as to how we operate our business which may affect those
obligations. For example, we have guaranteed the payment to all holders of the
SCUs of all but $5.0 million of the distributions they would otherwise be
entitled to receive under the operating agreement of CCC. In addition, we have
agreed to share cash flow from investment programs so that we and certain of
these former owners can receive payment of deferred fees. Further, TRCLP and its
affiliates currently engage in businesses which compete with us. The
non-competition covenants contained in a future relations agreement entered into
by TRCLP and its affiliates in connection with our acquisition of RCC prohibit
TRCLP and its affiliates from competing with any business currently engaged in
by us other than in specified areas, including:
o providing credit enhancement on debt products secured by "80/20"
multifamily housing properties; and
o providing mezzanine financing to multifamily housing properties other
than so-called "tax credit properties."
There can be no assurance that we and TRCLP and its affiliates will not compete
for similar products and opportunities in these areas in the future.
NO ASSURANCE CAN BE GIVEN THAT OUR SHAREHOLDERS WILL BE ENTITLED TO THE SAME
LIMITATION ON PERSONAL LIABILITY AS STOCKHOLDERS OF PRIVATE CORPORATIONS FOR
PROFIT
We are governed by the laws of the State of Delaware. Under our trust agreement
and the Delaware Statutory Trust Act, as amended ("Delaware Act"), our
shareholders will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware. In general, stockholders of
Delaware corporations are not personally liable for the payment of corporate
debts and obligations, and are liable only to the extent of their investment in
the Delaware corporation. However, a shareholder may be obligated to make
certain payments provided for in our trust agreement and bylaws. The properties
securing our investments are dispersed in numerous states and the District of
Columbia. In jurisdictions which have not adopted legislative provisions
regarding statutory trusts similar to those of the Delaware Act, questions exist
as to whether such jurisdictions would recognize a statutory trust, absent a
state statute, and whether a court in such jurisdiction would recognize the
Delaware Act as controlling. If not, a court in such jurisdiction could hold
that our shareholders are not entitled to the limitation of liability set forth
in our trust agreement and the Delaware Act and, as a result, are personally
liable for our debts and obligations.
23
OUR ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE THIRD-PARTY PROPOSALS
Certain provisions of our trust agreement may have the effect of discouraging a
third party from making an acquisition proposal for our Company. This could
inhibit a change in control of our Company under circumstances that could give
our shareholders the opportunity to realize a premium over then-prevailing
market prices. Such provisions include the following:
ADDITIONAL CLASSES AND SERIES OF SHARES
Our trust agreement permits our board of trustees to issue additional
classes or series of beneficial interests and to establish the preferences
and rights of any such securities. Thus, our board of trustees could
authorize the issuance of beneficial interests with terms and conditions
which could have the effect of discouraging a takeover or other
transaction.
STAGGERED BOARD
Our board of trustees is divided into three classes of managing trustees.
The terms of the first, second and third classes will expire in 2005, 2006
and 2007, respectively. Managing trustees for each class will be chosen for
a three-year term upon the expiration of the current class' term. The use
of a staggered board makes it more difficult for a third-party to acquire
control over us.
SALES IN THE PUBLIC MARKET OF OUR COMMON SHARES ISSUABLE IN EXCHANGE FOR OUR
SCUS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR SHARES
Future sales of substantial amounts of our common shares in the public market
could adversely affect prevailing market prices of our shares. Approximately
15.2 million common shares remain issuable in exchange for the SCUs we issued in
connection with the RCC acquisition and we also granted restricted common shares
of which approximately 541,000 were unvested at December 31, 2004. When these
shares vest, their sale in the public market could, and depending upon the
number of involved, likely would, adversely affect prevailing market prices of
our shares and our ability to raise additional capital through equity markets.
As of December 31, 2004, TRCLP and its owners indirectly held approximately 10.2
million SCUs and approximately 286,000 common shares which, subject to some
exceptions, are not subject to a lock-up agreement.
On March 7, 2005, Mr. Schnitzer and Ms. Kiley each adopted a pre-arranged share
trading plan to sell common shares that can be issued to each of them upon the
conversion of a portion of their respective SCUs. Trades under Mr. Schnitzer's
plan could begin as early as April 12, 2005. Trades under Ms. Kiley's plan could
begin as early as April 15, 2005. Each of the share trading plans was adopted in
accordance with guidelines specified under Rule 10b5-1 of the Securities and
Exchange Act of 1934. Mr. Schnitzer adopted his plan as part of his personal
financial planning for asset diversification and liquidity. Under his Rule
10b5-1 plan, Mr. Schnitzer will sell up to 215,000 common shares (approximately
18.9% of his total holdings) over a period of approximately ten months in
accordance with the plan schedule. These shares will be acquired through the
conversion of a portion of his SCUs. If Mr. Schnitzer completes all the planned
sales of shares under his Rule 10b5-1 plan, he would continue to own
approximately 924,347 shares representing approximately 1.8% of our outstanding
common shares as of the date of this filing. Ms. Kiley adopted her plan as part
of her personal financial planning for asset diversification and liquidity.
Under her Rule 10b5-1 plan, Ms. Kiley will sell up to 131,906 common shares
(approximately 18.7% of her total holdings) over a period of approximately six
months in accordance with the plan schedule. These shares will be acquired
through the conversion of a portion of her SCUs. If Ms. Kiley completes all the
planned sales of shares under her Rule 10b5-1 plan, she would continue to own
approximately 571,870 shares representing approximately 1.1% of our outstanding
common shares as of the date of this filing.
IF WE HAD TO REGISTER UNDER THE INVESTMENT COMPANY ACT, THERE COULD BE NEGATIVE
CONSEQUENCES TO OUR INVESTMENT STRATEGY
Neither we nor our subsidiaries are registered under the Investment Company Act
of 1940, as amended (the "Investment Company Act") and we may not be able to
conduct our activities as we currently do if we were required to so register.
24
At all times, we intend to conduct our activities, and those of our
subsidiaries, so as not to become regulated as an "investment company" under the
Investment Company Act. Even if we are not an investment company under the
Investment Company Act, we could be subject to regulation under the Investment
Company Act if a subsidiary of ours were deemed to be an investment company.
There are a number of possible exemptions from registration under the Investment
Company Act that we believe apply to us and our subsidiaries and which we
believe make it possible for us not to be subject to registration under the
Investment Company Act.
For example, the Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate," which we refer to as "qualifying
interests." Under current interpretations by the SEC staff, one of the ways in
which our subsidiaries can qualify for this exemption is to maintain at least
55% of their assets directly in qualifying interests and the balance in real
estate-type interests. We believe our subsidiaries can rely on this exemption or
another exemption from registration.
The requirement that our subsidiaries maintain 55% of their assets in qualifying
interests (or satisfy another exemption from registration) may inhibit our
ability to acquire certain kinds of assets or to securitize additional interests
in the future. If any of our subsidiaries fail to qualify for exemption from
registration as an investment company and we, in turn, are required to register
as an investment company, our ability to maintain our financing strategies would
be substantially reduced, and we would be unable to conduct our business as
described herein. Such a failure to qualify could have a material adverse effect
upon our ability to make distributions to our shareholders.
AN INABILITY TO RAISE CAPITAL COULD ADVERSELY AFFECT OUR GROWTH
A major aspect of our business plan includes the acquisition of additional
revenue bonds, which requires capital. In addition to funds generated through
operations (including securitizations), we raise capital by periodically
offering securities issued by us or one or more of our subsidiaries. Our ability
to raise capital through securities offerings is subject to risks, including:
o conditions then prevailing in the relevant capital markets;
o our results of operations, financial condition, investment portfolio
and business prospects;
o the timing and amount of distributions to the holders of our shares
which could negatively affect the price of a common share; and
o the amount of securities that are structurally senior to the
securities being sold.
Item 2. Properties
We lease the office space in which our headquarters are located at 625 Madison
Avenue, New York, NY. The lease expires in 2017.
We also lease office space in other location as follows:
o Jersey City, NJ - An office facility; the lease expires in 2010.
o Bethesda, MD - An office facility; the lease expires in 2009.
o Irvine, CA - An office facility; the lease expires in 2008.
o Mineola, NY - An office facility; the lease expires in 2007.
o Dallas, TX - An office facility; the lease expires in 2005.
o Sherman Oaks, CA - An office facility; the lease expires in 2007.
o San Rafael, CA - An office facility; the lease expires in 2005.
o Kansas City, KS - An office facility; the lease expires in 2005.
o Metarie, LA - An office facility; currently being leased on a
month-to-month basis.
We believe that these facilities are suitable for current requirements and
contemplated future operations.
25
Item 3. Legal Proceedings
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted to shareholders for voting during the fourth
quarter of 2004.
26
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market Information
- ------------------
Our common shares have been listed on the American Stock Exchange since October
1, 1997 under the symbol "CHC". Prior to October 1, 1997, there was no
established public trading market for our common shares.
The high and low prices for each quarterly period of the last two years during
which our common shares were traded were as follows:
2004 2003
---------------------- ----------------------
Quarter Ended Low High Low High
- ------------- ---------- ---------- ---------- ----------
March 31 $21.03 $24.85 $16.51 $18.34
June 30 $17.75 $24.70 $17.50 $19.79
September 30 $18.85 $23.15 $16.68 $19.62
December 31 $21.35 $25.42 $18.35 $21.86
The last reported sale price of our common shares on the American Stock Exchange
on March 31, 2005 was $21.50.
Holders
- -------
As of March 31, 2005, there were 3,136 registered shareholders owning 51,323,062
common shares.
Distributions
- -------------
Our earnings are allocated pro rata among the common shares and the Convertible
CRA Shares. The Convertible CRA Shares rank on par with the common shares with
respect to rights upon liquidation, dissolution or winding up of our Company.
Quarterly cash distributions per share for the years ended December 31, 2004 and
2003 were as follows:
Total Amount
Date Per Distributed
Cash Distribution for Quarter Ended Paid Share (In thousands)
- ----------------------------------- -------- -------- --------------
March 31, 2004 5/15/04 $0.370 $19,217
June 30, 2004 8/14/04 0.380 21,929
September 30, 2004 11/14/04 0.410 23,649
December 31, 2004 2/14/05 0.410 23,690
------ -------
Total for 2004 $1.570 $88,485
====== =======
March 31, 2003 5/15/03 $0.325 $14,643
June 30, 2003 8/14/03 0.325 14,667
September 30, 2003 11/14/03 0.350 16,201
December 31, 2003 2/14/04 0.370 18,551
------ -------
Total for 2003 $1.370 $64,062
====== =======
In addition to the distributions set forth in the table above, we paid Related
Charter L.P., as our manager prior to our acquisition of RCC, a special
distribution (equal to .375% per annum of our total invested assets) which
amounted to approximately $5.3 million for the period from January 1, 2003 to
November 17, 2003.
There are no material legal restrictions upon our present or future ability to
make distributions in accordance with the provisions of our Second Amended and
27
Restated Trust Agreement. We do not believe that the financial covenants
contained in our and our subsidiaries' secured indebtedness or in the terms of
the preferred shares issued by Equity Issuer will have any adverse impact on our
ability to make distributions in the normal course of business to our common and
Convertible CRA shareholders. Future distributions will be at the discretion of
the trustees based upon evaluation of our actual cash flow, our financial
condition, capital requirements and such other factors as the trustees deem
relevant.
Securities authorized for issuance under equity compensation plans
- ------------------------------------------------------------------
The following table provides information related to our share incentive plans as
of December 31, 2004:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon exercise Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected in
and rights warrants and rights column a) (1)
-------------------- -------------------- -----------------------
Equity compensation plans 1,075,313 $16.1282 6,348,802
approved by security
holders
Equity compensation plans
not approved by security
holders -- -- --
--------- -------- ---------
Totals 1,075,313 $16.1282 6,348,802
========= ======== =========
(1) Our Incentive Share Plan (see Note 15 to the consolidated financial
statements) authorizes us to issue options or other share-based
compensation equal to 10% of the common shares outstanding as of December
31 of the year preceding the issuance of new grants or options.
Securities purchased by us
- --------------------------
The following table presents information related to our repurchases of our
equity securities during the fourth quarter of 2004 and other information
related to our repurchase program:
28
Purchases of Equity Securities
(a) (b) (c) (d)
Total number Maximum number
Total of shares (or approximate dollar
number of Average purchased as part value) of shares that
shares price paid of publicly may yet be purchased
Period purchased per share announced program under the program
- --------------------- --------- ----------- ------------------ ----------------------
October 1 - 31, 2004 -- $ -- -- --
November 1 - 30, 2004 51,613 (1) 24.49 -- 1,374,357
December 1 - 31, 2004 -- -- -- --
------ --------- ------------- ---------
Total 51,613 $ 24.49 -- 1,374,357
====== ========= ============= =========
(1) These repurchases were in payment of tax withholding obligations incurred by
holders of newly vested restricted shares and were outside of our share
repurchase program.
Other information required by this item, as well as information regarding our
share repurchase program and share compensation paid to our independent
trustees, is included in Notes 14 and 15 to our consolidated financial
statements.
Item 6. Selected Financial Data
The information set forth below presents our selected financial data. Additional
financial information is set forth in the consolidated financial statements and
notes thereto.
For the Years Ended December 31 (in thousands, except per share amounts):
Operations 2004 (1) 2003 2002 2001 2000
- ----------------------------------------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 232,854 $ 152,240 $ 116,614 $ 74,625 $ 59,091
Net income $ 65,363 $ 66,586 $ 60,833 $ 38,985 $ 30,091
Net income applicable to shareholders (2) $ 65,363 $ 61,248 $ 55,905 $ 35,010 $ 27,074
Net income per share (2)
Basic $ 1.13 $ 1.31 $ 1.31 $ 1.14 $ 1.22
Diluted $ 1.12 $ 1.31 $ 1.31 $ 1.14 $ 1.22
Financial position
- -----------------------------------------
Total assets $5,757,361 $2,581,169 $1,852,868 $1,421,059 $ 925,236
Financing arrangements $1,068,428 $ 900,008 $ 671,659 $ 541,796 $ 385,026
Notes payable $ 174,454 $ 153,350 $ 68,556 $ 56,586 $ --
Preferred shares of subsidiary:
Subject to mandatory repurchase $ 273,500 $ 273,500 $ 273,500 $ 218,500 $ 169,000
Not subject to mandatory repurchase $ 104,000 $ -- $ -- $ -- $ --
Distributions
- -----------------------------------------
Distributions per share (3) $ 1.57 $ 1.37 $ 1.26 $ 1.14 $ 1.07
(1) Reflects adoption of Interpretation 46(R), CONSOLIDATION OF VARIABLE
INTEREST ENTITIES ("FIN 46(R)"), as of March 31, 2004 (See Note 2 to the
consolidated financial statements).
(2) Includes common shareholders and Convertible CRA shareholders.
(3) Distributions per share are the same for both common shares and Convertible
CRA shares.
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
- --------------------------
This Annual Report on Form 10-K contains forward-looking statements. These
forward-looking statements are not historical facts, but rather our beliefs and
expectations and are based on our current expectations, estimates, projections,
beliefs and assumptions about our Company and industry. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. Some of
these risks include, among other things:
o adverse changes in the real estate markets including, among other
things, competition with other companies;
o interest rate fluctuations;
o general economic and business conditions, which will, among other
things, affect the availability and credit worthiness of prospective
tenants, lease rents and the terms and availability of financing for
properties financed by revenue bonds owned by us;
o risk of real estate development and acquisition;
o environment/safety requirements;
o changes in applicable laws and regulations;
o our tax treatment, the tax treatment of our subsidiaries and the tax
treatment of our investments; and
o risk of default associated with the revenue bonds and other securities
held by us or our subsidiaries.
We caution you not to place undue reliance on these forward-looking statements,
which reflect our view only as of the date of this annual report.
Factors Affecting Comparability
- -------------------------------
RCC ACQUISITION
Our operating results for 2004 were impacted significantly by the November 2003
acquisition of RCC, an affiliated business that, until the date of acquisition,
had acted as an external manager for our Company and our subsidiaries. As a
result of the acquisition, we generate more taxable income and have assumed
numerous expenses that had previously been covered by fees paid to RCC. Further,
the issuance of a new class of subsidiary equity as part of the acquisition
requires us to apportion certain earnings and identify them as due to the
holders of that equity. Likewise, the acquisition affected the comparability of
our 2003 results to those in 2002.
Through our acquisition of RCC, we now provide management services to real
estate equity investment funds we sponsor (many of which we now consolidate -
see ACCOUNTING CHANGES below) and AMAC, a publicly traded real estate investment
trust that is also an affiliated entity. The funds we sponsor are the upper-tier
investment funds that provide LIHTCs for investors.
Our acquisition of RCC has enabled us to accomplish many of our goals. First, we
are now internally managed, which has eliminated any perceived conflicts of
interest in the marketplace and broadens our access to capital. Internalizing
management has also created a more effective cost structure for a company of our
size. Second, the acquisition diversified our revenue streams, increasing our
proportion of fee income, which is much less interest rate sensitive and much
less capital intensive than our Portfolio Investing business.
ACCOUNTING CHANGES
The adoption of several accounting pronouncements has affected our financial
statements. The adoption of SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTIC OF BOTH LIABILITIES AND EQUITY ("SFAS No. 150")
caused us to reclassify certain liability and expense categories while not
increasing the actual amounts to be recorded. The adoption of FIN 46(R) led to a
significant increase in the amount of assets and liabilities we record due to
30
consolidation of numerous investment partnerships (see Note 2 to the
consolidated financial statements). This consolidation also results in the
recognition of the operating results of partnerships in which we have no equity
interest, the elimination of transactions between our businesses and those
partnerships and the allocation of their results to their investor partners.
Results of Operations
- ---------------------
The following is a summary of our operations:
% %
Change Change
% of % of % of 2004 vs 2003 vs
(In thousands) 2004 Revenues 2003 Revenues 2002 Revenues 2003 2002
----------------------------------------------------------------------------------------------------
Revenues $232,854 100.0% $152,240 100.0% $116,614 100.0% 53.0% 30.6%
Income before income taxes 48,120 20.7 60,514 39.7 62,117 53.3 (18.1) (2.6)
Net income 65,363 28.1 66,586 43.7 60,833 52.2 (6.9) 9.5
Our consolidated results over the three-year period illustrate the impact of our
changing business from our 2001 structure, previously incorporating only
recurring, non-taxable revenues with a cost structure based on external
management, to one with a large proportion of fee-based transactional income and
costs associated with internal management. This transition involved:
o our acquisition of the Mortgage Banking business at the end of 2001,
adding taxable revenues and internal management costs to our
consolidated cost structure;
o the inception of the credit enhancement portion of the Fund Management
segment in 2002, adding more taxable business; and
o our acquisition of RCC in late 2003, adding the majority of our Fund
Management revenues, and completely internalizing our management
structure.
Full integration of these businesses in our unified operating platform, while we
continued to add to our Portfolio Investing business, resulted in 2004 being our
first full year incorporating all businesses.
REVENUES
Our revenues for the three years ended December 31 were as follows:
% Change % Change
2004 2003
(In thousands) 2004 2003 vs. 2003 2002 vs. 2002
- ----------------------------- ---------------------------------------------------------------
Revenue bond interest income $132,075 $113,655 16.2% $ 92,882 22.4%
Fee income
Mortgage banking 15,026 13,712 9.6 13,681 0.2
Fund sponsorship 42,790 12,642 238.5 -- N/A
Credit enhancement 10,085 4,924 104.8 2,619 88.0
---------------------------------------------------------------
Total fee income 67,901 31,278 117.1 16,300 91.9
Other income
Capri loan interest 4,462 -- N/A -- N/A
Other interest 4,967 2,606 90.6 6,555 (60.2)
Service fees 3,266 1,062 207.5 -- N/A
Other 7,970 3,639 119.0 877 314.9
---------------------------------------------------------------
Total other income 20,665 7,307 182.8 7,432 (1.7)
Revenues of consolidated VIEs 12,213 -- N/A -- N/A
---------------------------------------------------------------
Total revenues $232,854 $152,240 53.0% $116,614 30.6%
===============================================================
The substantial growth in our annual revenues in both 2004 and 2003 resulted
primarily from the rapid growth of our Fund Management segment, particularly
31
from the acquisition of RCC in late 2003. RCC has contributed the entire amount
of fund sponsorship fees and the majority of other income, all stemming from the
sponsorship of tax credit equity funds, while our credit enhancement business
has also grown markedly over the three-year period. During the same period,
aggressive expansion of the Portfolio Investing and Mortgage Banking businesses
has generated substantial revenue growth. Offsetting these gains in 2004 is the
elimination of revenues earned by our subsidiaries in transactions with VIEs we
have consolidated beginning April 1, 2004 (see Note 2 to the consolidated
financial statements). The revenues eliminated totaled $31.6 million in our Fund
Management and $0.7 million in our Portfolio Investing businesses. On a
comparable basis, including RCC revenues for all of 2003 and 2002, and adjusting
for the impact of consolidated VIEs, our total revenues increased approximately
14.0% in 2003 and 21.0% in 2004.
The Capri loan interest relates to a loan we provided to Capri Capital Limited
Partnership ("Capri") in July 2004 (see Note 6 to the consolidated financial
statements and SUBSEQUENT EVENT below). Service fee income represents income for
services RCC provides to affiliates, which became a part of our operations with
the acquisition of RCC in November 2003. The increase in other income is
primarily due to exit fees received within the Mortgage Banking business.
For further discussion, see RESULTS BY SEGMENT below.
EXPENSES
Our expenses for the three years ended December 31 were as follows:
% Change % Change
2004 2003
(In thousands) 2004 2003 vs. 2003 2002 vs. 2002
- ---------------------------------------------------------------------------------------------------------------
Interest expense $ 30,838 $ 23,919 28.9% $ 19,004 25.9%
Interest expense - distribution to preferred
shareholders of subsidiary 18,898 9,448 100.0 -- N/A
Salaries and benefits 55,763 17,540 217.9 9,937 76.5
General and administrative 45,063 23,403 92.6 14,569 60.6
Depreciation and amortization 30,407 11,926 155.0 9,092 31.2
Loss on impairment of assets 757 1,759 (57.0) 920 91.2
-------- -------- ----- -------- ----
Subtotal 181,726 87,995 106.5 53,522 64.4
Interest expense of consolidated VIEs 21,395 -- N/A -- N/A
Other expenses of consolidated VIEs 29,355 -- N/A -- N/A
-------- -------- ----- -------- ----
Subtotal 50,750 -- N/A -- N/A
-------- -------- ----- -------- ----
Total expenses $232,476 $ 87,995 164.2% $ 53,522 64.4%
======== ======== ===== ======== ====
The total amount of costs we recognize increased dramatically over the
three-year period due to investment activity, the RCC acquisition in the fourth
quarter of 2003 and the resulting recognition of expenses due to the new
ownership structure, the amortization of intangible assets acquired with RCC,
and costs we now recognize or classify differently as a result of accounting
rules adopted in 2003 and 2004.
The increase in interest expense reflects the higher borrowing levels as we
expand our various business lines. Significant borrowings during 2003 and 2004
included those related to:
o acquisitions and fundings of revenue bonds totaling approximately
$432.9 million in 2003 and $325.0 million in 2004;
o our acquisition of RCC in 2003, for which we borrowed approximately
$60.0 million to fund the cash portion of the total cost;
o short-term investments to acquire equity interests inherent in the
fund sponsorship portion of our Fund Management business since the RCC
acquisition in the fourth quarter of 2003; and
o a loan to Capri in the third quarter of 2004 as the first step in our
full acquisition of its mortgage banking business and partial
ownership of its fund advisory business.
In addition to higher borrowings, 2004 interest expense reflects an increase in
the average borrowing rate to 2.7% as compared to 2.4% in 2003 and 2.5% in 2002.
The increase in the average borrowing rate resulted from gradual increases in
the overall interest environment during the year, following sharp declines in
prior years. Interest expense in all years presented include amounts paid
pursuant to a swap agreement with a notional amount of $50.0 million as part of
32
our risk management strategy. Additionally, we have entered into six swap
transactions with an aggregate notional amount of $450.0 million, all of which
provide protection beginning in 2005. These swaps have a weighted average term
of four years.
The amount reported as "interest expense - distributions to preferred
shareholders of subsidiary" represents dividends on our preferred shares subject
to mandatory repurchase, which we reported as an allocation of income outside of
operating earnings until the adoption of new accounting rules in July 2003. See
further discussion in OTHER ITEMS below.
Salaries and benefits in 2004 and 2003 include amortization of share grants
issued as part of the RCC acquisition transaction. The amortization of these
grants, amounting to $11.0 million in 2004 and $2.8 million in 2003, will
decrease in 2005 to $5.0 million due to a majority of the remaining shares
vesting within the year. The underlying increase in salary costs is directly
attributable to the internalization of management in the fourth quarter of 2003
and subsequent hiring as our businesses have expanded. Prior to the RCC
acquisition, all salary costs recognized were generated by the Mortgage Banking
business.
The increase in General and Administrative expenses is predominantly due to our
acquisition of RCC and the associated recognition of expenses associated with
management of the company and origination of tax-credit equity funds. These
expenses include approximately $4.3 million in organization and offering ("O&O")
costs in 2003 and approximately $16.0 million in 2004.
We did not record the expenses of consolidated VIEs prior to April 1, 2004. The
interest and other expenses do not represent any cash or non-cash charges to be
currently absorbed by us as they are absorbed entirely by the investor partners
of the VIEs.
OTHER ITEMS
% Change % Change
2004 2003
(In thousands) 2004 2003 vs. 2003 2002 vs. 2002
- ----------------------------------------------------------------------------------------------------
Gain on repayment of revenue
bonds $ 217 $ 1,951 (88.9)% $ 3,885 (49.8)%
Gain on sale of loans 6,995 5,532 26.4 10,683 (48.2)
Equity in earnings of 1,938 2,219 (12.7) 2,219 0.0
investments
Income allocated to preferred 3,942 9,449 (58.3) 17,266 (45.3)
shareholders of subsidiary
Income allocated to Special 28,174 4,038 597.7 -- N/A
Common Units of subsidiary
Income (loss) allocated to 194 (54) 459.3 496 (110.9)
minority interests
Income tax benefit (provision) 17,243 6,072 184.0 (1,284) 572.9
The year-to-year variations in gains on sales of loans are attributable to the
fluctuations in the volume of mortgage originations. Similarly, the variance in
gain on sale of revenue bonds relates to the level of repayments in the
Portfolio Investing segment. See RESULTS BY SEGMENT below.
Equity in earnings of investments is principally comprised of dividends from our
investment in ARCap Investors, LLC. In 2004, this amount also includes losses
from tax advantaged investment vehicles similar to those we sponsor.
The total income allocated to preferred shareholders for 2004 and 2003,
including the portion classified as interest expense, increased as compared to
2002 due to additional preferred offerings consummated in June 2002 and April
2004.
33
The income allocation to SCUs represents the portion of our consolidated
earnings attributed to holders of the new class of equity issued at the time of
the RCC acquisition in the fourth quarter of 2003, as if those shares were all
converted to common equity.
Income Taxes
- ------------
A large majority of our pre-tax income is derived from our Portfolio Investing
businesses, which are structured as partnership entities; as such, income from
those investments is not subject to taxes. Conversely, our businesses that
generate taxable income are corporations operating with financial losses due to
their absorption of most company costs and expenses as well as tax-deductible
distributions on their subsidiary equity.
We provide for income taxes for these corporate subsidiaries in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109") which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. The tax benefit disclosed
relates to the financial losses of those businesses. As the proportion of our
pre-tax income contributed by the businesses generating taxable income and
losses changes, the resulting tax benefit or provision may appear incongruous
with our consolidated income before income taxes.
The effective tax rate on a consolidated basis was (35.8)% in 2004, (10.0)% in
2003 and 2.1% in 2002. The effective rate for our corporate subsidiaries that
were subject to taxes was 54.4% in 2004, 101.7% in 2003 and 156.4% in 2002. The
substantially higher rates for the corporate subsidiaries in 2003 and 2002 as
compared to 2004 resulted from factors that pertain to our transition from an
externally managed entity with little taxable income to one with significant
taxable income streams, deferred tax adjustments attributable to the timing of
revenue receipts and deductible costs. Many of these factors disproportionately
affected the effective rate in 2002 and 2003 because of a comparatively low
level of taxable income on which the ratio was calculated.
Results by Segment
- ------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our portfolio investing
activities:
(IN THOUSANDS) 2004 2003 2002
- ------------------------------------------------------------------------------------------------
Revenue bond acquisitions and fundings $ 325,037 $ 432,915 $ 457,060
Weighted average permanent interest rate of bonds
acquired 6.26% 6.59% 6.98%
Revenue bonds repaid $ 26,294 $ 83,274 $ 108,242
Average portfolio balance $2,107,486 $1,609,000 $1,267,000
Weighted average yield of portfolio 6.27% 7.06% 7.32%
---------- ---------- ----------
Revenue bond interest income (1) $ 132,815 $ 113,655 $ 92,882
Other revenues (1) 11,116 2,838 2,930
---------- ---------- ----------
$ 143,931 $ 116,493 $ 95,812
========== ========== ==========
Interest expense and securitizations fees (1) $ 29,254 $ 25,691 $ 18,196
Loss on impairment of assets $ 757 $ 1,759 $ 920
Gain on repayments of revenue bonds $ 217 $ 1,951 $ 3,885
---------- ---------- ----------
(1) Prior to intercompany eliminations.
We continued to expand our revenue bond portfolio in 2003 and 2004, although the
rate of investment slowed due to challenging market conditions in 2004 whereby
some potential investments did not meet our underwriting standards. While we saw
deferments by Texas developers that shifted a substantial level of acquisitions
until just after the end of the year, in 2004 we expanded our presence in
California, the nation's largest bond market, and originated investments in new
markets in Arizona, Massachusetts, Kentucky and New York.
34
s
While the decline in interest rates has gradually lowered the average yield of
our portfolio, from a profit perspective, the low interest rate environment has
been favorable for us in 2003 and 2004 as compared to 2002. The Bond Market
Association ("BMA") rate, the short-term tax-exempt index, continues to be at
historic lows, having averaged only 1.03% in 2003 and 1.22% in 2004. Our
weighted average cost of debt associated with these investments was
approximately 2.52% at December 31, 2004, and approximately 2.50% at December
31, 2003, taking into effect our current hedging. We continue to recognize
healthy spreads between our cost of borrowing and the interest rates on our
revenue bonds. The interest rates on our tax-exempt first mortgage bonds for
2004 had a weighted average permanent coupon rate of 6.5% and our entire
tax-exempt first mortgage bond portfolio had a weighted average coupon rate of
6.7% at December 31, 2004.
Other income in this segment is predominantly interest income on investments
other than revenue bonds and intercompany royalty fees eliminated in
consolidation. The increase in 2004 over the prior years is due largely to Capri
loan interest (see Note 6 to the consolidated financial statements).
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
(IN THOUSANDS) 2004 2003 2002
- -----------------------------------------------------------------------------------
Equity raised $1,143,379 $ 266,237 $ --
Equity invested by investment funds $ 972,477 $ 183,776 $ --
---------- ---------- ---------
Fund sponsorship fees (1) $ 75,895 $ 12,702 $ --
Credit enhancement fees 10,085 4,924 2,619
Other revenues (1) 11,884 1,394 --
---------- ---------- ---------
Total $ 97,864 $ 19,020 $ 2,619
========== ========== =========
(1) Prior to intercompany eliminations.
Our fund management activities generate origination and acquisition fees
associated with sponsoring tax-credit equity investment funds and for assisting
the funds in acquiring assets, which we recognize when the equity is invested by
the investment fund. We also receive asset management fees for the services we
perform for the funds once they are operating, which we recognize over the
service periods.
The increase in fund sponsorship fees represents our full year of owning RCC in
2004, while 2003 includes only the period following the November acquisition. On
a pro forma basis, comparing the 2004 period to the full 2003 period, as if we
had owned RCC as of January 1, 2003 ("the 2003 Pro Forma Period"), fund
sponsorship revenues increased approximately 26%.
RCC had a record year in 2004, with originations exceeding $1.1 billion,
representing an increase of 28% over the 2003 Pro Forma Period. The increase in
business reflects a strong appetite among corporate investors for the type of
funds we sponsor, as well as the growth of our product offerings, including the
introduction of funds specifically designed for investors seeking state tax
credits.
We earn partnership management and O&O fees based upon the level of equity we
raise for tax-credit equity funds. Fees earned for partnership management and
O&O services increased approximately 40% to $11.0 million over the 2003 Pro
Forma Period. This increase exceeded the rise in equity raised due to higher
average allowance rates realized as a result of the higher proportion of
proprietary (single-investor) and guaranteed funds in the total mix of fund
equity raised in 2004 as compared to 2003.
During 2004, the $972.5 million of equity invested by investment funds
represented an increase of 12% over the 2003 Pro Forma Period. We earn property
acquisition fees and acquisition allowance fees based upon the level of fund
equity invested. Fees earned for property acquisition and equity origination
services associated with tax credit equity fund sponsorship increased to
approximately $42.0 million in 2004, representing an approximate 25% increase
compared to the 2003 Pro Forma Period results. While these fees are earned based
on investment activity, the increase exceeded the 12% increase in investments
due to a higher rate of fees realized as a result of the fund composition, as
noted above.
35
Also during 2004, RCC acted as advisor for $547.6 million of investment
originations by CharterMac entities and others, compared to $649.2 million of
such originations for the 2003 Pro Forma Period. We recognize acquisition fees
in this segment for such services, which declined approximately 25% compared
2003 Pro Forma Period due to the lower level of investment activity overall.
Additionally, the average acquisition fees recognized were lower because of a
higher proportion of investment originations for entities outside of CharterMac
in 2004 as compared to 2003 due to the lower acquisition fee rate RCC receives
for those acquisitions.
Partnership and asset management fees increased to $18.6 million in 2004,
representing an increase of approximately 30% over the 2003 Pro Forma Period,
attributable to the higher level of assets under management.
The increase in credit enhancement fees relates to acceleration of the credit
enhancement business. In 2004, we completed four transactions to guarantee tax
benefits to investors, and continued to earn fees from three transactions
completed in 2003 and 2002. These fees are recognized over an average of 20
years; accordingly we expect to recognize increased revenues going forward as we
expand this business.
The increase in other revenues reflects the impact of the RCC acquisition,
whereby we recorded revenues for miscellaneous service that RCC provides to
funds it manages. On a comparable basis, these revenues increased approximately
30.0% in 2004 over the 2003 Pro Forma Period.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Year Ended December 31,
(IN THOUSANDS) 2004 2003 2002
- --------------------------------------------------------------------------------
Originations $1,011,910 $ 604,788 $ 698,893
Total loans serviced $4,113,288 $4,114,293 $3,237,197
Mortgage servicing rights $ 32,366 $ 33,350 $ 35,595
---------- ---------- ----------
Mortgage origination fees $ 5,455 $ 4,683 $ 5,710
Mortgage servicing fees 9,571 9,029 7,971
Other revenues 6,002 3,978 4,524
---------- ---------- ----------
$ 21,028 $ 17,690 $ 18,205
========== ========== ==========
Originations in 2004 increased 67.3% over the 2003 level, marking an all-time
high volume for CMC. The increased volume in 2004 was driven by a determined
focus on expanding the Freddie Mac platform, including approximately $99.3
million of affordable housing transactions and significant levels of portfolio
originations. In addition, we diversified our funding with a higher proportion
of conduit lending and other funding avenues outside the traditional Fannie Mae
and Freddie Mac funding sources. Also, the expansion of product offerings,
including early rate lock products, and the growth of our origination team
helped to push this business to the record levels. The decline in originations
in 2003 of 13.5% resulted from heightened competition and a resultant decline in
market share. Such competition caused a larger decline in origination fees as
average fees were reduced in response to the market conditions.
The 17% increase in origination fees was lower than the increase in originations
because certain of the portfolio originations in 2004 were opportunistically
priced at lower than standard fee rates. Originations for the three-years ended
December 31 are broken down as follows:
36
% of % of % of
2004 total 2003 total 2002 total
---------- ------- ---------- ------- ---------- -------
Fannie Mae $ 387,477 38.3% $ 334,189 55.3% $ 447,459 64.0%
Freddie Mac 350,091 34.6 109,849 18.2 144,895 20.8
FHA 27,714 2.8 -- -- 7,300 1.0
Assumptions 47,050 4.6 50,289 8.3 52,995 7.6
Conduit - Bank 199,578 19.7 104,711 17.3 33,857 4.8
Other -- -- 5,750 0.9 12,387 1.8
---------- ----- ---------- ----- ---------- -----
Total $1,011,910 100.0% $ 604,788 100.0% $ 698,893 100.0%
========== ===== ========== ===== ========== =====
Despite the high volume of originations in 2004, our servicing portfolio
declined slightly during the year due to an unusually high volume of loans paid
off during the year and a high percentage of originations for loans without
associated servicing. While loan originations declined in 2003 compared to 2002,
nearly three-quarters of the loans closed in 2003 were new loans rather than
portfolio refinancings, which added valuable new servicing to the portfolio.
More than 50% of the 2004 originations were additive to the portfolio. The
growth in the portfolio in 2003 also reflects a sub-servicing agreement with
CreditRe which added $630 million of serviced loans to our business.
Despite the decline in the year-end servicing portfolio level, the 6.0%
servicing fees increase in 2004 was due to a higher average portfolio during
2004 when compared to 2003. The higher average resulted from the sub-servicing
agreement noted above, which began in April 2003, while the loans were included
for all of 2004. Additionally, more than half of the loan payoffs during 2004
occurred in the second half of the year. The 13.3% fee increase in 2003 resulted
from the 27.1% growth in the portfolio, although the lower percentage increase
in fees than in the portfolio balance was due to the mid-year addition of the
sub-serviced portfolio discussed above.
With the addition of Capri Capital Funding ("CCF") in 2005 (see SUBSEQUENT
EVENTS, below), we expect significant growth in revenues in this segment, with
the addition of a servicing portfolio of approximately $5.3 billion and access
to numerous new origination regions upon acquiring licenses owned by CCF.
VIES
The results of VIEs reflected in our financial statements are those of entities
we are considered to control according to the definitions of FIN 46(R), but in
which we have no equity interest. Our Fund Management segment earns fees from
the entities, however, and our Portfolio Investing business earns interest on
several revenue bonds for which VIEs are the obligors. The VIEs are primarily
tax-credit equity investment funds we sponsor and manage.
The results we reported in 2004 reflect nine months of operations for the VIEs
we consolidated upon our initial adoption of FIN 46(R) effective March 31, 2004,
as well as any new funds closed after that date for the full periods they were
in operation.
As third party investors hold all the equity partnership interests in these
entities, we allocate all results of operations to those partners. As a result,
these VIEs have no impact on our net income.
Inflation
- ---------
Inflation did not have a material effect on our results for the periods
presented.
Liquidity and Capital Resources
- -------------------------------
We fund our ongoing business (including investments) primarily with cash
provided by operations, securitization of investments and revolving or warehouse
credit facilities. Our primary sources of capital to meet long-term liquidity
needs (including acquisitions) are debt and various types of equity offerings,
including equity of our subsidiaries. We believe that our financing capacity and
cash flow from current operations are adequate to meet our current and projected
liquidity requirements. Nonetheless, as business needs warrant, we may issue
other types of debt or equity in the future.
37
DEBT AND SECURITIZATIONS
- ------------------------
We have entered into the following bridge loans and revolving warehouse
facilities:
o $100.0 million, used for mortgage banking needs, which is renewable
annually;
o $75.0 million, used to fund investments in revenue bonds on a short
term basis, which matures March 31, 2005, with a built in accordion
feature allowing up to a $25.0 million increase and a one year
extension at our option;
o $90.0 million, used to acquire equity interests in property ownership
entities prior to the inclusion of these equity interests into
investments funds, which matures on October 28, 2005, with a one-year
extension at our option;
o $85.0 million, used to provide the interim loan to Capri, which
matures in July 2005; and
o $40.0 million, established in connection with the CMC acquisition,
which expires December 31, 2006.
We also use floating rate securitization programs to leverage our portfolio of
revenue bonds to generate capital for the acquisition of additional revenue
bonds. In each of our securitization programs, we contribute revenue bonds into
trusts, which are generally credit enhanced by investment grade rated third
party entities and then floating rate certificates are sold out of the trust. We
retain a residual interest in each of the trusts. We use two primary
securitization programs: MBIA securitizations and the P-FLOATs/RITES program.
o Under our MBIA securitizations, pools of bonds are contributed into
trusts, which are credit enhanced by MBIA, a large financial insurer,
and then "low-floater" certificates are sold. The low-floater
certificates have an interest rate that is reset weekly ("floating
rate") or an interest rate that is reset periodically based on a Dutch
auction process ("auction rate securitizations"). MBIA has agreed to
provide us with up to $650.0 million in credit enhancement through
2011. Using the MBIA credit enhancement we can complete up to $425.0
million of floating rate securitizations and $225.0 million of auction
rate securitization. At December 31, 2004, we had $405.5 million of
floating rate securitization and $100.0 million of auction rate
securitizations outstanding.
o In the P-FLOATs/RITES program, Merrill Lynch deposits individual
revenue bonds into a special purpose trust and provides a credit
enhancement guarantee enabling the trust to sell a weekly reset
floating rate security. We are required to post additional bonds with
Merrill Lynch as collateral for the credit enhancement provided. At
December 31, 2004, we had approximately $198.9 million of outstanding
revenue bonds and approximately $264.0 million of A Certificates of
various trusts under the P-FLOATs program.
During 2003, we completed a new fixed rate securitization, whereby we sold
$100.0 million of two-year certificates with a fixed rate of 3.25%
collateralized by $196.8 million bonds and requiring no credit enhancement.
Our continued ability to raise capital through the use of securitization
programs is dependent on:
o the availability of bonds to be used in securitizations or as excess
collateral;
o the depth of the market of buyers for tax-exempt floating rate
investments; and
o our ability to maintain and expand our relationships with credit
enhancers and liquidity providers.
We continue to actively manage our balance sheet and our relationships to
mitigate the impact of the factors listed above and to continue to diversify our
sources of capital.
Our debt financing facilities are more fully described in Notes 9 and 10 to our
consolidated financial statements.
While the Mortgage Banking warehouse facility, the Fund Management warehouse
facility, the Equity Issuer revolving line and the line of credit associated
with the Capri loan all mature in 2005, we expect to renew, replace or refinance
all of them. Additionally, the fixed rate securitization program matures in 2005
and we intend to remarket it through the P-FLOATs/RITES program.
As of December 31, 2004, we had approximately $260.3 million available to borrow
under these debt and securitization facilities without exceeding limits imposed
by debt covenants and our trust agreement.
38
EQUITY
- ------
Other than our common shares, we have several classes of equity outstanding,
with varying claims upon our income and cash flows:
o Convertible Community Reinvestment Act Preferred Shares ("Convertible
CRA Shares");
o Preferred shares of Equity Issuer (some of which are subject to
mandatory repurchase); and
o Special Common Units ("SCUs") of our subsidiary, CharterMac Capital
Company LLC ("CCC").
The Convertible CRA Shares are economically equivalent to our common shares,
receiving the same dividend. Unlike the common shares, however, these shares are
not publicly traded and do not have voting rights but entitle the holders to
"credit" under the US government's Community Reinvestment Act. These shares are
convertible into common shares at the holders' option. We first issued
Convertible CRA Shares during 2000 and the program has since become increasingly
popular with a broad range of banks that invest in our shares to both make an
investment in us and to make qualifying Community Reinvestment Act investments.
At December 31, 2004, 34 banks had invested in our Convertible CRA Shares and we
believe they remain a viable method to raise capital.
The preferred shares of Equity Issuer entitle their holders to a claim on the
income and cash flows of a portion of our Portfolio Investing business. They
have no voting rights with respect to CharterMac and are not convertible into
CharterMac common shares.
The SCUs entitle their holders to a claim on the income and cash flows of our
subsidiaries through which we operate our fund sponsorship business. The SCUs
have no direct voting rights with respect to CharterMac, but all of the holders
also have special preferred voting shares of CharterMac, which have voting
rights equivalent to our common shares. The SCUs are convertible into common
shares and are entitled to tax-adjusted dividends based on the common dividend
rate.
In October 2004, we filed a shelf registration with the SEC providing for the
issuance of up to $400.0 million in common shares, preferred shares and debt
securities. The shelf registration was declared effective on March 1, 2005. We
have no current plans to draw upon this shelf registration but may as
opportunities or business requirements dictate.
Further information about our equity instruments is included in Note 13 and 14
to our consolidated financial statements.
39
SUMMARY OF CAPITAL RAISING ACTIVITY AND CASH FLOWS
- --------------------------------------------------
The following table summarizes, on a gross basis, our and our subsidiaries'
capital raising activities.
Amount of Capital Raised (In thousands):
---------------------------------------------
Capital Source 2004 2003 2002
- ---------------------------------- --------- --------- ---------
Equity:
- ------
Preferred shares of Equity Issuer $ 104,000 $ -- $ 55,000
Convertible CRA shares -- 107,500 34,000
Common 110,803 -- 92,835
--------- --------- ---------
Total $ 214,803 $ 107,500 $ 181,835
--------- --------- ---------
Securitizations:
- ---------------
MBIA
Floater Certificates $ 22,000 $ (73,000) (1) $ 106,500
Auction Certificates -- 100,000 --
P- FLOATs/RITES 146,420 101,348 23,272
Fixed Rate -- 100,000 --
--------- --------- ---------
Total $ 168,420 $ 228,348 $ 129,772
--------- --------- ---------
Other Debt:
- ----------
CMC Acquisition Facility $ (3,408) (2) $ (2,044) (2) $ --
Fund Management Warehouse Line 15,399 24,532 --
Mortgage Banking Warehouse Line 5,610 (19,424) 11,969
Bank of America Line of Credit (21,730) 21,730 --
RCC Acquisition Loan (60,000) 60,000 --
Capri Bank of America Loan 85,000 -- --
Other 233 -- --
--------- --------- ---------
Total $ 21,104 $ 84,794 $ 11,969
--------- --------- ---------
Total of all capital activity $ 404,327 $ 420,642 $ 323,576
--------- --------- ---------
(1) Negative amount is due to the restructuring of the MBIA program.
(2) Negative amount reflects net principal paid.
SUMMARY OF CASH FLOWS
2004 vs. 2003
- -------------
The net increase in cash and cash equivalents during 2004 was lower than the
increase in 2003, primarily due to increased investing outflows, although those
investing activities were funded from a higher proportion of operating cash
flows as compared to financing cash flows than in 2003.
Operating cash flows were higher in the 2004 period by a margin of $29.8
million. This increase resulted from a higher level of earnings exclusive of
non-cash expenses, which increased substantially following our acquisition of
RCC late in 2003. Additionally, the timing of receipts and payments in operating
asset and liability accounts contributed to this increase.
Investing outflows increased by $33.0 million in 2004 as compared to 2003. A
lower level of revenue bond acquisition and funding activity was partially
offset by our loan to Capri. In addition, in 2003 we received a much higher
level of revenue bond repayments as compared to the current year. The level of
repayments in 2003 stemmed from the expiration of lockout periods for older
revenue bonds, with no comparable occurrence in 2004.
40
Financing inflows in the 2004 period were lower than in 2003 by $28.3 million.
The primary reason for the higher inflows in 2003 was the level of
securitization borrowings to finance the investment level in that year. A higher
amount of proceeds from equity offerings in the current year were partially
offset by the resulting increase in distributions to shareholders. In addition,
2004 also included payments to SCU holders, with none in 2003 as the SCUs were
issued in November of that year.
2003 vs. 2002
- -------------
The $136.2 million net increase in cash and cash equivalents in 2003 as compared
to 2002 resulted from increased operating and financing cash flows as well as
decreased investing outflows.
Operating cash flows increased by $4.2 million in 2003 as compared to the 2002
level. The increase was attributable in large part to the addition of business
lines from the RCC acquisition and the resultant cash inflows that RCC generated
at the end of the year. These cash flows, which resulted in a significant
increase in the level of deferred income balances, offset the incremental costs
now included in operating cash flows upon the internalization of management
associated with this acquisition, as well as higher deferred tax liabilities.
Investing outflows in 2003 decreased by $68.9 million as compared to 2002.
Despite the cash paid as part of the RCC acquisition, funds flow benefited from
sharply lower restricted cash requirements as we replaced cash collateralizing
our securitization programs with revenue bond investments. Additionally, a sharp
reduction in mortgage loan receivables in 2003 benefited the cash flows in this
category. This reduction stemmed from a very high level of originations late in
2002, which were not settled and sold until early 2003. Late 2003 originations,
on the other hand, were much lower than in 2002, leading to the net decrease in
the mortgage loans receivable asset.
Financing inflows in 2003 were $63.2 million higher than in 2002. This was
primarily a result of restructuring and expanding our securitization
capabilities and taking advantage of these facilities to monetize our revenue
bond investment portfolio to expand our business, as well as borrowings to
finance the RCC acquisition. In comparison, during 2002 we relied more on equity
capital to finance our growth.
LIQUIDITY REQUIREMENTS AFTER DECEMBER 31, 2004
- ----------------------------------------------
During January 2005, distributions of approximately $6.3 million (at various per
share amounts) were paid to holders of preferred shares. During February 2005,
distributions of approximately $23.7 million ($0.41 per share) were paid to
holders of common and Convertible CRA shares and $8.6 million were paid to SCU
holders. These distributions were declared in December 2004.
In the first quarter of 2005, we paid approximately $7.5 million to purchase the
portion of CMC that we did not own at December 31, 2004 and approximately $6.0
million will be paid as part of the Capri loan conversion and acquisition
transactions (See SUBSEQUENT EVENTS below).
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way (see also CONTINGENT LIABILITIES below).
SUBSEQUENT EVENTS
- -----------------
In the first quarter of 2005, we converted the loan made to Capri in July 2004.
Upon conversion, we held two participating loans, one of which allowed us to
participate in the cash flows of, and in turn was convertible into a 100%
ownership interest in, CCF. The other allows us to participate in the cash flows
of, and is convertible into a 49% ownership interest in, Capri Capital Advisors
("CCA"), a pension fund advisory business. In the first quarter of 2005, we
converted the CCF loan and acquired the business as an addition to our Mortgage
Banking segment. Management currently expects to convert the CCA loan into an
equity ownership prior to the end of the loan term in August 2006.
41
CharterMac and Capri anticipate that this strategic alliance will benefit us by:
o diversifying our revenue sources to include additional fee businesses
that are less susceptible to changes in the interest rate environment;
o expanding our business lines into pension fund advisory and providing
CCA access to our real estate platform and our balance sheet;
o increasing our market share and generating economies of scale through
the combined mortgage banking platforms of CCF and CMC; and
o cultivating the complementary product offerings of CCF and CMC,
thereby establishing a broader array of products for the clients of
both firms.
Also in the first quarter of 2005, we purchased the 13% of CMC that we had not
previously owned, and AMAC repaid advances we had made to it in 2004.
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of December 31, 2004 to make
future payments under our debt agreements and other contractual obligations:
Payments due by period
----------------------------------------------------------------------
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
- --------------------------------- ---------- ---------- ---------- ---------- ----------
Notes payable (1) $ 174,454 $ 155,371 $ 5,452 $ 13,631 $ --
Notes payable of consolidated
VIEs (2) 461,557 153,572 166,706 83,551 57,728
Operating lease obligations 71,218 3,914 12,928 11,772 42,604
Unfunded loan commitments 201,821 143,266 58,555 -- --
Floating rate securitization (1) 968,428 968,428 -- -- --
Fixed rate securitization (1) 100,000 100,000 -- -- --
Preferred shares of subsidiary
(subject to mandatory
repurchase) 273,500 -- -- -- 273,500
---------- ---------- ---------- ---------- ----------
Total $2,250,978 $1,524,551 $ 243,641 $ 108,954 $ 373,832
========== ========== ========== ========== ==========
(1) The amounts included in each category reflect the current expiration, reset
or renewal date of each facility or security certificate. Management has the
ability and intent to renew, refinance or remarket the borrowings as described
in LIQUIDITY AND CAPITAL RESOURCES.
(2) Of the notes payable of consolidated VIEs, $386.7 million is guaranteed by
certain equity partners of the investment funds. Per partnership agreements, the
equity partners are also obligated to pay the principal and interest on the
notes. The remaining balance of $74.9 million is collateralized with the
underlying properties of the consolidated operating partnerships. All of this
debt is non-recourse to us.
42
Off Balance Sheet Arrangements
- ------------------------------
The following table reflects our maximum exposure for guarantees we have entered
into and the carrying amounts as of December 31, 2004:
Maximum Carrying
(In thousands) Exposure Amount
- -------------------------------------------- -------- --------
Payment guarantees (1) $ 47,059 $ --
Completion guarantees (1) 48,593 --
Operating deficit guarantees (1) 949 --
Recapture guarantees (1) 53,426 --
Replacement reserve (1) 1,454 --
Mortgage pool credit enhancement (2) 19,000 --
LIHTC guarantees (2) 459,971 17,136
Mortgage banking loss sharing agreement (3) 361,999 6,500
-------- --------
$992,451 $ 23,636
======== ========
(1) These guarantees generally relate to business requirements for developers to
obtain construction financing. As part of our role as co-developer of certain
properties, we issue these guarantees in order to secure properties as assets
for the funds we manage. To date, we have had minimal exposure to losses under
these guarantees and anticipate no material liquidity requirements in
satisfaction of any guarantee issued.
(2) We see these guarantees as opportunities to expand our Fund Management
business by offering broad capital solutions to customers. To date, we have had
minimal exposure to losses under these guarantees and anticipate no material
liquidity requirements in satisfaction of any guarantee issued. The carrying
values disclosed above relate to the fees we earn for the guarantees, which we
recognize as the fair value of the guarantee.
(3) The loss sharing agreement with Fannie Mae is a normal part of the DUS
lender program and affords a higher level of fees than we earn for other
comparable funding sources. The carrying value disclosed above is our estimate
of potential exposure under the guarantees, although any funding requirements
for such exposure is based on the contractual requirements of the underlying
loans we sell to Fannie Mae, which vary as to amount and duration, up to a
maximum of 30 years.
The maximum exposure amount is not indicative of our expected losses under the
guarantees. For details of these transactions, see Note 20 to the consolidated
financial statements.
Application of Critical Accounting Policies
- -------------------------------------------
Our consolidated financial statements are based on the selection and application
of accounting principles generally accepted in the United States of America
("GAAP"), which require us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions sometimes involve future events which cannot be determined with
absolute certainty. Therefore, our determination of estimates requires that we
exercise our judgment. While we have used our best estimates based on the facts
and circumstances available to us at the time, different results may actually
occur and any such differences could be material to our financial statements.
We believe the following policies may involve a higher degree of judgment and
complexity and represent the critical accounting policies used in the
preparation of our financial statements:
o valuation of investments in revenue bonds;
o valuation of mortgage servicing rights;
o impairment of goodwill; and
o accounting for income taxes.
43
VALUATION OF INVESTMENTS IN REVENUE BONDS
SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
provides guidance on determining the valuation of investments owned. The initial
classification of our investments in the "available for sale" category rather
than as "held to maturity" is due to a provision in most of the revenue bonds
under which we have a right to require redemption prior to maturity, although we
can and may elect to hold them up to their maturity dates unless otherwise
modified. Because of this classification, we must carry our investments at fair
value. Since there is no ready market for these investments, we must exercise
judgment in determining what constitutes "fair value". We estimate the fair
value by calculating the present value of future payments under the bonds, with
a discount rate based upon the average rate of new originations for the quarter
leading up to the valuation date. If the property underlying the bond has
substandard performance, a factor is added to the discount rate to allow for the
additional risk. Conversely, if the underlying property is performing much
better than expected, the discount rate may be reduced to allow for the reduced
risk.
In making these determinations, we evaluate, among other factors:
Bonds Secured by Properties in Construction Phase
-------------------------------------------------
o Assets where there are issues outstanding regarding timely
completion of the construction, even if there is no apparent risk
of financial loss.
Bonds Secured by Properties that are in Lease-Up or Stabilized Phases
---------------------------------------------------------------------
o Stabilization requirements (i.e., minimum occupancy level and
debt service coverage for specified periods) not yet met but all
completion requirements (i.e., timely submission of documentation
regarding certificates of occupancy, deal waivers, etc., as well
as completing construction within the budgeted cost) met.
Established material variation from anticipated operating
performance, ability to meet stabilization test within the
allotted time period is in question or material deficiencies at
the collateral level, or other weaknesses exist calling into
question the viability of the project in the near to intermediate
term; or
o Project viability is in question and defaults exist and
notification of such has been delivered. Enhanced possibility of
loss may exist or has been specified.
We use these criteria to assess all of our revenue bonds. In our valuation
review, any bonds meeting these criteria are monitored and assessed for
risk of financial loss. If no financial loss is expected, the fair value of
a bond is considered to be the lower of outstanding face amount or the
present value of future cash flows, with the discount rate adjusted to
provide for the applicable risk factors. If a financial loss is expected,
the bond is considered impaired and written down to fair value as
determined by the present value of expected future cash flows.
VALUATION OF MORTGAGE SERVICING RIGHTS
SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, requires that servicing rights retained when
mortgage loans are sold be recorded as assets at fair value and amortized in
proportion to, and over the period of, estimated net servicing income.
Significant judgment is required in accounting for these assets, including:
o Determining the fair value of the asset retained when the
associated mortgage is sold and in subsequent reporting periods,
including such factors as costs to service the loans, the
estimated rate of prepayments, the estimated rate of default and
an appropriate discount rate to calculate the present value of
cash flows; and
o Estimating the appropriate proportion and period for amortizing
the asset.
Changes in these estimates and assumptions could materially affect the
determination of fair value.
We assess our mortgage servicing rights for impairment based on the fair value
of the assets as compared to carrying values. We estimate the fair value by
obtaining market information from one of the primary mortgage servicing rights
brokers. To determine impairment, the mortgage servicing portfolio is stratified
by the issuer of the underlying mortgage loans and we compare the estimated fair
value of each stratum to its recorded book value. When the recorded value of
44
capitalized servicing assets exceeds fair value, we recognize temporary
impairment through a valuation allowance; fair value in excess of the amount
capitalized is not recognized. In addition, we periodically evaluate our
mortgage servicing rights for other-than-temporary impairment to determine
whether the carrying value before the application of the valuation allowance is
recoverable. When we determine that a portion of the balance is not recoverable,
the asset and the valuation allowance are reduced to reflect permanent
impairment.
IMPAIRMENT OF GOODWILL
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, requires that goodwill be
tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis and between annual tests if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, sale or disposition of a
significant portion of a reporting unit. Application of the goodwill impairment
test requires judgment regarding the fair value of each reporting unit which is
estimated using a discounted cash flow methodology. This, in turn, requires
significant judgments including estimation of future cash flows, which is
dependent on internal forecasts, estimation of the long-term rate of growth for
our business and the life over which cash flows will occur. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment.
ACCOUNTING FOR INCOME TAXES
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Furthermore, these projected future tax consequences include our
assumption as to the continuing tax-free nature of a significant portion of our
earnings. Variations in the actual outcome of these future tax consequences
could materially impact our financial position or our results of operations.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), SHARE-BASED PAYMENT, which replaced SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. As we already follow the fair value provisions set
forth in SFAS No. 123, this statement is expected to have an immaterial impact
on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We invest in certain financial instruments, primarily revenue bonds and other
bond related investments that are subject to various forms of market risk,
including interest rate risk. We seek to prudently and actively manage such
risks to earn sufficient compensation to justify the undertaking of such risks
and to maintain capital levels which are commensurate with the risks we
undertake.
The assumptions related to the following discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond our control
and all of which are difficult or impossible to predict with accuracy. Although
we believe that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking information included herein will prove
to be accurate. Due to the significant uncertainties inherent in forward-looking
information, the inclusion of such information should not be regarded as our
representation that our objectives and plans would be achieved.
45
INTEREST RATE RISK
- ------------------
The nature of our investments and the instruments used to raise capital for
their acquisition expose us to income and expense volatility due to fluctuations
in market interest rates. Market interest rates are highly sensitive to many
factors, including governmental policies, domestic and international economic
and political considerations and other factors beyond our control. Our exposure
to interest rate is twofold:
o the potential increase in interest expense on our variable rate debt;
and
o the impact of interest rate on the value of our assets.
IMPACT ON EARNINGS
Our investments in revenue bonds generally bear interest at fixed rates, or pay
interest according to the cash flows of the underlying properties, which do not
fluctuate with changes in market interest rates.
In contrast, payments required under our floating rate securitization programs
vary based on market interest rates based on the BMA index and are re-set weekly
or every 35 days. In addition, we have floating rate debt related to our
acquisition financing and our warehouse facilities, with rates based on LIBOR.
Other long-term sources of capital, such as our preferred shares of Equity
Issuer, carry a fixed dividend rate and as such, are not impacted by changes in
market interest rates.
With the exception of $50.0 million of debt hedged via an interest rate swap
agreement and the $100.0 million fixed rate securitization, the full amount of
our liabilities labeled on our consolidated balance sheet as Financing
Arrangements and Notes Payable are variable rate debts. We estimate that an
increase of 1.0% in interest rates would decrease our annual net income by
approximately $10.9 million.
We manage this risk through the use of interest rate swaps, interest rate caps
and forward bond origination commitments, as described in Note 11 to our
consolidated financial statements. In addition, we manage our exposure by
striving for diversification in our businesses to include those not susceptible
to interest rate changes and by managing our leverage.
IMPACT ON VALUATION OF ASSETS
A rising interest rate environment could reduce the demand for multifamily
tax-exempt and taxable financing, which could limit our ability to invest in
revenue bonds or to structure transactions. Conversely, falling interest rates
may prompt historical renters to become homebuyers, in turn potentially reducing
the demand for multifamily housing.
Changes in market interest rates would also impact the estimated fair value of
our portfolio of revenue bonds. We estimate the fair value for each revenue bond
as the present value of its expected cash flows, using a discount rate for
comparable tax-exempt investments. Therefore, as market interest rates for
tax-exempt investments increase, the estimated fair value of our revenue bonds
will generally decline, and a decline in interest rates would be expected to
result in an increase in their estimated fair values. For example, we estimate,
using the same methodology used to estimate the portfolio fair market value
under SFAS No. 115, that a 1% increase or decrease in market rates for
tax-exempt investments would change the estimated fair value of our portfolio of
revenue bonds by approximately $130.0 million. Changes in the estimated fair
value of the revenue bonds do not impact our reported net income, earnings per
share, distributions or cash flows, but are reported as components of other
accumulated comprehensive income and affect reported shareholders' equity, and
may affect our borrowing capability to the extent that collateral requirements
are sometimes based on our asset values.
46
Item 8. Financial Statements and Supplementary Data.
Page
(a) 1. Financial Statements -------
Report of Independent Registered Public Accounting Firm 48
Consent of Independent Registered Public Accounting Firm 49
Management's Report on the Effectiveness of Internal
Control over Financial Reporting 50
Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting 52
Consolidated Balance Sheets as of December 31, 2004 and
2003 54
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 55
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003 and 2002 56
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 58
Notes to Consolidated Financial Statements 60
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
and Shareholders of
CharterMac
New York, New York
We have audited the accompanying consolidated balance sheets of CharterMac and
subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedules listed in the Index at Item 15(a)2.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CharterMac and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated MARCH 31, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an adverse opinion on the effectiveness of the Company's internal control
over financial reporting because of material weaknesses.
/s/DELOITTE & TOUCHE LLP
New York, New York
March 31, 2005
48
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference
o in the Registration Statement (Form S-8 and its post effective
amendment on Form S-8/A No. 333-55957) pertaining to the CharterMac
(formerly known as "Charter Municipal Mortgage Acceptance Company")
Incentive Share Option Plan,
o in the Registration Statement (Form S-3 No. 333-54802) of CharterMac,
o in the Registration Statement (Form S-3 No. 333-109078) of CharterMac,
o in the Registration Statement (Form S-8 No. 333-110722) of CharterMac,
o in the Registration Statement (Form S-3/A No. 333-111919) of
CharterMac,
of our report dated March 31, 2005 appearing in the Annual Report on Form 10-K
of CharterMac for the year ended December 31, 2004, and to the reference to us
under the heading "Experts"
o in the Prospectus which is part of the Registration Statement (Form
S-8 and its post effective amendment on Form S-8/A No. 333-55957)
o in the Prospectus which is part of the Registration Statement (Form
S-3 No. 333-54802),
o in the Prospectus which is part of the Registration Statement (Form
S-3 No. 109078),
o in the Prospectus which is part of the Registration Statement (Form
S-8 No. 333-110722),
o and in the Prospectus which is part of the Registration Statement
(Form S-3/A No. 333-111919).
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 31, 2005
49
Management's Report on the Effectiveness of Internal Control over Financial
- --------------------------------------------------------------------------------
Reporting
- ---------
The management of CharterMac is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
of the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and Board of Trustees regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
An internal control material weakness is a significant deficiency, or
aggregation of deficiencies, that does not reduce to a relatively low level the
risk that material misstatements in financial statements will be prevented or
detected on a timely basis by employees in the normal course of their work.
Management is not permitted to conclude that the company's internal control over
financial reporting is effective if there are one or more material weaknesses in
internal control over financial reporting.
As part of our compliance efforts relative to Section 404 of the Sarbanes-Oxley
Act of 2002, CharterMac management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, and this
assessment identified two material weaknesses in the Company's internal control
over financial reporting. As described below, as of December 31, 2004, the
Company did not maintain effective controls over:
o accounting for income taxes, including the determination of income
taxes payable and deferred income tax assets and liabilities and the
related income tax benefit; and
o the consolidation of its subsidiaries, including identifying revenues
that should have been re-characterized upon the acquisition of a
subsidiary in 2003 and the elimination of certain intercompany
balances.
These control deficiencies result in more than a remote likelihood that a
material misstatement of annual or interim financial statements would not be
prevented or detected. Further, it resulted in the restatement of the company's
interim financial statements for the first, second and third quarters of 2004.
Accordingly, management determined that these control deficiencies constitute
material weaknesses.
In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
INTERNAL CONTROL - INTEGRATED FRAMEWORK. Due to the material weaknesses
described in the preceding paragraph, we believe that, as of December 31, 2004,
our internal control over financial reporting was not effective in accordance
with those criteria.
Deloitte & Touche, LLP, our independent auditors, have issued an unqualified
opinion on management's assessment and an adverse opinion on the effectiveness
of the company's internal control over financial reporting as of December 31,
2004, which appears on page 52.
Management's Discussion of Material Weaknesses
The incidents described above arose in connection with the acquisition of
Related Capital Company LLC in November 2003.
With regard to the calculations of tax amounts, the deferred tax amounts arising
from share based compensation grants at the time of the acquisition were not
properly calculated, resulting in an understatement of the Company's income tax
benefit. During the first quarter of 2005, management has taken steps to
remediate the errors in its tax accounting through increased use of third-party
tax service providers for the more complex areas of the Company's tax accounting
and increased formality and rigor of controls and procedures over accounting for
income taxes.
The error identified with regard to revenues stemmed from the change in
character of two revenue streams, both of which existed prior to the
acquisition, but which changed in character upon the introduction of the two
businesses (RCC and CharterMac) into a consolidated whole. While these revenue
50
streams were accounted for correctly on a stand alone basis, the change in
character in the consolidated financial statements was not properly identified
until the end of 2004. Management has since strengthened due diligence
procedures in reviewing acquisition candidates to ensure that similar
recharacterizations are identified on a timely basis. In addition, the
elimination of unrealized gains on revenue bond investments for which the
obligors are partnerships consolidated pursuant to FASB Interpretation No. 46(R)
was not properly executed, as the assets are carried at fair value and the
liabilities are carried at their outstanding face amounts. Management has since
strengthened its analytical procedures with regard to the preparation and review
of all consolidation eliminations.
/s/ Stuart J. Boesky /s/ Alan P. Hirmes
- -------------------- ------------------
Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
March 31, 2005 March 31, 2005
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
and Shareholders of CharterMac
New York, NY
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that CharterMac and
Subsidiaries (the "Company") did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of the
material weaknesses identified in management's assessment based on criteria
established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of trustees, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following two material weaknesses in the Company's internal
control over financial reporting have been identified and included in
management's assessment: The first material weakness related to an inadequacy in
management review of income taxes that lead to an error in the Company's
calculation of their income tax benefit. Specifically, the Company did not
properly record certain deferred tax assets resulting from temporary differences
related to the recognition of stock based compensation expense. This error
resulted in the overstatement of the Company's deferred tax liability, and the
understatement of the Company's income tax benefit. The second material weakness
relates to the Company's completion and review of their consolidation
adjustments. Specifically, the Company did not properly consider and record
certain entries related to the elimination of income and comprehensive income
upon consolidation of the Related Capital Company subsidiary. These errors
resulted in the understatement of the Company's deferred income liability, the
understatement of limited partners' interests in consolidated VIEs, the
overstatement of other comprehensive income and the overstatement of fund
sponsorship fees.
52
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the consolidated financial
statements and the related financial statement schedule as of and for the year
ended December 31, 2004, of the Company, and this report does not affect our
report on such financial statements and financial statement schedules.
In our opinion, management's assessment that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, because of the
effect of the material weaknesses described above on the achievement of the
objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2004, based on the
criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the balance sheet of the Company, and
the related statements of income, shareholders' equity, cash flows, and the
financial statement schedule included in the index at Item 15(a) 2, as of and
for the year ended December 31, 2004, and our report dated March 31, 2005
expressed an unqualified opinion on those financial statements and the related
financial statement schedules.
/s/DELOITTE & TOUCHE LLP
New York, New York
March 31, 2005
53
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
----------------------------
2004 2003
----------- -----------
ASSETS
Revenue bonds-at fair value $ 2,100,720 $ 1,871,009
Mortgage servicing rights, net 32,366 33,351
Cash and cash equivalents 71,287 58,257
Cash and cash equivalents-restricted 25,879 26,636
Other investments 187,506 97,500
Deferred costs - net of amortization of $19,635 and $13,463 57,260 58,408
Goodwill 206,397 214,745
Other intangible assets - net of amortization of $20,847
and $4,163 177,519 194,203
Loan to affiliate 4,600 --
Other assets 37,813 27,060
Investments in partnerships of consolidated VIEs 2,527,455 --
Other assets of consolidated VIEs 328,559 --
----------- -----------
Total assets $ 5,757,361 $ 2,581,169
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,068,428 $ 900,008
Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500
Notes payable 174,454 153,350
Accounts payable, accrued expenses and other liabilities 32,628 32,782
Deferred income 55,572 23,691
Deferred tax liability 29,898 60,370
Distributions payable 38,859 27,612
Notes payable and other liabilities of consolidated VIEs 1,307,093 --
----------- -----------
Total liabilities 2,980,432 1,471,313
----------- -----------
Minority interest in consolidated subsidiary - convertible SCUs 267,025 288,006
----------- -----------
Minority interest in consolidated subsidiary - CMC 4,394 4,193
----------- -----------
Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 --
----------- -----------
Limited partners' interests in consolidated VIEs 1,501,519 --
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners equity - convertible CRA Shareholders (6,552 shares
issued and outstanding in 2004 and 8,180 issued and outstanding in
2003) 108,745 138,748
Beneficial owners equity - special preferred voting shares; no par value
(15,172 shares outstanding) 152 161
Beneficial owners equity - other common shareholders; no par value
(100,000 shares authorized; 51,363 issued and 51,229 outstanding in
2004 and 42,726 issued and 42,704 outstanding in 2003) 773,165 644,641
Restricted shares granted (7,922) (19,385)
Treasury shares of beneficial interest - common, at cost (134 shares in
2004 and 23 shares in 2003) (2,970) (378)
Accumulated other comprehensive income 28,821 53,870
----------- -----------
Total shareholders' equity 899,991 817,657
----------- -----------
Total liabilities and shareholders' equity $ 5,757,361 $ 2,581,169
=========== ===========
See accompanying notes to consolidated financial statements
54
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Year Ended December 31,
---------------------------------------
2004 2003 2002
--------- --------- ---------
Revenues:
Revenue bond interest income $ 132,075 $ 113,655 $ 92,882
Fee income:
Mortgage banking 15,026 13,712 13,681
Fund sponsorship 42,790 12,642 --
Credit enhancement 10,085 4,924 2,619
Other income 20,665 7,307 7,432
Revenues of consolidated VIEs 12,213 -- --
--------- --------- ---------
Total revenues 232,854 152,240 116,614
--------- --------- ---------
Expenses:
Interest expense 30,838 23,919 19,004
Interest expense of consolidated VIEs 21,395 -- --
Interest expense - distributions to preferred shareholders of subsidiary
subject to mandatory repurchase 18,898 9,448 --
Salaries and benefits 55,763 17,540 9,937
General and administrative 45,063 23,403 14,569
Depreciation and amortization 30,407 11,926 9,092
Loss on impairment of assets 757 1,759 920
Other expenses of consolidated VIEs 29,355 -- --
--------- --------- ---------
Total expenses 232,476 87,995 53,522
--------- --------- ---------
Income before equity in earnings of investments, loss on investments
held by consolidated VIEs, gain on sale of loans and gain on repayment
of revenue bonds 378 64,245 63,092
Equity in earnings of investments 1,938 2,219 2,219
Loss on investments held by consolidated VIEs (149,048) -- --
Gain on sale of loans 6,995 5,532 10,683
Gain on repayment of revenue bonds 217 1,951 3,885
--------- --------- ---------
Income (loss) before allocation of (income) loss to preferred shareholders
of subsidiary, Special Common Units of subsidiary, minority interests
and partners of consolidated VIEs (139,520) 73,947 79,879
(Income) allocated to preferred shareholders of subsidiary (3,942) (9,449) (17,266)
(Income) allocated Special Common Units of subsidiary (28,174) (4,038) --
(Income) loss allocated to minority interests (194) 54 (496)
Loss allocated to partners of consolidated VIEs 219,950 -- --
--------- --------- ---------
Income before income taxes 48,120 60,514 62,117
Income tax benefit (provision) 17,243 6,072 (1,284)
--------- --------- ---------
Net income $ 65,363 $ 66,586 $ 60,833
========= ========= =========
Allocation of net income to:
Special distribution to Manager $ -- $ 5,332 $ 4,872
Manager -- 6 56
Common shareholders 56,786 54,608 52,516
Convertible CRA shareholders 8,577 6,640 3,389
--------- --------- ---------
Total for shareholders $ 65,363 $ 61,248 $ 55,905
========= ========= =========
Net income per share:
Basic $ 1.19 $ 1.31 $ 1.31
========= ========= =========
Diluted $ 1.19 $ 1.31 $ 1.31
========= ========= =========
Weighted average shares outstanding:
Basic 54,786 46,653 42,697
========= ========= =========
Diluted 55,147 46,735 42,768
========= ========= =========
Distributions declared per share $ 1.57 $ 1.37 $ 1.26
========= ========= =========
See accompanying notes to consolidated financial statements
55
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
Beneficial Beneficial
Owner's Equity Owner's Equity Beneficial
Convertible Special Preferred Owner's Equity-
CRA Shareholders Voting Shares Manager
---------------- ----------------- ---------------
Balance at January 1, 2002 $ 25,522 $ -- $ 1,070
Comprehensive income:
Net income 3,389 4,928
Other comprehensive gain (loss):
Net unrealized loss on derivatives
Unrealized holding gain on revenue bonds
Less: reclassification to net income
Total other comprehensive gain
Comprehensive income
Issuance of Convertible CRA shares 32,523
Issuance of common shares -- --
Distributions (3,260) (4,872)
--------- --------- ---------
Balance at December 31, 2002 58,174 -- 1,126
Comprehensive income:
Net income 6,640 5,338
Other comprehensive gain (loss):
Net unrealized gain on derivatives
Unrealized holding loss on revenue bonds
Less: reclassification to net income
Other comprehensive loss
Comprehensive income
Restricted shares granted
Amortization of share awards
Elimination in manager interest (1,132)
Issuance of special preferred voting shares 161
Conversion of Convertible CRA shares (21,870)
Issuance of Convertible CRA shares 102,532
Issuance of common shares
Repurchase of treasury shares
Distributions (6,728) (5,332)
--------- --------- ---------
Balance at December 31, 2003 $ 138,748 $ 161 $ --
Treasury
Beneficial Shares of
Owner's Equity Beneficial Restricted
Other Common Interest - Shares
Shareholders Common Granted
---------------- ----------------- ---------------
Balance at January 1, 2002 $ 511,456 $ (103) $ --
Comprehensive income:
Net income 52,516
Other comprehensive gain (loss):
Net unrealized loss on derivatives
Unrealized holding gain on revenue bonds
Less: reclassification to net income
Total other comprehensive gain
Comprehensive income
Issuance of Convertible CRA shares
Issuance of common shares 92,383
Distributions (51,859)
--------- --------- ---------
Balance at December 31, 2002 604,496 (103) --
Comprehensive income:
Net income 54,608
Other comprehensive gain (loss):
Net unrealized gain on derivatives
Unrealized holding loss on revenue bonds
Less: reclassification to net income
Other comprehensive loss
Comprehensive income
Restricted shares granted 19,454 $ (22,228)
Amortization of share awards 2,843
Elimination in manager interest
Issuance of special preferred voting shares
Conversion of Convertible CRA shares 21,870
Issuance of Convertible CRA shares
Issuance of common shares 1,828
Repurchase of treasury shares (275)
Distributions (57,615)
--------- --------- ---------
Balance at December 31, 2003 $ 644,641 $ (378) $ (19,385)
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income Total
---------------- ----------------- ---------------
Balance at January 1, 2002 $ (2,697) $ 535,248
Comprehensive income:
Net income $ 60,833 60,833
Other comprehensive gain (loss):
Net unrealized loss on derivatives (2,607)
Unrealized holding gain on revenue bonds 99,011
Less: reclassification to net income (3,885)
---------
Total other comprehensive gain $ 92,519 92,519 92,519
---------
Comprehensive income $ 153,352
---------
Issuance of Convertible CRA shares 32,523
Issuance of common shares 92,383
Distributions (59,991)
--------- --------- ---------
Balance at December 31, 2002 89,822 753,515
Comprehensive income:
Net income 66,586 66,586
Other comprehensive gain (loss):
Net unrealized gain on derivatives 2,607
Unrealized holding loss on revenue bonds (36,608)
Less: reclassification to net income (1,951)
---------
Other comprehensive loss (35,952) (35,952) (35,952)
---------
Comprehensive income $ 30,634
---------
Restricted shares granted (2,774)
Amortization of share awards 2,843
Elimination in manager interest (1,132)
Issuance of special preferred voting shares 161
Conversion of Convertible CRA shares --
Issuance of Convertible CRA shares 102,532
Issuance of common shares 1,828
Repurchase of treasury shares (275)
Distributions (69,675)
--------- ---------
Balance at December 31, 2003 $ 53,870 $ 817,657
(continued)
See accompanying notes to consolidated financial statements
56
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
(continued)
Beneficial Beneficial
Owner's Equity Owner's Equity Beneficial
Convertible Special Preferred Owner's Equity-
CRA Shareholders Voting Shares Manager
---------------- ----------------- ---------------
Balance at December 31, 2003 $138,748 $ 161 $ --
Comprehensive income:
Net income 8,577
Other comprehensive gain (loss):
Net unrealized loss on derivatives
Unrealized holding loss on revenue bonds
Less: reclassification to net income
Other comprehensive loss
Comprehensive income
Options exercised and other share based
compensation, net of forfeitures
Tax effect of amortization of share awards
Amortization of share awards
Conversion of Special Common Units and
redemption of Special Preferred Voting
Shares (9)
Conversion of Convertible CRA shares (27,585)
Issuance costs of Convertible CRA shares (148)
Issuance of common shares
Repurchase of treasury shares
Distributions (10,847)
--------- --------- ---------
Balance at December 31, 2004 $ 108,745 $ 152 $
--------- --------- ---------
Treasury
Beneficial Shares of
Owner's Equity Beneficial Restricted
Other Common Interest - Shares
Shareholders Common Granted
---------------- ----------------- ---------------
Balance at December 31, 2003 $ 644,641 $ (378) $ (19,385)
Comprehensive income:
Net income 56,786
Other comprehensive gain (loss):
Net unrealized loss on derivatives
Unrealized holding loss on revenue bonds
Less: reclassification to net income
Other comprehensive loss
Comprehensive income
Options exercised and other share based
compensation, net of forfeitures (1,012) (169)
Tax effect of amortization of share awards 448
Amortization of share awards 11,632
Conversion of Special Common Units and
redemption of Special Preferred Voting
Shares 17,789
Conversion of Convertible CRA shares 27,585
Issuance costs of Convertible CRA shares
Issuance of common shares 105,541
Repurchase of treasury shares (2,592)
Distributions (78,613)
--------- --------- ---------
Balance at December 31, 2004 $ 773,165 $ (2,970) $ (7,922)
--------- --------- ---------
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income Total
---------------- ----------------- ---------------
Balance at December 31, 2003 $ 53,870 $ 817,657
Comprehensive income:
Net income $ 65,363 65,363
---------
Other comprehensive gain (loss):
Net unrealized loss on derivatives (1,078)
Unrealized holding loss on revenue bonds (24,188)
Less: reclassification to net income 217
---------
Other comprehensive loss (25,049) (25,049) (25,049)
---------
Comprehensive income $ 40,314
---------
Options exercised and other share based
compensation, net of forfeitures (1,181)
Tax effect of amortization of share awards 448
Amortization of share awards
Conversion of Special Common Units and
redemption of Special Preferred Voting
Shares 17,780
Conversion of Convertible CRA shares --
Issuance costs of Convertible CRA shares
Issuance of common shares 105,541
Repurchase of treasury shares
Distributions (89,460)
--------- ---------
Balance at December 31, 2004 $ 28,821 $ 899,991
--------- ---------
See accompanying notes to consolidated financial statements.
57
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,363 $ 66,586 $ 60,833
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on repayment of revenue bonds (217) (1,951) (3,885)
Loss on impairment of assets 757 1,759 920
Depreciation and amortization 30,407 11,926 9,092
Income allocated to preferred shareholders of subsidiary 3,942 9,449 17,266
Income allocated to Special Common Units of subsidiary 28,174 4,038 --
Income (loss) allocated to minority interest 194 (54) 496
Non-cash compensation expense 11,632 2,843 674
Other non-cash expense (income) 2,982 3,329 6,323
Deferred taxes (20,544) (9,491) 539
Changes in operating assets and liabilities:
Mortgage servicing rights (6,854) (4,015) (9,571)
Other assets (28,458) (16,748) (3,900)
Loans to affiliates (4,600) -- --
Deferred income 31,881 16,937 931
Accounts payable, accrued expenses and other liabilities 293 527 1,259
--------- --------- ---------
Net cash provided by operating activities 114,952 85,135 80,977
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments from revenue bonds 39,067 99,931 113,616
Revenue bond acquisitions and fundings (325,037) (432,915) (457,060)
Advances to partnerships (173,526) (18,925) --
Collection of partnership advances 156,875 26,569 --
Loan to Capri Capital (84,000) -- --
Mortgage loans funded (563,710) (364,300) (433,000)
Mortgage loans sold 558,100 369,800 431,900
Acquisition of Related Capital Company -- (56,261) --
Acquisitions, net of cash acquired (1,579) (788) (3,590)
Net decrease (increase) in other investments 10,498 18,391 (13,897)
Deferred investment acquisition costs -- (11,170) (14,233)
Decrease (increase) in cash and cash equivalents - restricted 757 20,149 (42,115)
--------- --------- ---------
Net cash used in investing activities (382,555) (349,519) (418,379)
--------- --------- ---------
See accompanying notes to consolidated financial statements
continued
58
CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (84,395) (65,121) (56,441)
Distributions to preferred shareholders of subsidiary (2,386) (9,449) (16,234)
Distributions to Special Common Unit holders (28,412) -- --
Proceeds from financing arrangements 281,060 521,153 197,176
Repayments of financing arrangements (112,639) (292,805) (67,313)
Increase in notes payable 20,872 55,842 11,969
Issuance of common shares and convertible CRA shares 111,119 104,841 125,599
Offering costs relating to issuance of common and convertible CRA shares (5,261) (495) (723)
Issuance of preferred shares 104,000 -- 55,000
Retirement of special preferred voting shares (10) -- --
Treasury share purchases (2,592) (275) --
Deferred financing costs (723) (4,749) (3,296)
--------- --------- ---------
Net cash provided by financing activities 280,633 308,942 245,737
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 13,030 44,558 (91,665)
Cash and cash equivalents at the beginning of the period 58,257 13,699 105,364
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 71,287 $ 58,257 $ 13,699
========= ========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 31,057 $ 23,417 $ 12,703
Taxes paid 8,040 137 178
Non-cash investing and financing activities:
Reclassification of goodwill to intangible assets: $ -- $ -- $ 8,639
Conversion of SCUs to common shares 17,789 -- --
Conversion of CRA shares to common shares 27,585 21,870 --
Acquisition of RCC
Increase in investment in and advances to partnerships $ (35,424)
Increase in intangible assets (185,300)
Increase in goodwill (210,294)
Increase in other assets and liabilities (1,272)
Issuance of special common units 288,006
Increase in notes payable 28,952
Increase in deferred tax liability 59,071
---------
$ (56,261)
=========
See accompanying notes to consolidated financial statements
59
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CharterMac, its
wholly owned and majority owned subsidiary statutory trusts, corporations which
it controls and entities consolidated pursuant to the adoption of FASB
Interpretation No. 46(R) (see Note 2). For the entities consolidated pursuant to
FASB Interpretation No. 46(R), the financial information included is as of and
for the period ended September 30, 2004, the latest practical date. All
intercompany accounts and transactions have been eliminated in consolidation.
Unless otherwise indicated, "the Company", "we" and "us", as used throughout
this document, refers to CharterMac and its consolidated subsidiaries.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts from prior years have been reclassified to conform to the 2004
presentation.
B. REVENUE RECOGNITION
We derive our revenues from a variety of investments and services, summarized as
follows:
o REVENUE BOND INTEREST INCOME
We recognize income as it accrues, provided collectibility of future
amounts is reasonably assured. We recognize contingent interest when
received. For bonds with modified terms, or when collectibility is
uncertain, we recognize revenue based upon expected cash receipts. For
bonds which carry a different interest rate during the construction
period than during the balance of the term, we calculate the effective
yield on the bond and use that rate to recognize income over the life
of the bond.
o FUND SPONSORSHIP FEES
o PROPERTY ACQUISITION FEES are for services we perform in
acquiring interests in property-owning partnerships which
comprise the assets of funds we sponsor. We recognize these fees
when the investor equity is invested and the properties have been
acquired by the investment fund.
o PARTNERSHIP MANAGEMENT FEES are for the following services we
perform:
o maintaining the books and records of an investment fund,
including requisite investor reporting; and
o monitoring the acquired property interests to ensure that
their development, leasing and operations comply with low
income housing or other tax credit requirements.
We recognize these fees on a straight-line basis over the five
year contractual service period following the initial closing of
an investment fund.
o ACQUISITION FEES received upon acquisition of revenue bonds are
deferred and amortized over the estimated life of the revenue
bond.
o ORGANIZATION, OFFERING AND ACQUISITION ALLOWANCE FEES are for
reimbursement of costs we incur for organizing the investment
60
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
funds and for providing assistance in acquiring the properties to
be included in the investment funds. The organization and
offering allowance fee is recognized when the investor equity is
raised and the acquisition allowance fee is recognized when the
investment funds acquire properties. The related expenses are
included in general and administrative expenses.
o ASSET MANAGEMENT FEES from investment funds, based on a
percentage of each investment fund's invested assets, are
recorded monthly as earned, provided that collection is
reasonably assured.
o MORTGAGE BANKING FEES
o MORTGAGE ORIGINATION FEES for originating loans are recorded upon
delivery of the closing documents to the purchaser of the loans.
o MORTGAGE SERVICING FEE income is recognized on an accrual basis
as the services are performed over the servicing period.
o CREDIT ENHANCEMENT FEES
o Fees for credit enhancement are received monthly and recognized
as income when due.
o Fees for yield guarantee transactions, received in advance, are
deferred and amortized over the guarantee periods on a
straight-line basis. For those pertaining to the construction and
lease-up phase of a pool of properties, the periods are generally
one to three years. For those pertaining to the operational phase
of a pool of properties, the period is approximately 20 years.
o OTHER INCOME
o INTEREST INCOME on temporary investments such as cash in banks
and short-term instruments, is recognized on the accrual basis as
it becomes due.
o OTHER INTEREST INCOME (from promissory notes, mortgages
receivable and other investments) is recognized on the accrual
basis when due.
o DEVELOPMENT FEES are earned from properties co-developed with
unaffiliated developers and contributed to investment funds.
Recognition of development fees is based on completion and
stabilization of properties, after guarantees of completion and
deficits are no longer anticipated to require funding, provided
that collection is reasonably assured.
o CONSTRUCTION SERVICE FEEs from borrowers for servicing revenue
bonds during the construction period are deferred and amortized
into other income over the estimated construction period.
o EXPENSE REIMBURSEMENTS includes amounts billed to the investment
funds and other affiliated entities ("affiliates") for the
reimbursement of salaries and certain other ongoing operating
expenditures incurred by RCC on behalf of these affiliates.
C. INVESTMENT IN REVENUE BONDS
We account for our investments in revenue bonds as available-for-sale debt
securities under the provisions of SFAS No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS No. 115") due to a provision in
most of the revenue bonds under which we have a right to require redemption
prior to maturity, although we can and may elect to hold them up to their
maturity dates unless otherwise modified. Accordingly, investments in revenue
bonds are carried at their estimated fair values, with unrealized gains and
losses reported in accumulated other comprehensive income.
61
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Because revenue bonds have a limited market, we estimate fair value for each
bond as the present value of its expected cash flows using a discount rate for
comparable tax-exempt investments. This process is based upon projections of
future economic events affecting the real estate collateralizing the bonds, such
as property occupancy rates, rental rates, operating cost inflation, market
capitalization rates and an appropriate market rate of interest.
When a revenue bond is underperforming with respect to certain of our standards
(for example, expectations of timely construction completion, actual occupancy
levels or actual debt service coverage) but we still expect to recover all
contractual payments, we value it based on our estimate of the fair value as
described above, although such fair value will not exceed the outstanding face
amount. If we determine it is probable that we will not receive all contractual
payments required when they are due, we deem a bond impaired and write it down
to its estimated fair value and record a realized loss in the income statement.
D. MORTGAGE SERVICING RIGHTS ("MSRS")
We recognize as assets the rights to service mortgage loans for others, whether
the MSRs are acquired through a separate purchase or through loans originated
and sold. Purchased MSRs are recorded at cost. For originated loans, we allocate
total costs incurred to the loan originated and the MSR retained based on the
relative fair values as determined by a third-party appraiser. All MSRs are
amortized in proportion to, and over the period of, estimated net servicing
income.
MSRs are assessed for impairment based on the fair value of the assets as
compared to carrying value. When we determine that a portion of the balance is
not recoverable, the asset and the valuation allowance are reduced to reflect
permanent impairment.
E. OTHER INVESTMENTS
We invest in partnership interests related to the real estate equity investment
funds we sponsor. Typically, we hold these investments for a short period until
we establish a new fund.
We account for our preferred equity investment in ARCap Investors, LLC ("ARCap")
using the equity method pursuant to Accounting Principles Board Opinion No. 18,
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK ("APB No. 18")
as interpreted by AICPA Statement of Position 78-9, ACCOUNTING FOR INVESTMENTS
IN REAL ESTATE VENTURES, EITF Issue D-46, ACCOUNTING FOR LIMITED PARTNERSHIP
INVESTMENTS and EITF 03-16, ACCOUNTING FOR INVESTMENTS IN LIMITED LIABILITY
COMPANIES.
Our equity in the earnings of ARCap is accrued at the preferred dividend rate of
12%, which equals the income allocated to us per the LLC agreement, unless ARCap
does not have earnings and cash flows adequate to meet this dividend
requirement.
F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and investments in short-term
instruments with an original maturity of three months or less. Restricted cash
includes collateral for borrowings within our existing securitization programs
and in accordance with Fannie Mae requirements.
G. DEFERRED COSTS
Prior to the RCC acquisition in November 2003 (see Note 3), we paid fees to RCC
for its activities performed as our Manager (see Note 17). The fees pertaining
to acquisitions of revenue bonds were capitalized and are amortized as a
reduction to interest income over the terms of the revenue bonds. Since the
acquisition, all fees paid for this purpose are charged to expense and the
intercompany charges are eliminated in consolidation. Direct costs relating to
unsuccessful acquisitions and all indirect costs relating to the revenue bonds
are charged to operations.
62
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We capitalize costs incurred in connection with our MBIA securitization program
(see Note 9) and amortize them on a straight-line basis over 10 years, which
approximates the average remaining term to maturity of the revenue bonds in this
program.
We capitalize costs incurred in connection with the issuance of preferred shares
of our Equity Issuer subsidiary and amortize them on a straight-line basis over
the period to the mandatory repurchase date of the shares. We record costs we
incur in connection with the issuance of Convertible Community Reinvestment Act
("CRA") Shares as a reduction of beneficial owners' equity of such shares.
H. FINANCIAL RISK MANAGEMENT AND DERIVATIVES
We account for derivative financial instruments pursuant to SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING Activities ("SFAS No. 133"),
as amended and interpreted. We record derivatives classified as cash flow hedges
at fair value, with changes in fair value recorded in accumulated other
comprehensive income, to the extent they are effective. If deemed ineffective,
we record the amount considered ineffective in the statement of income.
I. GOODWILL AND OTHER INTANGIBLE ASSETS
We test goodwill for impairment annually or if circumstances indicate there may
be reason to believe impairment has occurred. Any such impairment would be
charged to expense in the period in which it is determined. Should goodwill be
deemed impaired, the useful lives of identified intangible assets may need to be
reassessed and amortization accelerated, or such intangible assets could be
deemed impaired as well.
We amortize other intangible assets on a straight-line basis over their
estimated useful lives.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
As described above, our investments in revenue bonds, our MSRs and our liability
under the interest rate derivatives are carried at estimated fair values. We
have determined that the fair value of our remaining financial instruments,
including temporary investments, cash and cash equivalents, promissory notes
receivable, mortgage notes receivable and borrowings approximate their carrying
values at December 31, 2004 and 2003.
K. INCOME TAXES
We provide for income taxes in accordance with SFAS No. 109, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities.
L. EARNINGS PER SHARE
Basic income per share represents income allocated to Common and Convertible CRA
shareholders (see Note 14) by the weighted average number of Common and
Convertible CRA shares outstanding during the period. Diluted income per share
represents the weighted average number of shares outstanding during the period
and the dilutive effect of common share equivalents, calculated using the
treasury stock method.
The Convertible CRA shareholders are included in the calculation of shares
outstanding as they share the same economic benefits as common shareholders.
SCUs are not included in the calculation as they are antidilutive, since each
share is convertible to one common share while the allocations to SCU holders
exceed common dividends.
63
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
M. GUARANTEES AND MORTGAGE BANKING LOSS SHARING AGREEMENT
For guarantees issued since January 1, 2003, we record liabilities (included in
deferred income) equal to the fair values of the guarantee obligations
undertaken. For yield guarantees and other credit enhancement obligations for
which we receive fees, the fees received are considered the measure of fair
value, in accordance with FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS ("FIN 45"). For completion guarantees issued to lenders
for the underlying financing of properties, as required by an investment fund,
we generally recognize no liability upon inception of the guarantee as the
exposure is considered minimal and no fee is received.
For mortgage loans originated since January 1, 2003, we account for exposure to
loss under our servicing contract with Fannie Mae as guarantees under FIN 45,
recording an asset and a liability equal to the estimated portion of the
servicing cash flows deemed to represent compensation for our guarantee. We
offset cash received for the guarantee against the asset and credit interest
income for the change in asset due to the passage of time. The portion of the
liability representing an accrual for probable losses is adjusted as loss
estimates change and the portion representing our willingness to stand by as
guarantor is amortized over the expected life of the guarantee. We evaluate
loans owned for impairment on a specific loan basis based on debt service
coverage ratios.
N. MORTGAGE BANKING LOAN LOSS RESERVE
We place loans on a nonaccrual status when any portion of the principal or
interest is 90 days past due or earlier when concern exists as to the ultimate
collectibility of principal or interest. Loans return to accrual status when
principal and interest become current and anticipate they will be fully
collectible. An impaired loan is defined, as noted within accounting guidance,
when we determine it is probable that not all required contractual payments will
be made when due. Our primary tool to determine which loans are likely to incur
a loss is to evaluate the debt service coverage ratio based on our historical
experience with similar properties and the frequency of such losses. There were
no nonaccrual or impaired loans at December 31, 2004 or December 31, 2003.
We record provisions as an expense and as a contra-asset account on the balance
sheet under Mortgage Servicing Rights (See Note 5).
O. SHARE BASED COMPENSATION
We account for our share options in accordance with the provisions of SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"). Accordingly, we
record compensation cost, based on the options' estimated fair value, on a
straight-line basis over the vesting period. The fair values of option grants
are estimated using the Black-Scholes option-pricing model.
Prior to our acquisition of RCC in November 2003 (see Note 3), most options
granted were issued to non-employees rendering services to us under our
management agreement with RCC. As such, we estimated the fair value of the share
options at each period-end up to the vesting date, and adjusted the expense
accordingly. Upon the acquisition of RCC, such optionees became employees and
the fair value of the options at that date became the basis of amortization
until the respective vesting dates.
We record restricted share grants as a contra-account within shareholder's
equity. The balance recorded equals the number of shares issued multiplied by
the closing price of our common shares on the grant date. We amortize the cost
over the vesting period of the shares on a straight-line basis. Any shares
granted with immediate vesting are expensed when granted.
64
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS AND ENTITIES CONSOLIDATED PURSUANT TO FIN
46(R)
A. NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Interpretation 46(R), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES ("FIN 46(R)"). FIN 46(R) clarified the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Effective March
31, 2004, we adopted FIN 46(R). See below regarding the impact of our adopting
this standard.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS No.
150"). This statement requires that certain financial instruments that have the
characteristics of debt and equity be classified as debt. Pursuant to SFAS No.
150, we have classified mandatorily redeemable preferred securities previously
shown as mezzanine equity as a liability in our balance sheets, and the
dividends paid on such shares as interest expense; dividends related to prior
periods remain classified as income allocated to preferred shareholders of
subsidiary.
The following accounting pronouncements issued in 2002 and 2003 related to
disclosure only or had no material impact on our financial statements:
o SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64,
AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS, issued
in April 2002.
o SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, issued in July 2002.
o SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE, issued in December 2002.
o SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, issued in April 2003.
In December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED PAYMENT, which
replaces SFAS No. 123 and which we are required to adopt by the third quarter of
2005. As we have been accounting for share based payments following the
fair-value provisions of SFAS No. 123, we expect the impact of our adoption of
this standard to be immaterial.
B. FIN 46(R)
Through our acquisition of RCC (see Note 3), and in subsequent fund
originations, we became the general partner or equivalent in 90 entities in
which we have no financial investment. Typically, outside investors acquire all
partnership interest in an upper-tier, or investment partnership, or 100% of the
membership interest if structured as a limited liability company. The investment
partnership, in turn, invests as a limited partner in one or more lower-tier, or
operating partnerships, that own and operate the multifamily housing complexes.
Partners in the investment partnerships are most often corporations who are able
to utilize the tax benefits, which are comprised of operating losses and
Low-Income Housing Tax Credits ("LIHTCs").
Investment and operating partnerships in which the limited partners or limited
members do not have the right to remove us as the general partner or managing
member are variable interest entities ("VIEs") as defined by FIN 46(R). We have
concluded that, as the general partner or managing member for these type of
investments, we are the primary beneficiary as defined by FIN 46(R) because we
absorb the majority of the expected income and loss variability (as we are
entitled to fees and are the "decision maker" of the funds), and such
variability is disproportionate to our actual ownership interest, which is none.
In addition, our executive officers have nominal, indirect equity interests in
many of the funds. We have consolidated the assets and liabilities of these
entities in our balance sheet and have recorded their results of operations in
our statement of income beginning April 1, 2004. Upon adoption of FIN 46(R), we
recorded the assets and liabilities of the VIEs we consolidated at their
historical bases, which approximated their fair values at that date. As noted
65
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
above, the balance sheets and statements of operations consolidated in our
financial statements are as of and for the period ended September 30, 2004, the
latest date available.
NOTE 3 - ACQUISITIONS
A. RELATED CAPITAL COMPANY
On November 17, 2003, we acquired the ownership interests in and substantially
all of the businesses operated by Related Capital Company ("RCC") (other than
specific excluded interests) for approximately $346.0 million. The consideration
paid included:
o $50.0 million in cash, paid to one of the selling principals;
o approximately 15.9 million Special Common Units ("SCUs") in a newly
formed subsidiary (see Note 13); and
o approximately 15.9 million special preferred voting shares associated
with the SCUs (see Note 14).
The cash portion of the acquisition and associated acquisition costs were funded
by two bridge loans totaling $60.0 million (see Note 10). In connection with the
acquisition, we also established a restricted share program and issued
approximately 778,000 of our common shares to employees of RCC (other than the
selling principals) and granted 1,000,000 share options to our non-executive
chairman (see Note 15). In addition, our subsidiary issued approxi- mately
217,000 SCUs to employees of RCC (other than the selling principals).
We accounted for the acquisition as a purchase and allocated the cost based on
the estimated fair values of the assets acquired and liabilities assumed. We
valued intangible assets based on an appraisal by an independent valuation firm.
We recorded the excess of the purchase price over the net assets acquired
(including identified intangibles) as goodwill.
Prior to the acquisition, RCC acted as our external manager (the "Manager"). See
Note 17 regarding related party transactions prior to the acquisition and Note
16 regarding earnings per share treatment of allocations to the Manager prior to
the acquisition.
In recording our acquisition of RCC, we ascribed approximately $5.1 million of
the purchase price to the estimated future cash flows to be received from
general partner interests in investment partnership in which we maintain a
non-equity controlling partner. From time to time, the general partner of the
investment funds may be called upon to fund investment fund operations. In such
a case, we would advance the funds (on behalf of the general partner) and would
be repaid out of future operating cash flow or sale or refinancing proceeds
received by the investment fund.
B. PW FUNDING/CHARTERMAC MORTGAGE CAPITAL CORP.
In December 2001, we acquired 80% of the common shares of PW Funding, Inc.
("PWF"). During 2002 and 2003, we acquired another 7% of the common shares. The
aggregate cost of the shares, including debt assumed and repaid and true-up
payments subsequent to the purchase dates, was $40.0 million, all of which was
paid in cash. We accounted for the acquisition as a purchase and allocated the
purchase price to the assets and liabilities at their respective fair values,
including $7.9 million recorded as MSRs and $6.2 million recorded as goodwill.
See Note 21 regarding our 2005 purchase of the remaining shares of PWF, which we
have also renamed CharterMac Mortgage Capital Corp. ("CMC").
66
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 - REVENUE BONDS
The following tables summarize our revenue bond portfolio at December 31, 2004:
(Dollars in Thousands)
Units Face Amount of Bond Fair Value at 12/31/04
----------------- --------------------- ----------------------
Number % of %of %of
of Bonds Number Total $ Amount Total $ Amount Total
-------- ---------------- -----------------------------------------------
BY STATE:
- ---------------
Texas 67 11,270 24.3% $ 601,402 27.7% $ 609,854 28.6%
Georgia 24 6,019 13.0% 313,960 14.4% 305,355 14.3%
California 42 4,924 10.6% 241,008 11.1% 226,867 10.6%
Florida 25 4,150 9.0% 175,782 8.1% 165,466 7.8%
Missouri 11 2,203 4.7% 105,928 4.9% 95,948 4.4%
All others 104 17,794 38.4% 734,152 33.8% 731,517 34.3%
- -----------------------------------------------------------------------------------------
Subtotal 273 46,360 100.0% 2,172,232 100.0% 2,135,007 100.0%
Eliminations(1) (5) (541) -- (31,667) -- (34,287) --
- ---------------------------------------------------------------------------------------
Total 268 45,819 -- $2,140,565 -- $2,100,720 --
=======================================================================================
2003 Total 243 40,556 100.0% $1,838,801 100.0% $1,871,009 100.0%
=======================================================================================
BY PROPERTY
STATUS:
- ---------------
Stabilized 112 18,668 40.3% $ 772,084 35.5% $ 775,122 36.3%
Lease-up 86 16,429 35.4% 817,773 37.6% 805,760 37.7%
Construction 46 6,197 13.4% 355,580 16.4% 335,543 15.8%
Rehab 29 5,066 10.9% 226,795 10.5% 218,582 10.2%
- ---------------------------------------------------------------------------------------
Subtotal 273 46,360 100.0% 2,172,232 100.0% 2,135,007 100.0%
Eliminations(1) (5) (541) -- (31,667) -- (34,287) --
- ---------------------------------------------------------------------------------------
Total 268 45,819 -- $2,140,565 -- $2,100,720 --
=======================================================================================
2003 Total 243 40,556 100.0% $1,838,801 100.0% $1,871,009 100.0%
=======================================================================================
Pertinent Weighted Average Dates Annualized Base Interest
------------------------------------- ------------------------
Current Occupancy
Stated Optional on DSCR on
Interest Redemption %of Stablized Stabilized
Rate Put Date Date Maturity Date $ Amount Total Properties Properties
-----------------------------------------------------------------------------------------------------------
BY STATE:
- ---------------
Texas 7.04% Jun-19 Sept-18 Sep-41 $ 42,673 28.2% 87.0% 1.00x
Georgia 6.16% Aug-18 Apr-16 Feb-41 21,101 14.0% 84.8% 0.73x
California 6.79% Sep-18 Mar-17 Sep-38 16,910 11.2% 96.3% 1.30x
Florida 7.08% Mar-20 May-15 May-39 12,455 8.2% 94.4% 1.31x
Missouri 6.70% Oct-16 May-12 Apr-34 7,292 4.8% 89.1% 1.22x
All others 6.69% Aug-18 Aug-16 Dec-37 50,713 33.6% 89.6% 1.16x
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 151,144 100.0% 90.7% 1.14x
====================================================
Eliminations(1)
- ---------------
Total
===============
2003 Total $ 127,002 100.0% 91.8% 1.20x
=============== ====================================================
BY PROPERTY
STATUS:
- ---------------
Stabilized Jul-16 Mar-14 Oct-34 $ 55,940 37.0% 90.7% 1.14x
Lease-up May-19 Jul-16 Apr-41 56,809 37.6% N/A N/A
Construction Mar-21 Dec-20 Oct-43 23,782 15.7% N/A N/A
Rehab Apr-21 Apr-21 Nov-41 14,613 9.7% N/A N/A
- --------------- --------------------------------------------------------------------------------------------
Subtotal $ 151,144 100.0% 90.7% 1.14x
====================================================
Eliminations(1)
- ---------------
Total
===============
2003 Total $ 127,002 100.0% 91.8% 1.20x
=============== ====================================================
(1) These bonds are recorded as liabilities on the balance sheets of
consolidated VIEs (See Note 2) and are therefore eliminated in consolidation.
67
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 - REVENUE BONDS (CONTINUED)
(Dollars in Thousands)
Units Face Amount of Bond
---------------- ---------------------
Number % of %of
of Bonds Number Total $ Amount Total
-------- ---------------- ---------------------
BY PUT DATE:
- ----------------
No put date 50 1,019 2.2% $ 81,233 3.7%
With 6 months
notice 2 400 0.9% 8,325 0.4%
2005 6 1,380 3.0% 59,925 2.8%
2006-2010 6 1,404 3.0% 57,250 2.6%
2011-2015 9 2,414 5.2% 94,263 4.3%
2016-2020 160 30,919 66.7% 1,448,907 66.7%
2021-2025 28 6,381 13.8% 312,878 14.4%
2026-2030 11 2,339 5.0% 102,451 4.7%
2031-2035 1 104 0.2% 7,000 0.4%
- ------------------------------------------------------------------
Subtotal 273 46,360 100.0% 2,172,232 100.0%
Eliminations (1) (5) (541) -- (31,667) --
- ------------------------------------------------------------------
Total 268 45,819 -- $2,140,565 --
==================================================================
2003 Total 243 40,556 100.0% $1,838,801 100.0%
==================================================================
BY MATURITY DATE:
- -----------------
2006-2010 20 640 1.4%$ 39,658 1.8%
2011-2015 20 293 0.6% 23,945 1.2%
2016-2020 17 1,352 2.9% 79,042 3.6%
2021-2025 14 1,024 2.2% 59,520 2.7%
2026-2030 10 2,132 4.6% 68,847 3.2%
2031-2035 11 2,520 5.4% 94,424 4.3%
2036-2040 56 11,217 24.2% 450,227 20.7%
2041-2045 115 24,835 53.6% 1,233,469 56.8%
2046 and after 10 2,347 5.1% 123,100 5.7%
- ------------------------------------------------------------------
Subtotal 273 46,360 100.0% 2,172,232 100.0%
Eliminations (1) (5) (541) -- (31,667) --
- ------------------------------------------------------------------
Total 268 45,819 -- $2,140,565 --
==================================================================
2003 Total 243 40,556 100.0% $1,838,801 100.0%
==================================================================
(Dollars in Thousands)
Fair Value at 12/31/04
------------------------
Current
Stated
%of Interest
$ Amount Total Rate
-------------------------------------
BY PUT DATE:
- ----------------
No put date $ 77,024 3.6% 7.16%
With 6 months
notice 8,928 0.4% 7.74%
2005 56,353 2.6% 7.17%
2006-2010 56,678 2.7% 7.47%
2011-2015 96,005 4.5% 7.02%
2016-2020 1,434,441 67.2% 6.92%
2021-2025 293,009 13.8% 5.61%
2026-2030 105,630 4.9% 6.64%
2031-2035 6,939 0.3% 5.50%
- -------------------------------------------------------
Subtotal 2,135,007 100.0% 6.75%
===================
Eliminations (1) (34,287)
- -------------------------------
Total $2,100,720
===============================
2003 Total $1,871,009 100.0% 6.93%
=======================================================
BY MATURITY DATE:
- -----------------
2006-2010 $ 36,069 1.7% 7.30%
2011-2015 20,951 1.0% 6.12%
2016-2020 75,390 3.5% 6.99%
2021-2025 57,668 2.7% 7.63%
2026-2030 70,078 3.3% 7.02%
2031-2035 95,578 4.5% 6.67%
2036-2040 453,569 21.2% 7.17%
2041-2045 1,211,732 56.8% 6.67%
2046 and after 113,972 5.3% 5.30%
- -------------------------------------------------------
Subtotal 2,135,007 100.0% 6.75%
===================
Eliminations (1) (34,287)
- -------------------------------
Total $2,100,720
===============================
2003 Total $1,871,009 100.0% 6.93%
=======================================================
(1) These bonds are recorded as liabilities on the balance sheets of
consolidated VIEs (See Note 2) and are therefore eliminated in
consolidation.
68
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reconciliation of revenue bonds: 2004 2003 2002
- ------------------------------------------------------ ----------- ----------- -----------
(In thousands)
Balance at beginning of period $ 1,871,009 $ 1,579,590 $ 1,137,715
Acquisitions and additional fundings 325,037 432,915 457,060
Repayments (26,477) (83,795) (108,630)
Regular principal payments (12,589) (16,136) (4,986)
Carrying amount less than repayment proceeds 400 2,472 4,273
Advance held by Trustee -- (3,643) --
Impairment losses (610) (1,759) (920)
Net change in fair value (20,766) (38,559) 95,126
Accretion of deferred income and purchase accounting
adjustment (97) (76) (48)
Reclassification to other assets (900) -- --
----------- ----------- -----------
Subtotal 2,135,007 1,871,009 1,579,590
Less: eliminations (1) (34,287) -- --
----------- ----------- -----------
Balance at close of period $ 2,100,720 $ 1,871,009 $ 1,579,590
=========== =========== ===========
(1) These bonds are recorded as liabilities on the balance sheets of
consolidated VIEs (See Note 2) and are therefore eliminated in
consolidation.
Certain revenue bonds provide for "participating interest" which is equal to a
percentage of net property cash flow of the net sale or refinancing proceeds.
Bonds that contain these provisions are referred to as "participating" while the
rest are "non-participating". Both the stated and participating interest on the
revenue bonds are exempt from federal income tax. Participating interest
included in interest revenue was approximately $230,000 in 2004, $2.0 million in
2003 and $3.1 million in 2002.
As of December 31, 2004, approximately $2.0 billion of our revenue bonds were
securitized or pledged as collateral in relation to financing arrangements (see
Note 9).
The amortized cost basis of our portfolio of revenue bonds, and the related
unrealized gains and losses were as follows at December 31:
(In thousands) 2004 2003
----------- -----------
Amortized cost basis $ 2,098,944 $ 1,814,180
Gross unrealized gains 50,716 65,394
Gross unrealized losses (14,653) (8,565)
----------- -----------
Subtotal/fair value 2,135,007 1,871,009
Less: eliminations (1) (34,287) --
----------- -----------
Total fair value per balance sheet $ 2,100,720 $ 1,871,009
=========== ===========
(1) These bonds are recorded as liabilities on the balance sheet of entities
consolidated pursuant to FIN 46(R) (See Note 2) and are therefore eliminated
in consolidation.
69
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value and gross unrealized losses of our revenue bonds aggregated by
length of time that individual bonds have been in a continuous unrealized loss
position is summarized in the table below:
(Dollars in thousands) December 31, 2004
------------------------------------------------
Less than 12 Months
12 Months or More Total
-------------- ------------- --------------
Number 42 39 81
Fair value $ 392,856 $ 217,196 $ 610,052
Gross unrealized loss $ (6,543) $ (8,110) $ (14,653)
December 31, 2003
------------------------------------------------
Less than 12 Months
12 Months or More Total
-------------- ------------- --------------
Number 54 8 62
Fair value $ 216,743 $ 36,660 $ 253,403
Gross unrealized loss $ (5,789) $ (2,777) $ (8,566)
The unrealized losses related to these revenue bonds are due solely to changes
in interest rates, in that we calculate present values based upon future cash
flows from the bonds and discount these cash flows at the current rate on our
recent bond issuances; as rates rise, the fair value of our portfolio decreases.
We have the intent and ability to hold these bonds until recovery and have
therefore concluded that these declines in value are temporary. For discussion
of other-than temporary impairments, see BOND IMPAIRMENT below.
The following is a table summarizing the maturity dates of revenue bonds we hold
as of December 31, 2004:
Outstanding Weighted
Bond Average
(In thousands) Amount Fair Value Interest Rate
- ------------------------------ ----------- ----------- -------------
Due between one and five years $ 35,549 $ 33,474 7.08%
Due after five years 2,071,786 2,101,533 6.75%
----------- ----------- -------------
Total/weighted average 2,107,335 2,135,007 6.75%
===========
Less: eliminations (1) (31,063) (34,287)
----------- -----------
Total $ 2,076,272 $ 2,100,720
=========== ===========
(1) These bonds are recorded as liabilities on the balance sheet of entities
consolidated pursuant to FIN 46(R) (See Note 2) and are therefore eliminated
in consolidation.
The principal and interest payments on each revenue bond are payable primarily
from the cash flows of the underlying properties, including proceeds from a sale
of a property or the refinancing of the mortgage loan securing a bond. None of
the revenue bonds constitutes a general obligation of any state or local
government, agency or authority. The structure of each mortgage loan mirrors the
structure of the corresponding revenue bond that it secures. In order to protect
the tax-exempt status of the revenue bonds, the owners of the underlying
properties are required to enter into agreements to own, manage and operate the
properties in accordance with requirements of the Internal Revenue Code of 1986,
as amended.
No single revenue bond provided interest income that exceeded 10% of our total
revenue for the years ended December 31, 2004, 2003, or 2002. Other than those
detailed in the table on page 67, based on face amount, no state comprises more
than 10% of the total at December 31, 2004 or 2003.
70
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All of our revenue bonds bear fixed base interest rates and, to the extent
permitted by existing regulations, may also provide for contingent interest and
other features. Terms are expected to be five to 35 years, although we may have
the right to cause repayment prior to maturity through a mandatory redemption
feature (five to seven years with up to six month's notice). In some cases, the
bonds call for amortization or "sinking fund" payments, generally at the
completion of rehabilitation or construction, of principal based on 30 to 40
year level debt service amortization schedules.
Revenue bonds are generally not subject to optional prepayment during the first
five to ten years of our ownership and may carry various prepayment penalty
structures. Certain revenue bonds may be purchased at a discount from their face
value.
In selected circumstances, and generally only in connection with the acquisition
of tax-exempt revenue bonds, we may acquire a small amount of taxable bonds:
o which we may be required to acquire in order to satisfy state
regulations with respect to the issuance of tax-exempt bonds; and
o to fund certain costs associated with the issuance of the bonds, that
under current law cannot be funded by the proceeds of the bond itself.
Revenue bonds acquired and/or additional fundings made during 2004 are
summarized below:
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Rate Interest Rate
- ------------------------------------------------- ------------- ------------- --------------
Construction/rehabilitation properties $290,907 5.45% 6.49%
Additional funding of existing bonds 34,130 3.60% 4.28%
------------- ------------- --------------
Total 2004 acquisitions $325,037 5.26% 6.26%
============= ============= ==============
Revenue bonds repaid during 2004 are summarized below:
Outstanding Realized
(In thousands) Value Proceeds Gains
- ------------------------------------------------- -------------- ------------- --------------
Non-participating revenue bonds stabilized $26,470 $26,870 $217
============== ============= ==============
Revenue bonds acquired and/or additional fundings made during 2003 are
summarized below:
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Rate Interest Rate
- ------------------------------------------------- ------------- ------------ --------------
Construction/rehabilitation properties $421,595 6.21% 6.58%
Additional funding of existing bonds 11,320 7.00% 7.00%
------------- ------------ --------------
Total 2003 acquisitions $432,915 6.23% 6.59%
============= ============ ==============
71
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue bonds and notes repaid during 2003 are summarized below:
Outstanding Realized
(In thousands) Value Proceeds Gains (Losses)
- ------------------------------------------------- -------------- ------------- --------------
Participating revenue bonds stabilized $21,330 $23,550 $ 2,220
Non-participating revenue bonds stabilized 55,465 60,346 (269)
Notes stabilized 245 245 --
-------------- ------------- --------------
Total 2003 dispositions $77,040 $84,141 $ 1,951
============== ============= ==============
BOND IMPAIRMENT
In the third quarter of 2004, in light of the underperformance of one of our
investments, which will necessitate the temporary revision of payment terms, we
recognized an impairment loss of approximately $610,000.
In 2003, because of developer defaults and a softening of the market of an
underlying property, we determined that one of our revenue bonds was impaired,
and wrote down the bond to its estimated fair value, recognizing an impairment
loss of approximately $1.8 million. The first mortgage was foreclosed upon in
October 2004. The bonds were subsequently retired and CharterMac owns the land
valued at $900,000.
In 2001 and 2002, the borrowers of one of our revenue bonds failed to make
regular interest payments, we determined the bond was impaired and its trustee
foreclosed on the underlying property. In 2002, we began marketing the property
and it was ultimately sold in 2003. In connection with this revenue bond, we
recorded an impairment loss of approximately $920,000 in 2002 and a loss on
disposal of approximately $631,000 in 2003.
NOTE 5 - MORTGAGE SERVICING RIGHTS
The components of the change in MSRs and related reserves were as follows:
Servicing Assets (In thousands)
- ------------------------------------------------------- ---------------
Balance at December 31, 2002 $35,594
MSRs capitalized 6,490
Amortization (6,259)
Increase in reserves (2,474)
---------------
Balance at December 31, 2003 33,351
MSRs capitalized 6,588
Amortization (7,839)
Decrease in reserves 266
---------------
Balance at December 31, 2004 $32,366
===============
Reserve for Loan Loss Reserves of Servicing Assets
- -------------------------------------------------------
Balance at December 31, 2002 $ 4,271
Additions 2,474
---------------
Balance at December 31, 2003 6,745
Reductions (266)
---------------
Balance at December 31, 2004 $ 6,479
===============
72
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of the MSRs, based upon third-party valuations, were
$39.3 million at December 31, 2004 and $39.7 million at December 31, 2003. The
significant assumptions used in estimating the fair values at December 31, 2004
were as follows:
Fannie Mae FHA Freddie Mac
--------------- -------------- ---------------
Weighted average discount rate 17.14% 16.07% 17.17%
Weighted average pre-pay speed 11.40% 10.09% 13.96%
Weighted average lockout period 4.8 years 3.6 years 6.9 years
Cost to service loans $2,463 $1,259 $1,956
Acquisition cost (per loan) $1,500 $ 500 $1,482
The table below illustrates hypothetical, fair values of MSRs at December 31,
2004 caused by assumed immediate adverse changes to key assumptions which are
used to determine fair value.
(In thousands)
Fair value of MSRs at December 31, 2004 $39,264
Prepayment speed:
Fair value after impact of +10% change 38,954
Fair value after impact of -10% change 39,570
Fair value after impact of +20% change 38,669
Fair value after impact of -20% change 39,903
Discount rate:
Fair value after impact of +10% change 37,279
Fair value after impact of -10% change 41,477
Fair value after impact of +20% change 35,490
Fair value after impact of -20% change 43,960
Default rate:
Fair value after impact of +10% change 39,290
Fair value after impact of -10% change 39,371
Fair value after impact of +20% change 39,178
Fair value after impact of -20% change 39,705
NOTE 6 - OTHER INVESTMENTS
Investments other than revenue bonds consisted of:
(In thousands) 2004 2003
- -------------------------------------------------------------- ----------- -----------
Investment in equity interests in LIHTC properties $ 40,132 $24,644
Investment in properties under development 3,157 1,994
Investment in ARCap 19,054 19,054
Capri Capital loan 84,000 --
Mortgage loans receivable 27,480 21,870
Other investments 13,683 29,938
----------- -----------
Total other investments $ 187,506 $97,500
=========== ===========
73
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INVESTMENTS IN EQUITY INTERESTS IN LIHTC PROPERTIES
Through a subsidiary, we acquire equity interests in property ownership entities
on a short-term basis, and also invest funds with third-party developers to
develop properties for inclusion in Fund Management offerings to investors. We
expect to recapture such amounts from the proceeds of the equity and debt
financing when the investment fund has closed. The developer also guarantees
repayment of these investments. Substantially all of these investments are
pledged as collateral for our borrowings under a warehouse facility (see Note
10).
INVESTMENTS IN PROPERTIES UNDER DEVELOPMENT
We invest funds in affiliated entities, whereby subsidiaries co-develop
properties to be sold to investment funds. Development investments include
amounts invested to fund pre-development and development costs. Investment funds
we sponsor acquire the limited partnership interests in these properties. We
expect to recapture these amounts from various sources attributable to the
properties, including capital contributions of investments funds, cash flow from
operations, and/or from co-development partners, who in turn have cash flow
notes from the properties. In connection with our co-development agreements,
affiliates of CharterMac issue construction completion, development deficit
guarantees and operating deficit guarantees to the lender and investment funds
(for the underlying financing of the properties) on behalf of our subsidiary
(see Note 20).
INVESTMENT IN ARCAP
We hold approximately 740,000 units of Series A Convertible Preferred Membership
Interests in ARCap Investors, LLC, a provider of portfolio management services.
The cost was $25 per unit, and the shares carry a preferred return of 12%.
CAPRI CAPITAL LOAN
In July 2004, CM Investor LLC ("CM Investor"), one of our subsidiaries, provided
an interim loan in the principal amount of $84.0 million ("Interim Loan") to
Capri Capital Limited Partnership ("Capri"), which bears interest at a rate of
11.5% per year and matures on January 15, 2005 subject to extension.
We funded the Interim Loan through bridge loans from Bank of America (See Note
10).
See Note 21 regarding the extension and conversion of this loan and the
subsequent acquisition of a Capri subsidiary.
MORTGAGES LOANS RECEIVABLE
CMC originates mortgages pursuant to purchase agreements and holds them until
settlement of their sale is completed. We are entitled to the interest income
paid by the borrower during this holding period.
74
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7 - DEFERRED COSTS
The components of deferred costs at December 31 were as follows:
(In thousands) 2004 2003
- -------------------------------------------------------------- ------------ ------------
Deferred bond selection costs (1) $ 43,989 $ 44,888
Deferred financing costs 15,214 13,027
Deferred costs relating to the issuance of preferred shares
of subsidiary (see Note 13) 12,890 10,445
Other deferred costs 4,802 3,511
------------ ------------
76,895 71,871
Less: Accumulated amortization (19,635) (13,463)
------------ ------------
$ 57,260 $ 58,408
============ ============
(1) Primarily represents the bond selection fee paid to the Manager prior to
our acquisition of RCC (see Notes 3 and 17).
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
We adopted SFAS No. 141, BUSINESS COMBINATIONS, in 2001 and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, in 2002 and determined that our previously
capitalized goodwill met the SFAS No. 141 criteria for recognition as intangible
assets apart from goodwill. Accordingly, we continue to amortize the remaining
balances over their remaining useful lives, subject to impairment testing and,
therefore, the adoption of SFAS No. 142 did not materially affect our results of
operations.
A. GOODWILL
The following table provides information regarding goodwill by segment:
Fund Mortgage
(In thousands) Management Banking Total
- ----------------------------------- ---------- ---------- ----------
Balance at December 31, 2002 $ -- $ 4,793 $ 4,793
Additions 209,164 788 209,952
---------- ---------- ----------
Balance at December 31, 2003 209,164 5,581 214,745
Additions 916 663 1,579
Reductions (9,927) -- (9,927)
---------- ---------- ----------
Balance at December 31, 2004 $ 200,153 $ 6,244 $ 206,397
========== ========== ==========
The 2001 CMC acquisition agreement stipulated that we make periodic "true-up"
and contingent payments to the original CMC shareholders for a period of up to
three years from the acquisition date. Pursuant to this agreement, we paid
approximately $3.0 million in 2002, $700,000 in 2003 and $663,000 in 2004 and
recorded the payments as additional goodwill. These true-up payments were based
on:
o the increase in the value of mortgage servicing rights due to certain
loans closing;
o changes between the audited balance sheet used for the initial
purchase price and the audited balance sheet at December 31, 2001;
o payments of certain servicing fees; and
o forward conversions of previously committed loans.
75
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, we paid approximately $583,000 and $91,000 in 2002 and 2003,
respectively, for various costs we incurred in relation to the acquisition of
CMC, which were also recorded as goodwill.
The reduction to Fund Management goodwill in 2004 pertained to the conversion of
SCUs (see Note 13), the deferred tax impact of which served to effectively lower
the purchase price of RCC, partially offset by adjustments to estimated
liabilities recorded at the time of the acquisition.
B. OTHER INTANGIBLE ASSETS
The components of other identified intangible assets are as follows:
Estimated
Useful
Life Accumulated
(In thousands) (in Years) Carrying Amount Amortization Net
- ------------------------------- ---------- ------------------ ------------------ ------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
Amortized identified intangible
assets:
Trademarks and trade names 21.0 $ 25,100 $ 25,100 $ 1,338 $ 143 $ 23,762 $ 24,957
Partnership service
contracts 9.4 47,300 47,300 5,661 604 41,639 46,696
Transactional
relationships 16.7 103,000 103,000 9,436 1,006 93,564 101,994
General partner interests 9.0 5,100 5,100 634 68 4,466 5,032
Joint venture developer
relationships 5.0 4,800 4,800 1,075 115 3,725 4,685
Other 9.3 4,427 4,427 2,703 2,227 1,724 2,200
---------- -------- -------- -------- -------- -------- --------
Subtotal/weighted average 14.5 189,727 189,727 20,847 4,163 168,880 185,564
Unamortized Identified
Intangible Assets:
Mortgage Banking Licenses 8,639 8,639 -- -- 8,639 8,639
-------- -------- -------- -------- -------- --------
Total Identified Intangible
Assets $198,366 $198,366 $ 20,847 $ 4,163 $177,519 $194,203
======== ======== ======== ======== ======== ========
Amortization Expense Recorded $ 16,684 $ 2,413
======== ========
The estimated amortization expense for intangible assets for the next five years
is as follows:
(In thousands)
2005 $16,207
2006 $16,207
2007 $16,207
2008 $16,092
2009 $14,658
The amortization of other identified intangible assets (approximately $477,000
per year) is included as a reduction to revenue bond interest income as they
pertain to the acquisition of such bond investments.
C. IMPAIRMENT
The initial gross carrying amounts for identified intangible assets were based
on third party valuations. We review goodwill and intangible assets annually for
impairment. Through December 31, 2004, we have concluded that these assets have
not been impaired.
76
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 - FINANCING ARRANGEMENTS
Following are the components of financing arrangements at December 31:
(In thousands) 2004 2003
- ------------------------- ---------- ----------
P-FLOATs/RITES $ 462,928 $ 316,508
MBIA:
Floater Certificates 405,500 383,500
Auction Certificates 100,000 100,000
Fixed-Rate Securitization 100,000 100,000
---------- ----------
Total $1,068,428 $ 900,008
========== ==========
A. P-FLOATS/RITES PROGRAM ("P-FLOATS")
We have securitized certain revenue bonds through the Merrill Lynch Pierce
Fenner & Smith Incorporated ("Merrill Lynch") P-FLOATs/RITES program. Under this
program, we transfer certain revenue bonds, or trust certificates that represent
senior interests in the bonds, to Merrill Lynch and they deposit each revenue
bond into an individual special purpose trust together with a credit enhancement
guarantee. A credit enhanced custodial receipt is issued and deposited into a
second trust. Two types of securities are then issued by that trust:
(1) Puttable Floating Option Tax-Exempt Receipts ("P-FLOATs"), short-term
senior securities which bear interest at a floating rate that is reset
weekly as the lowest rate that will clear the market at par; and
(2) Residual Interest Tax Exempt Securities ("RITES"), subordinate
securities which receive the residual interest payment after payment
of P-FLOAT interest and ongoing transaction fees.
The P-FLOATs are sold to third party investors and the RITES are generally sold
back to us. We have the right, with at least 14 days notice to the trustee, to
purchase the outstanding P-FLOATs and withdraw the underlying revenue bonds or
trust certificates from the trust. When the revenue bonds or trust certificates
are deposited into the P-FLOAT Trust, we receive the proceeds from the sale of
the P-FLOATs less certain transaction costs. In certain other cases, Merrill
Lynch may directly buy the revenue bonds from local issuers, deposit them in the
trust, sell the P-FLOAT security to investors and then the RITES to us.
Due to the repurchase right, we account for the net proceeds received upon
transfer as secured borrowings and, accordingly, continue to account for the
revenue bonds as assets.
To facilitate the securitization, we have pledged certain additional revenue
bonds as collateral for the benefit of the credit enhancer or liquidity
provider. At December 31, 2004, the total carrying amount of such additional
revenue bonds pledged as collateral was approximately $217 million.
During 2004, we repaid borrowings of approximately $61.9 million and redeemed
the corresponding bonds. Additionally we transferred 30 bonds, against which we
borrowed approximately $211.4 million.
Our annualized cost of funds relating to its secured borrowings under this
program (calculated as a percentage of the weighted average secured borrowings)
was approximately 2.20% in 2004, 2.03% in 2003 and 2.40% in 2002. The related
amount of $4.6 million in 2004, $4.3 million in 2003 and $4.0 million in 2002 is
included in interest expense in the statement of income. The year end interest
rate at December 31, 2004 was 2.12%, excluding fees.
B. MBIA SECURITIZATION PROGRAMS
MBIA, a financial insurer, has entered into a surety commitment with us, through
October 2011, whereby MBIA has agreed to credit-enhance certain pools of bonds
77
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in exchange for certain fees. As of December 31, 2004, the maximum amount of
capital that could be raised under our securitization programs with MBIA was
$650.0 million, with a maximum of $425.0 million in Floater Certificates and a
maximum of $225.0 in Auction Certificates, as described below.
Under the MBIA securitization program, we contribute revenue bonds to specific
"Series Trusts," seven of which had been created as of December 31, 2004. Two of
the trusts contain only bonds secured by properties in California while the rest
are National (i.e., non-state specific). Each Series Trust issues two equity
certificates:
o a Senior Certificate which is deposited into a "Certificate Trust"
which, in turn, issues and sells "Floater Certificates" or "Auction
Certificates" representing proportional interests in the Senior
Certificate to new investors; and
o a "Residual Certificate," issued to us, which represents the remaining
beneficial ownership interest in each Series Trust.
The surety commitment by MBIA can be used to enhance certificates sold under
"low-floater" and "auction rate" programs.
o The low-floater certificates have an interest rate that is reset
weekly. The low-floater program requires liquidity due to a put option
available to the buyers of the certificates. The liquidity is
currently supplied by a consortium of highly-rated banks whose
commitments are one-year renewable contracts. We expect to renew or
replace such commitments upon expiration of their terms.
o The auction rate certificates have rates that are reset periodically
through a Dutch auction process. This program does not require
liquidity as the buyers of the securities do not have the option to
put their certificates back to the seller.
The effect of our MBIA securitization is that a portion of the interest we
receive on certain revenue bonds is distributed to the holders of the Floater
Certificates or Auction Rate Certificates, with any remaining interest remitted
to us via the Residual Certificate. At December 31, 2004, the total carrying
amount of revenue bonds pledged as collateral for these obligations was
approximately $577 million.
During 2003, we refined the MBIA securitization programs, placing certain
revenue bonds in trusts in connection with our guarantees of specified rate of
returns to third party investors in mortgage pools (see Note 20). We agreed to
subordinate approximately 50% of the par value of the revenue bonds that are
secured by the properties in these pools. These trusts issued Class A
Certificates, which were securitized through the P-FLOATs/RITES program and
Class B Certificates, held by us as excess collateral to support our obligations
to the Merrill Lynch as Primary Guarantor under credit enhancement agreements
(see Note 20).
In 2003, we entered into a new form of securitization, under which Auction
Certificates secured by an open pool of revenue bonds were auctioned through UBS
Financial Services Inc. We placed revenue bonds with an aggregate par value of
approximately $143.0 million into a trust (approximately $81.0 million of these
bonds had been previously securitized with MBIA). In order to move the bonds to
the new trust, we redeemed low-floater certificates aggregating approximately
$118 million. In October 2003, the new trust issued $100.0 million of auction
rate certificates. These certificates had an initial rate of 1% which will be
reset every 35 days through a Dutch auction process.
Our floating rate cost of funds relating to bonds securitized with MBIA
(calculated as interest expense plus recurring fees as a percentage of the
weighted average amount of the outstanding Senior Certificate) was approximately
2.9% in 2004, 2.2% in 2003 and 2.4% in 2002. The year end interest rate at
December 31, 2004 was 2.11%, excluding fees.
78
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
C. FIXED RATE SECURITIZATION
In April 2003, we closed on a transaction whereby we contributed revenue bonds
with an aggregate par value of approximately $196.8 million into a trust. The
trust then sold $100.0 million of Class A Certificates to various institutional
investors while we retained subordinated Class B Certificates totaling
approximately $96.8 million; we will hold the Class B Certificates until the
trust is terminated. The Class A Certificates accrue interest at 3.25% per annum
for two years. At our option, the Class A Certificates are subject to mandatory
tender for the outstanding certificate balance plus accrued interest on March
15, 2005. If we do not exercise our option to terminate the trust then, the
Class A Certificates are subject to remarketing and to mandatory tender for
purchase and cancellation on March 15, 2005, at which time we intend to remarket
this securitization through the P-FLOATs program.
D. RESTRICTED ASSETS
Certain of our subsidiaries hold revenue bonds which at December 31, 2004, had
an aggregate carrying amount of approximately $1.97 billion that serve as
collateral for securitized borrowings or are securitized. The total securitized
borrowings at December 31, 2004 were approximately $662.9 million. The
subsidiaries holding these bonds had net assets at December 31, 2004, of
approximately $695.2 million.
NOTE 10 - NOTES PAYABLE
Notes payable included the following at December 31:
(In thousands) 2004 2003
- ---------------------------- -------- --------
PWF acquisition loan $ 21,809 $ 25,217
CMC warehouse line 27,480 21,870
Equity Issuer revolving line -- 21,730
RCC acquisition lines -- 60,000
RCC warehouse line 39,932 24,533
Capri acquisition lines 85,000 --
Other 233 --
-------- --------
Total notes payable $174,454 $153,350
======== ========
In connection with the acquisition of PWF (See Note 3), we entered into a loan
commitment which expires in December 2006 and bears interest at LIBOR plus
2.25%. The rate was 4.67% and 3.37% at December 31, 2004 and 2003, respectively.
The loan requires quarterly payments of principal and interest over a ten-year
amortization period, with a balloon payment for the balance upon expiration.
CMC has a $100.0 million secured, revolving mortgage warehouse facility, subject
to annual renewal. The interest rate for each warehouse advance is the Federal
Funds rate at the end of each year plus 1.25%. The rate was 3.49% and 2.24% at
December 31, 2004 and 2003, respectively.
Our Equity Issuer subsidiary has entered into a $75.0 million secured revolving
tax-exempt bond warehouse line of credit with Bank of America Securities, Inc.
and Wachovia Securities, Inc. This facility has a built in accordion feature
allowing up to a $25.0 million increase for a total size of $100.0 million and a
term of two years expiring in March 2005, plus a one year extension at our
option. This facility bears interest at 31, 60, 90, or 180-day reserve adjusted
LIBOR plus 1.50%, or prime plus 0.25%, at our option. During the third quarter
of 2003, Citibank became the third lender under this facility. At December 31,
2004, there were no outstanding borrowings. At December 31, 2003, the rate was
2.62%.
We entered into $50.0 million and $10.0 million acquisition bridge loan
facilities with Wachovia Bank in order to fund the cash portion, fees and
expenses of the RCC acquisition in November 2003 (see Note 3). These bridge loan
facilities had nine-month terms with two 90-day extension options. We pledged
our common ownership interest in our Equity Issuer subsidiary as security under
79
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
these facilities. The facilities were pre-payable at any time and bore interest
at LIBOR plus 1.50% and 2.4%, respectively. We repaid and terminated the
facilities in 2004. At December 31, 2003, the rate was 2.62% and 3.52%.
RCC has entered into a warehouse facility in the amount of $90.0 million with
Bank of America, Merrill Lynch, C.D.C. and Citicorp, USA. This facility has a
maturity date of October 28, 2005 and bears interest, at our option, at either
LIBOR plus 2% or the prime rate plus .125%. The weighted average net rate was
5.13% and 3.73% at December 31, 2004 and 2003, respectively. This facility is
collateralized by a lien on certain limited partnership interests (See Note 6).
Payments of interest only are due on a monthly basis. We have the option to
extend this facility upon its maturity in 2005, renegotiate its terms or arrange
alternate sources of financing to repay the outstanding balance.
The Capri acquisition lines with Bank of America bear interest at LIBOR plus
1.65% and mature in July 2005. The weighted average interest rate on the loans
was 4.02% at December 31, 2004.
Payments of the notes are due as follows:
(In thousands) Payments Due
------------
2005 $155,371
2006 2,726
2007 2,726
2008 13,631
2009 --
THEREAFTER --
---------
Total $174,454
=========
NOTE 11 - FINANCIAL RISK MANAGEMENT AND DERIVATIVES
Our revenue bonds generally bear fixed rates of interest, but the P-FLOATs and
MBIA securitizations (see Note 9) incur interest expense at variable rates,
exposing us to interest rate risks. We have established a policy for risk
management and our objectives and strategies for the use of derivative
instruments to potentially mitigate such risks. We currently manage a portion of
our interest rate risk through the use of swaps indexed to the BMA rate, the
most widely used tax-exempt floating rate index. Under each swap agreement, for
a specified period of time we are required to pay a fixed rate of interest on a
specified notional amount to the transaction counterparty and we receive a
floating rate of interest equivalent to the BMA index. At inception, we
designate these swaps as cash flow hedges on the variable interest payments on
our floating rate securitizations. We assess both at the inception of the hedge
and on an ongoing basis whether the swap agreements are effective in offsetting
changes in the cash flows of the hedged financing. Any ineffectiveness in the
hedging relationship is recorded in earnings. Net amounts payable or receivable
under the swap agreements are recorded as adjustments to interest expense. Net
swap payments we receive, if any, will be taxable income to us and, accordingly,
to shareholders. A possible risk of such swap agreements is the possible
inability of the counterparty to meet the terms of the contracts with us;
however, there is no current indication of such an inability.
As of December 31, 2004, we have one swap with Merrill Lynch Capital Services,
Inc. as counterparty with a notional amount of $50.0 million fixed at an annual
rate of 3.98%, which began in January 2001 and expires in January 2006. The
average BMA rate was 1.22% in 2004, 1.03% in 2003 and 1.38% in 2002.
80
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We have entered into additional swap agreements as follows:
Notional
Amount
Counterparty (in millions) Inception Date Expiration Date Rate
- ------------------------------------------------------------------------------------------------------
Bank of America $100.0 January 2005 January 2007 2.56%
Bank of America 50.0 January 2005 January 2008 2.00% in 2005,
2.78% in 2006 and
3.27% in 2007
Bank of America 50.0 January 2005 January 2008 2.86%
Bank of America 50.0 January 2005 January 2009 3.08%
RBC Capital Markets 100.0 January 2005 January 2009 3.075%
Bank of America 100.0 January 2005 January 2010 3.265%
We evaluate our interest rate risk on an ongoing basis to determine whether it
would be advantageous to engage in any further hedging transactions.
The swaps are recorded at fair market value each accounting period. We record
changes in market values in accumulated other comprehensive income to the extent
that the hedges are effective in achieving offsetting cash flows. For the swap
in place and others that have expired, there was no ineffectiveness in the
hedging relationship during the three years ended December 31, 2004. For all of
the swaps, we expect that the hedging relationships will be effective in
achieving offsetting changes in cash flow throughout their terms.
At December 31, 2004, our interest rate swaps were recorded in other assets on
the consolidated balance sheets at an aggregate fair value of $835,700. Interest
expense includes approximately $1.6 million in 2004, $4.1 million in 2003 and
$3.5 million in 2002, for amounts paid or payable under the swap agreements.
We estimate that approximately $729,000 of the net unrealized loss included in
accumulated other comprehensive income will be reclassified into interest
expense within the next twelve months, due to the fact our swaps have been and
we expect they will continue to be effective.
NOTE 12 - INCOME TAXES
The income tax benefit (provision) consisted of the following components:
2004 2003 2002
-------- -------- --------
Current:
Federal $ (2,279) $ (2,212) $ (1,303)
State and local (1,022) (1,207) (520)
-------- -------- --------
Total current (3,301) (3,419) (1,823)
Deferred federal, state and local 20,544 9,491 539
-------- -------- --------
Total tax benefit (provision) $ 17,243 $ 6,072 $ (1,284)
======== ======== ========
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities that existed at the balance sheet date.
81
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of the statutory federal tax rate to our effective tax rate is
as follows:
2004 2003 2002
------- ------- ------
Statutory tax rate to which we are subject 35.0% 35.0% 35.0%
Partnerships not subject to income tax (56.4) (45.6) (32.0)
State and local taxes, net of federal
benefit (8.2) 1.7 (0.2)
SCUs (see Note 13) (3.4) -- --
Share based compensation (1.4) (0.2) --
Other (1.4) (0.9) (0.7)
------- ------- ------
Effective tax rate (35.8)% (10.0)% 2.1%
======= ======= ======
The components of the deferred tax liability are as follows:
2004 2003
-------- --------
Share-based compensation $ (3,464) $ --
Intangible assets 43,418 58,398
Originated mortgage service rights 11,262 11,072
Deferred revenue (19,637) (8,200)
Other deferred costs (1,681) (900)
-------- --------
Total deferred tax liability $ 29,898 $ 60,370
======== ========
NOTE 13 - SUBSIDIARY EQUITY
A. PREFERRED SHARES OF A SUBSIDIARY - SUBJECT TO MANDATORY REPURCHASE
Since June 1999, we have issued multiple series of Cumulative Preferred Shares,
which are subject to mandatory repurchase, through our Equity Issuer Trust
("Equity Issuer") subsidiary.
Liquidation
Preferred Date of Mandatory Mandatory Number of Preference per Total Face Dividend
Series Issuance Tender Repurchase Shares Share Amount Rate
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
Series A 06/29/99 06/30/09 06/30/49 45 $2,000 $ 90,000 6.625%
Series A-1 07/21/00 06/30/09 06/30/49 48 500 24,000 7.100%
Series A-2 10/09/01 06/30/09 06/30/49 62 500 31,000 6.300%
Series A-3 06/04/02 10/31/14 10/31/52 60 500 30,000 6.800%
Series B 07/21/00 11/30/10 11/30/50 110 500 55,000 7.600%
Series B-1 10/09/01 11/30/10 11/30/50 37 500 18,500 6.800%
Series B-2 06/04/02 10/31/14 10/31/52 50 500 25,000 7.200%
---------
Total $ 273,500
=========
We collectively refer to the Series A Cumulative Preferred Shares, Series A-1
Cumulative Preferred Shares, Series A-2 Cumulative Preferred Shares and Series
A-3 Cumulative Preferred Shares as the "Series A Shares." We collectively refer
to the Series B Subordinate Cumulative Preferred Shares, Series B-1 Subordinate
Cumulative Preferred Shares and Series B-2 Subordinate Cumulative Preferred
Shares as the "Series B Shares." We also collectively refer to the Series A
Shares and the Series B Shares as the "Preferred Shares."
The Series A Shares all have identical terms except as to the distribution
commencement date and other terms listed in the table above. Likewise, the
Series B Shares all have identical terms, except as to the distribution
commencement date and other terms listed in the table above. Equity Issuer may
82
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
not redeem the Preferred Shares before their mandatory repurchase dates. The
Preferred Shares are subject to mandatory tender for remarketing and purchase on
such dates and each remarketing date thereafter at their respective liquidation
amounts plus all distributions accrued but unpaid. Each holder of the Preferred
Shares will be required to tender its shares on the dates listed above, unless
Equity Issuer decides to remarket them. Holders of the Preferred Shares may
elect to retain their shares upon remarketing, with a new distribution rate to
be determined at that time by the remarketing agent. After the initial
remarketing dates, Equity Issuer may repurchase some or all of the Preferred
Shares, subject to certain conditions. The Preferred Shares are not convertible
into our common shares.
The Preferred Shares have annual preferred dividends payable quarterly in
arrears upon declaration by our Board of Trustees, but only to the extent of
tax-exempt net income for the particular quarter. With respect to payment of
distributions and amounts upon liquidation, dissolution or winding-up of our
Company, the Series A Shares rank, senior to:
o all classes or series of Convertible CRA Shares (see Note 14);
o all shares in the Series B group; and
o our common shares.
With respect to payment of distributions and amounts upon liquidation,
dissolution or winding-up of our Company, the Series B Shares rank senior to our
Convertible CRA Shares and common shares.
Equity Issuer may not pay any distributions to the parent trust until it has
either paid all Preferred Share distributions, or in the case of the next
following distribution payment date, set aside funds sufficient for payment.
Since issuance of the Preferred Shares, all quarterly distributions have been
declared at each stated annualized dividend rate for each respective series and
all distributions due have been paid.
Equity Issuer is subject to, among others, the following covenants with respect
to the Preferred Shares:
TAX-EXEMPT INTEREST AND DISTRIBUTION
Equity Issuer may only acquire new investments that it reasonably believes
will generate interest and distributions excludable from gross income for
federal income tax purposes. As soon as commercially practicable, Equity
Issuer will dispose of any investment if its interest becomes includable in
gross income for federal income tax purposes, for any reason.
LEVERAGE
Equity Issuer will not, and will not permit any of its subsidiaries to,
directly or indirectly, incur any obligation unless:
o Equity Issuer is not in default under its trust agreement;
o Equity Issuer has paid or declared and set aside for payment all
accrued and unpaid distributions on the Preferred Shares; and
o the leverage ratio on the portfolio is less than 0.6 to 1 after
giving effect to the incurrence of the obligation.
FAILURE TO PAY DISTRIBUTIONS
If Equity Issuer has not paid, in full, six consecutive quarterly
distributions on the Preferred Shares, it is required to reconstitute its
board of trustees so that a majority of the board of trustees consists of
trustees who are independent with respect to Equity Issuer, CharterMac and
RCC.
83
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ALLOCATION OF TAXABLE INTEREST INCOME AND MARKET DISCOUNT
Equity Issuer will specially allocate taxable interest income and market
discount that is taxable as ordinary income to us. Market discount, if any,
may arise where Equity Issuer acquires a bond other than upon its original
issuance for less than its stated redemption price at maturity and the
difference is greater than a de minimis amount (generally 1/4 of 1% of a
bond's stated redemption price at maturity multiplied by the number of
complete years to maturity).
In accordance with SFAS No. 150, we reclassified the Preferred Shares as
liabilities in our balance sheet in the third quarter of 2003 and included the
subsequent dividends paid for those share as interest expense in our statement
of income.
B. PREFERRED SHARES OF A SUBSIDIARY - NOT SUBJECT TO MANDATORY REPURCHASE
In May 2004, Equity Issuer issued the following Cumulative Preferred Shares,
which are not subject to mandatory repurchase:
Liquidation
Preference
Preferred Date of Number of per Total Face Dividend
Series Issuance Shares Share Amount Rate
- ----------------------------------------------------------------------------------------
(In thousands)
Series A-4-1 5/14/04 60 $500 $ 30,000 5.75%
Series A-4-2 5/14/04 58 500 29,000 6.00%
Series B-3-1 5/14/04 50 500 25,000 6.00%
Series B-3-2 5/14/04 40 500 20,000 6.30%
---------
Total $ 104,000
=========
Except for the absence of a mandatory repurchase feature (and for specific terms
enumerated in the table above),
o the Series A-4-1and Series A-4-2 shares have the same characteristics
as the Series A Shares described above; and
o the Series B-3-1 and Series B-3-2 shares have the same characteristics
as the Series B shares described above.
In accordance with SFAS No. 150, as these shares are not subject to mandatory
repurchase, we classified them as mezzanine equity and the associated dividends
are classified outside of interest expense in the statement of income.
C. SPECIAL COMMON UNITS OF A SUBSIDIARY
In connection with our acquisition of RCC (see Note 3), our subsidiary issued
membership interests in the form of 16.1 million special common units ("SCUs").
SCU holders are entitled to distributions at the same time as, and only if, we
pay distributions on our common shares. SCU distributions are calculated as the
amount of common share distributions divided by 0.72, to adjust for the taxable
nature of the income comprising the SCU distributions. SCU distributions are
payable only to the extent of the subsidiary's cash flow, supplemented by a loan
of all but $5.0 million from the parent trust in the event of a shortfall. Any
remaining shortfall will accrue interest at a market rate and will only be
payable at the time the subsidiary has sufficient cash flow.
Each holder of SCUs has the right to:
o exchange all or a portion of their SCUs for cash; and
o receive cash for any accrued but unpaid distributions with respect to
SCUs exchanged (not including accrued and unpaid distributions for the
quarterly period in which the exchange occurs).
84
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Instead of cash, we may, at our discretion, exchange the SCUs (and any accrued
but unpaid distributions) for common shares on a one-for-one basis, subject to
anti-dilution adjustments. We would issue the common shares at a price equal to
the average closing market price of our common shares for the five consecutive
trading days prior to the date when we receive notice of intent to convert.
Our subsidiary may not pay any distributions to the parent trust until it has
paid all SCU distributions. Through December 31, 2004, all SCU distributions
have been paid, with all funds generated by the issuing subsidiary.
As of December 31, 2004, there were 15.2 million SCUs outstanding and 16.1
million were outstanding at December 31, 2003.
NOTE 14 - SHAREHOLDERS' EQUITY
A. SPECIAL PREFERRED VOTING SHARES
In connection with our acquisition of RCC (see Note 3), each holder of SCUs (see
Note 13) also acquired one special preferred voting share (at a par value of
$.01 per share) for each SCU received. The special preferred voting shares have
no economic interest, but entitle the holder to vote, on a one-for-one basis, on
all matters subject to a vote of our common shareholders. We have the right to
require that each special preferred voting share be redeemed at par and
cancelled simultaneously upon the exchange of an SCU by its holder into cash or
a common share. Other than the payment of $.01 per share upon redemption of the
special preferred voting shares or the liquidation of our Company, the special
preferred voting shares are not entitled to any distributions or other economic
rights.
The selling principals of RCC entered into a voting agreement which governs the
voting of all of their:
o special preferred voting shares,
o common shares issuable upon exchange of their SCUs, and
o any other common shares currently owned or which may be acquired by
them in the future.
The voting agreement provides that the selling principals of RCC will:
o not vote more than 90% of the voting power represented by the special
preferred voting shares (and any common shares to be issued in
exchange for the SCUs) on any matter requiring a vote of our common
shareholders until November 17, 2005;
o vote their common shares or special preferred voting shares in favor
of the election of any independent trustee approved by our board of
trustees or in the same proportion as the unaffiliated holders of our
common shares vote in such election; and
o not exercise any right as shareholder of our Company to nominate any
independent trustee.
With the exception of Stephen M. Ross (see Note 17), the voting agreement will
terminate for each of the remaining selling principals at the time he or she is
no longer an employee, officer, or trustee of our Company. The voting agreement
with respect to Mr. Ross will remain in effect as long as he owns any of our
special preferred voting shares or common shares.
B. CONVERTIBLE COMMUNITY REINVESTMENT ACT PREFERRED SHARES
Our Convertible Community Reinvestment Act Preferred Shares ("Convertible CRA
Shares") enable financial institutions to receive certain regulatory benefits in
connection with their investment. We have developed a proprietary method for
specially allocating these regulatory benefits to specific financial
institutions that invest in the Convertible CRA Shares. Other than the preferred
allocation of regulatory benefits, the preferred investors receive the same
economic benefits as our common shareholders including:
85
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
o receipt of the same dividends per share;
o pro rata allocation of earnings between the two classes of shares; and
o equal ranking with the common shares with respect to rights upon
liquidation, dissolution or winding up of our Company.
The Convertible CRA Shares have no voting rights, except on matters relating to
the terms of the Convertible CRA Shares or to amendments to our Trust Agreement
which would adversely affect the Convertible CRA Shares.
For Convertible CRA shares issued prior to 2002, the investors have the option
to convert their shares into common shares at a predetermined conversion price,
calculated as the greater of:
o our book value per common share as set forth in our most recently
issued annual or quarterly report filed with the SEC prior to the
respective Convertible CRA Share issuance date; or
o 110% of the closing price of a common share on the respective
Convertible CRA Share's pricing date.
For Convertible CRA Shares issued in 2002 and later, conversion into common
shares is on a one-for-one basis.
Upon conversion, the investors would no longer be entitled to a special
allocation of the regulatory benefit.
At December 31, we had the following Convertible CRA Shares outstanding:
(In thousands)
2004 2003
---------------------
Convertible CRA Shares issued prior to 2002 998 1,352
Convertible CRA Shares issued 2002 and later 5,554 6,828
---------------------
Total outstanding 6,552 8,180
=====================
Common shares issuable upon conversion 6,504 8,104
=====================
C. ISSUANCES AND CONVERSIONS
During 2002 we issued approximately 2.0 million Convertible CRA Shares and
approximately 6.3 million common shares. Net proceeds were approximately $32.5
million for the Convertible CRA Shares and $92.9 million for the common shares.
During 2003, we issued approximately 5.8 million Convertible CRA Shares for net
proceeds of approximately $103.1 million. Also in 2003, shareholders converted
approximately 1.4 million Convertible CRA Shares into approximately the same
number of common shares. The placement agents for the offerings were Meridian
Investments, Inc.
In June 2004, we completed a common share offering, whereby we sold 5.75 million
shares (including an over-allotment of 750,000 shares) to the public at a price
of $19.27 per share. This offering resulted in net proceeds of approximately
$105.5 million after deducting underwriting discounts and commissions. The
underwriters for this offering were Wachovia Securities, UBS Securities LLC, RBC
Capital Markets Corporation and Legg Mason Wood Walker.
Also in 2004, shareholders converted approximately 1.6 million Convertible CRA
shares into approximately the same number of common shares and 933,000 SCUs (see
Note 13) were converted into an equivalent number of common shares.
D. DIVIDEND REINVESTMENT PLAN
In May 2000, we implemented a dividend reinvestment and common share purchase
plan. Under this plan, common shareholders may elect to have their distributions
automatically reinvested in additional common shares at a price equal to the
86
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
average of the high and low market price from the previous day's trading, and
make cash payments for further investment. As of December 31, 2004, there was
approximately 125,000 shares participating in the plan, which represents 321
investors.
E. REPURCHASES
The Board of Trustees has authorized the implementation of a common share
repurchase plan, enabling us to repurchase, from time to time, up to 1.5 million
common shares. This plan has no expiration date. The repurchases will be made in
the open market and the timing is dependant on the availability of common shares
and other market conditions. There were no acquisitions made under the plan
during 2004 or 2003. We acquired 8,400 shares in 2002 for approximately
$103,000.
In addition to the repurchase plan, we may repurchase shares from employees in
connection with tax withholding requirements upon vesting of restricted share
grants. During 2004 and 2003, we repurchased approximately 111,000 and 14,000
common shares for approximately $2.6 million and $275,000, respectively
(including commissions and service charges). We account for repurchased common
shares as treasury shares of beneficial interest.
F. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income (loss) were as follows:
(In thousands)
Net Unrealized Net Unrealized Accumulated Other
Gain/(Loss) on Gain/(Loss) on Comprehensive
Revenue Bonds Derivatives Income (Loss)
-------------- -------------- -----------------
Balance at January 1, 2002 $ 262 $ (2,959) $ (2,697)
Period change 95,126 (2,607) 92,519
-------------- -------------- -----------------
Balance at December 31, 2002 95,388 (5,566) 89,822
Period change (38,559) 2,607 (35,952)
-------------- -------------- -----------------
Balance at December 31, 2003 56,829 (2,959) 53,870
Period change (23,971) (1,078) (25,049)
-------------- -------------- -----------------
Balance at December 31, 2004 $ 32,858 $ (4,037) $ 28,821
============== ============== =================
NOTE 15 - SHARE BASED COMPENSATION
A. THE PLAN
As approved by shareholders in 1997 and amended and restated in 2003, we have an
Amended and Restated Incentive Share Plan (the "Plan"), the purpose of which is
to:
o attract and retain qualified persons as trustees and officers; and
o provide incentive and more closely align the financial interests of
our employees, officers and trustees with the interests of our
shareholders by providing them with substantial financial interest in
our success.
The Compensation Committee of our board of trustees administers the Plan.
Pursuant to the Plan, the maximum number of common shares that may be awarded is
the lesser of:
(i) 10% of the number of shares outstanding as of December 31 preceding
issuances of such awards; and
(ii) the limits prescribed by the American Stock Exchange or any other
national security exchange or national quotation system on which the
shares may then be listed.
87
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Plan allows for the issuance of share options, restricted share grants,
share appreciation rights, restricted and deferred shares, performance units and
performance shares.
B. SHARE OPTIONS
All options granted have an exercise price equal to or greater than the market
price of our common shares on the grant date. The maximum option term is ten
years from the date of grant and options granted pursuant to the Plan may vest
immediately upon issuance or over a period determined by our compensation
committee.
We issued the following options pursuant to the Plan:
Vesting
Year Issued Options Issued Exercise Price Term Period
- --------------------------------------------------------------------------
2000 297,830 $11.5625 10 years 3 years
2002 40,000 17.5600 10 years 3 years
As part of a separate plan established in connection with the RCC acquisition
(see Note 3), we issued 1.0 million options to our non-executive chairman at an
exercise price of $17.78. These options have a 10 year term and vest over a five
year period.
Prior to the RCC acquisition, all options were held by non-employees as we were
externally managed. Accordingly, we recorded outstanding options at fair value
at the end of each reporting period. Upon the RCC acquisition, all prior
optionees became CharterMac employees. Accordingly, all outstanding options were
adjusted to the fair value as November 17, 2003, and the expense we record in
relation to these options is based upon that fair value.
We used the following assumptions in the Black-Scholes option pricing model to
determine fair values:
2003 2002
---------- ---------
Risk free interest rate 3.80% 4.18%
Expected years until exercise 7.10 8.70
Expected stock volatility 20.00% 20.00%
Dividend yield 6.80% 6.70%
Options granted 1,000,000 40,000
Grant date 11/17/2003 9/18/2002
We recorded compensation cost of $597,000 in 2004, $264,000 in 2003, and
$382,000 in 2002 relating to these option grants.
88
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes share option activity in our share option plans
as of the year ended December 31:
2004 2003 2002
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Outstanding at beginning of
year 1,119,914 $ 17.3285 263,509 $ 12.4729 228,262 $ 11.5625
Granted -- -- 1,000,000 17.7800 40,000 17.5600
Forfeited (22,167) 17.5600 -- -- -- --
Exercised (22,434) 15.7285 (143,595) 11.5625 (4,753) 11.5625
------------------------------------------------------------------------------
Outstanding at end of year 1,075,313 $ 17.3571 1,119,914 $ 17.3285 263,509 $ 12.4729
==============================================================================
Exercisable at end of year 275,313 $ 16.1282 93,247 $ 11.5625 124,231 $ 11.5625
========= ========= =======
Fair value of options granted
during the year (in
thousands) $ -- $ 3,460 $ 34
========= ========= =======
The following table summarizes information about share options outstanding and
exercisable at December 31, 2004:
Weighted
Average
Remaining
Number Contractual Life Number
Exercise Price Outstanding (in Years) Exercisable
- -------------- ----------- ----------------- -----------
$11.5625 73,063 6.4 73,063
17.5600 2,250 8.7 2,250
17.7800 1,000,000 8.9 200,000
--------- -------
1,075,313 8.7 275,313
========= =======
As of December 31, 2004, there were 6,348,802 options or share grants available
for issuance under the Plan.
C. RESTRICTED SHARE GRANTS AND SCUS
In conjunction with the RCC acquisition (see Note 3), we issued 778,420
restricted common shares in 2003 to various individuals who are either employees
of RCC or of one of the selling principals, and we issued an additional 109,932
in 2004. Of the shares issued in 2003, 52,863 vested immediately and the
remainder vest over periods ranging from three months to four years. In 2003, we
recorded a contra-equity balance of approximately $14.0 million for the unvested
shares and recorded compensation expense of $1.0 million for the shares which
vested immediately. In 2004, we recorded approximately an additional $2.2
million contra-equity balance for the additional grants. The contra-equity
balance is amortized over the vesting periods. Grantees are entitled to
dividends on their shares during the vesting period. Any such payments are
recorded as a charge to Beneficial Owner's Equity - other common shareholders.
If any grantee forfeits an award, we reverse amounts previously amortized and
credit compensation expense.
In conjunction with the RCC acquisition, our subsidiary issued 217,280 SCUs in
2003 to employees other than the selling principals. In 2004, an additional
93,120 SCUs were issued. These SCUs vest over periods ranging from three to four
years. A contra-equity balance of approximately $3.8 million was recorded in
89
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2003 for the unvested shares and is amortized over the vesting periods. An
additional contra-equity balance of approximately $1.7 million was recorded in
2004.
Net of forfeiture amounts, we recorded approximately $11.0 million in salaries
and benefits expense in 2004 and $2.8 million in 2003 for the restricted shares
grants and SCUs. The contra-equity balance as of December 31, 2004 and 2003
amounted to $8.4 million and $16.1 million, respectively.
D. TRUSTEE GRANTS
Through November 17, 2003, two of our independent trustees were entitled to
receive annual compensation of $17,500 payable in a combination of cash and
common shares. The third independent trustee was entitled to receive annual
compensation of $30,000 payable in a combination of cash and common shares. In
2003 and 2002, we issued 1,728 and 1,830 common shares, respectively, to the
independent trustees as compensation for services rendered for the prior year.
The independent trustees also received an aggregate of 5,535 shares, worth
$97,500 at the time of issuance, as payment for their work on the special
committee analyzing the proposed acquisition of RCC. After the acquisition of
RCC, the five new independent trustees each received $18,750 as compensation for
their services rendered during the year ended December 31, 2003. In 2004, all
eight of the independent trustees received annual compensation of $50,000
payable in a combination of cash and common shares.
NOTE 16 - EARNINGS PER SHARE, PROFIT AND LOSS ALLOCATIONS AND DISTRIBUTIONS
Prior to our acquisition of RCC, pursuant to our Trust Agreement and a
management agreement, RCC was entitled to a special distribution equal to .375%
per annum of our total invested assets (which equaled the face amount of the
revenue bonds and other investments). After payment of the special distribution,
distributions were made to the shareholders in accordance with their percentage
interests (see also Note 17).
We allocated income first to RCC for the special distribution. After a special
allocation of 0.1% to RCC, we then allocated remaining profits to shareholders
in accordance with their percentage interests.
For periods subsequent to the RCC acquisition, we allocate the income of CCC
(the subsidiary we created as RCC's direct parent) first to the holders of the
SCUs for an amount based on a proportionate share of net income.
(In thousands, except per share amounts) Income Shares* Per Share
- ---------------------------------------------------------- ----------- ----------- -----------
2004:
- -----
Net income allocable to shareholders
(Basic EPS) $65,363 54,786 $ 1.19
Effect of dilutive securities -- 361
------- ------
Diluted net income allocable to shareholders (Diluted EPS) $65,363 55,147 $ 1.19
======= ====== =======
2003:
- -----
Net income allocable to shareholders
(Basic EPS) $61,248 46,653 $ 1.31
Effect of dilutive securities -- 82
------- ------
Diluted net income allocable to shareholders (Diluted EPS) $61,248 46,735 $ 1.31
======= ====== =======
2002:
- -----
Net income allocable to shareholders
(Basic EPS) $55,905 42,697 $ 1.31
Effect of dilutive securities -- 71
------- ------
Diluted net income allocable to shareholders (Diluted EPS) $55,905 42,768 $ 1.31
======= ====== =======
* Includes common and Convertible CRA Shares (see Note 14).
90
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17 - RELATED PARTIES
A. RCC AND TRCLP
Prior to the RCC Acquisition
Prior to our acquisition of RCC (see Note 3), we had engaged a subsidiary of RCC
to provide us with management services. Pursuant to the terms of the management
agreement, RCC, as Manager, was entitled to receive the fees and other
compensation set forth below:
Fees/Compensation* Amount
- ------------------ ------
Bond selection fee 2.000% of the face amount of each asset we invested in or
acquired.
Special distributions/investment management fee 0.375% per annum of our total invested assets.
Loan servicing fee 0.250% per annum based on the outstanding face amount of
revenue bonds and other investments we owned.
Operating expense reimbursement For direct expenses incurred by the Manager up to a specified
annual amount (subject to increases based on our assets and
the Consumer Price Index).
Incentive share options The Manager could receive options to acquire common shares
if our distributions in any year exceeded $0.9517 per common
share and if our Compensation Committee approved.
Liquidation fee 1.500 of the gross sales price of assets sold by us in a
liquidation proceeding.
* RCC could also earn miscellaneous compensation which included construction
fees, escrow interest, property management fees, leasing commissions and
insurance brokerage fees. The payment of any such compensation was generally
limited to the competitive rate for the services being performed. A bond
placement fee of 1.0% to 1.5% of the face amount of each asset invested in or
acquired by us was payable by the borrower, and not by CharterMac.
Affiliates of RCC provided certain financial guarantees to facilitate leveraging
by CharterMac, for which we would pay market rate fees. In addition, affiliates
of RCC provided financial guarantees to the owner (or partners of the owners) of
the underlying properties securing our revenue bonds, for which we would pay
market rate fees.
Subsequent to the RCC Acquisition
- ---------------------------------
Subsequent to the RCC acquisition we revised the management agreement and the
fees included in the agreement are eliminated in consolidation. The Related
Companies, L.P., ("TRCLP"), an affiliate of a selling principal of RCC,
continues to provide services under a shared services agreement. The services
provided include computer support, office management, payroll, human resources
and other office services. The majority of the services are charged to us at the
direct cost incurred by TRCLP.
The selling principals of RCC included its four executive managing partners
(Stuart J. Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley), all
of whom are members of our management and board of trustees, and an affiliate of
TRCLP, which is majority-controlled by Stephen M. Ross, who is also the
non-executive Chairman of our board of trustees. As a result of the equity we
issued in the RCC acquisition, TRCLP owns approximately 15.7% of CharterMac and
our management and employees own approximately 7.3% at December 31, 2004. On
February 25, 2005, we announced Ms. Kiley's intention to retire.
91
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amounts Paid and Incurred
The costs, expenses and the special distributions paid or payable to RCC, prior
to the acquisition, its affiliates, and TRCLP for the years ended December 31,
were as follows:
Paid or
Payable to Paid or Payable to
TRCLP RCC and Affiliates
----------------------------- ----------------------------
Year ended Nov 18 - Jan 1 - Year Ended
December 31, Dec 31 Nov 17 December 31,
------------ ------------ ------------ ------------
(In thousands) 2004 2003 2003 2002
------------ ------------ ------------ ------------
Bond selection fees $ -- $ -- $ 8,905 $ 11,104
Special distribution/investment
management fee -- -- 3,809 4,872
Bond servicing fees -- -- 5,764 3,792
Expense reimbursement -- -- 901 768
Shared service agreement 4,252 755 -- --
------------ ------------ ------------ ------------
$ 4,252 $ 755 $ 19,379 $ 20,536
============ ============ ============ ============
B. FUND MANAGEMENT TRANSACTIONS
Substantially all fund origination revenues in the Fund Management segment are
received from investment funds we have originated and manage, many of which
comprise the VIEs that we consolidate (see Note 2). While affiliates of our
Company hold equity interests in the investment funds' general partner and/or
managing member/advisor, we have no direct investments in these entities, and we
do not guarantee their obligations. We have agreements with these entities to
provide ongoing services on behalf of the general partners and/or managing
members/advisors, and we receive all fee income to which these entities are
entitled.
As of December 31, 2004, the obligors of certain revenue bonds were local
partnerships for which the general partners of the controlling investment
partnerships were non-equity managing partners controlled by RCC. As of December
31, 2002, the owner of the underlying property and obligor of the Highpointe
revenue bond was an affiliate of ours who has not made an equity investment.
This entity has assumed the day-to-day responsibilities and obligations of the
property. Buyers are being sought who would make equity investments in the
property and assume the non-recourse obligations for the revenue bond or
otherwise buy the property and pay off all or most of the revenue bond
obligation.
In connection with the refinancing of River Run, we entered into an agreement
which allows the revenue bond to be put to us should the owner of the underlying
property default on the bond. We, in turn, entered into agreements which allow
us to put the bond to the general partners of the owner. This right is secured
by collateral assignments of the general partners' partnership interests in the
limited partnership which owns the underlying property.
Related Management Company ("RMC"), which is wholly owned by TRCLP, earned fees
for performing property management services for various properties held in
investment funds we manage and consolidate. The fees totaled $2.2 million in
2004, $2.9 million in 2003 and $2.5 million in 2002.
C. LOAN TO AMERICAN MORTGAGE ACCEPTANCE CORP ("AMAC")
In June 2004, we entered into an unsecured revolving credit facility with AMAC,
an affiliated real estate investment trust, to provide it up to $20.0 million,
bearing interest at LIBOR plus 3.0%, which is to be used to purchase new
92
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
investments. This facility has a term of one year with a one year optional
extension. In the opinion of management, the terms of this facility are
consistent with those of transactions with independent third parties. As of
December 31, 2004, the advance totalled approximately $4.6 million (see also
Note 21) at an interest rate of 5.42%.
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts) 2004 Quarter Ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Total revenues $46,313 $57,006 $60,078 $69,457
Income before income taxes $ 4,029 $16,780 $10,079 $17,232
Net income $ 6,418 $24,203 $14,911 $19,831
Net income per share
Basic $ 0.12 $ 0.47 $ 0.26 $ 0.34
Diluted $ 0.12 $ 0.46 $ 0.26 $ 0.34
Weighted average shares outstanding
Basic 51,591 52,017 57,708 57,728
Diluted 51,839 52,359 58,112 58,194
2003 Quarter Ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Total revenues $31,954 $33,203 $35,841 $51,242
Income before income taxes $15,931 $17,412 $15,226 $11,945
Net income $17,907 $18,200 $15,915 $14,564
Net income per share
Basic $ 0.37 $ 0.37 $ 0.31 $ 0.27
Diluted $ 0.37 $ 0.37 $ 0.31 $ 0.27
Weighted average shares outstanding
Basic 45,013 45,090 46,331 50,121
Diluted 45,071 45,130 46,366 50,256
NOTE 19 - BUSINESS SEGMENTS
We operate in four business segments:
1. Portfolio Investing, which includes subsidiaries that invest in primarily
tax-exempt first mortgage revenue bonds issued by various state or local
governments, agencies or authorities and other investments designed to
produce federally tax-exempt income. The revenue bonds are used to finance
the new construction, substantial rehabilitation, acquisition, or
refinancing of affordable multifamily housing throughout the United States.
93
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Fund Management, which includes:
o Subsidiaries that sponsor real estate equity investment funds that
primarily invest in Low-Income Housing Tax Credit ("LIHTC")
properties. In exchange for sponsoring and managing these funds, we
receive fee income for providing asset management, underwriting,
origination and other services;
o A subsidiary which provides advisory services to AMAC, an affiliated,
publicly traded real estate investment trust; and
o Subsidiaries that participate in credit enhancement transactions,
including guaranteeing mortgage loans and specified returns to
investors in LIHTC equity funds, in exchange for guarantee fees.
3. Mortgage Banking, which includes subsidiaries that originate and service
primarily multifamily mortgage loans on behalf of third parties, primarily:
o Fannie Mae;
o Freddie Mac;
o the FHA; and
o Insurance companies and conduits.
In exchange for these origination and servicing activities, we receive
origination and servicing fees.
4. VIEs, primarily the LIHTC equity funds we sponsor through the Fund
Management segment's subsidiaries, for which we are required to consolidate
in accordance with FIN 46(R) (See Note 2).
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. In prior years, results from credit enhancement services were
included in Portfolio Investing. We have reclassified the results to Fund
Management to better reflect the management of our businesses.
Additionally, in prior periods we had eliminated intercompany transactions from
the results of the segment earning profits from such transactions. We have
adjusted our presentation to reflect the full operations of each segment to
better reflect the true operations of each business. We have reclassified prior
years' segment results accordingly.
94
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table provides more information regarding our segments:
(In thousands) DECEMBER 31,
---------------------------------------------
2004 2003 2002
----------- ----------- -----------
REVENUES
Portfolio Investing $ 143,931 $ 116,493 $ 95,812
Fund Management (1) 97,864 19,020 2,619
Mortgage Banking 21,028 17,690 18,205
VIEs (2) 12,213 -- --
Elimination of intersegment transactions (42,182) (963) (22)
----------- ----------- -----------
Consolidated $ 232,854 $ 152,240 $ 116,614
=========== =========== ===========
NET INCOME BEFORE ALLOCATIONS TO EQUITY HOLDERS
Portfolio Investing $ 82,499 $ 69,266 $ 72,986
Fund Management (1) (599) 3,091 2,418
Mortgage Banking 2,166 (637) 4,475
VIEs (2) -- -- --
Elimination of intersegment transactions (3,636) 2,227 --
----------- ----------- -----------
Consolidated 80,430 73,947 79,879
Income allocated to SCUs (28,174) (4,038) --
Income allocated to preferred shareholders (3,942) (9,449) (17,266)
Income allocated to minority interests (194) 54 (496)
Income tax benefit (provision) 17,243 6,072 (1,284)
----------- ----------- -----------
Consolidated Net Income $ 65,363 $ 66,586 $ 60,833
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 3,357 $ 2,405 $ 1,131
Fund Management (1) 18,974 3,095 201
Mortgage Banking 8,076 6,426 7,760
VIEs (2) -- -- --
Elimination of intersegment transactions -- -- --
----------- ----------- -----------
Consolidated $ 30,407 $ 11,926 $ 9,092
=========== =========== ===========
IDENTIFIABLE ASSETS AT DECEMBER 31
Portfolio Investing $ 4,750,072 $ 4,198,985 $ 3,204,055
Fund Management (1) 826,117 808,982 1,830
Mortgage Banking 91,525 90,769 123,675
VIEs (2) 2,856,014 -- --
Elimination of intersegment balances (2,766,367) (2,517,567) (1,476,692)
----------- ----------- -----------
Consolidated $ 5,757,361 $ 2,581,169 $ 1,852,868
=========== =========== ===========
(1) Prior to our acquisition of RCC in November 2003, this segment consisted
only of our credit enhancement business.
(2) Consolidated beginning April 2004 pursuant to FIN 46(R). See Note 2.
95
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - COMMITMENTS AND CONTINGENCIES
FORWARD TRANSACTIONS
At December 31, 2004, CMC had forward commitments of approximately $224.8
million for 28 mortgages to be funded in 2005 and later. As each lending
commitment has an associated sale commitment, the fair values of each offset
and, as a result, we record no asset or liability for the commitments. In
addition, CMC had commitments to sell 18 mortgages totaling $101.3 million.
Approximately $27.5 million of this amount was funded as of December 31, 2004
and are included in Other Investments as Mortgage Loans Receivable. The balance
of approximately $73.8 million will be funded in the first quarter of 2005.
We have entered into eighteen transactions to purchase revenue bonds. The
agreements require us, at the earlier of stabilization or conversion to
permanent financing, to acquire Series A and Series B revenue bonds at
predetermined prices and interest rates. We are obligated to purchase the
revenue bonds only if construction is completed. We are obligated to buy the
Series B revenue bonds only if, at the date the Series A bonds are stabilized,
the property's cash flow is sufficient to provide debt service coverage of 1.15x
for both the Series A and B bonds. During the construction period, a third party
lender will advance funds to the developer, as needed, at a floating rate. These
forward commitments create derivative instruments under SFAS No. 133, which have
been designated as a cash flow hedge of the anticipated funding of the revenue
bonds, and are recorded at fair value, with changes in fair value recorded in
other accumulated comprehensive income until the revenue bonds are funded. The
total potential amount we could possibly be required to fund is $176.3 million.
MORTGAGE BANKING LOSS SHARING AGREEMENT
Under a master loss sharing agreement with Fannie Mae, we assume responsibility
for a portion of any loss that may result from borrower defaults, based on
Fannie Mae loss sharing formulas. At December 31, 2004, all of our loans sold to
Fannie Mae consisted of Level I loans, meaning that we are responsible for the
first 5% of the unpaid principal balance and a portion of any additional losses
to a maximum of 20% of the original principal balance; Fannie Mae bears any
remaining loss. Pursuant to this agreement, we are responsible for funding 100%
of mortga- gor delinquency (principal and interest) and servicing (taxes,
insurance and foreclosure costs) advances until the amounts advanced exceed 5%
of the unpaid principal balance at the date of default. Thereafter, we may
request interim loss sharing adjustments which allow us to fund 25% of such
advances until final settlement under the agreement.
Our maximum exposure at December 31, 2004, pursuant to this agreement, was
approximately $362.0 million although this amount is not indicative of our
actual expected losses. We maintain an allowance for loan losses for loans
originated under the Fannie Mae DUS product line at a level that, in
management's judgment, is adequate to provide for estimated losses. At December
31, 2004, that reserve was approximately $6.5 million, which we believe
represents our maximum liability at that time. Unlike loans originated for
Fannie Mae, we do not share the risk of loss for loans we originate for Freddie
Mac or FHA.
CMC maintains, as of December 31, 2004, treasury notes of approximately $6.5
million and a money market account of approximately $89,000, which is included
in cash and cash equivalents-restricted in the consolidated balance sheet, to
satisfy the Fannie Mae collateral requirements of $6.2 million.
MORTGAGE POOL CREDIT ENHANCEMENT
In December 2001, we completed a credit enhancement transaction with Merrill
Lynch Capital Services, Inc. ("MLCS"). Pursuant to the terms of the transaction,
we assumed MLCS's $46.9 million first loss position on a $351.9 million pool of
tax-exempt weekly variable rate multifamily mortgage loans. TRCLP has provided
us with an indemnity covering 50% of any losses that we incur as part of this
transaction. As the loans mature or prepay, the first loss exposure and the fees
96
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
we receive are reduced. The latest maturity date on any loan in the portfolio
occurs in 2009. The remainder of the real estate exposure after the $46.9
million first loss position has been assumed by Fannie Mae and Freddie Mac. In
connection with the transaction, we have posted collateral, initially in an
amount equal to 50% of the first loss amount, which may be reduced to 40% if
certain post closing conditions are met. Our maximum exposure under the terms of
this transaction is approximately $23.5 million. During 2003, two of the
tax-exempt weekly variable rate multifamily mortgage loans were repaid in the
amount of $8.9 million. These repayments reduced the first loss position to
$38.0 million and the pool of multifamily mortgage loans to $288.6 million. This
reduced our maximum exposure under the terms of the transaction to approximately
$19.0 million.
We performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. We analyzed the portfolio on a "stressed" basis by increasing
capitalization rates and assuming an increase in the low floater bond rate. As
of December 31, 2004, the credit enhanced properties are performing according to
their contractual obligations and we do not anticipate any losses to be incurred
on its guaranty. Should our analysis of risk of loss change in the future, a
provision for probable loss might be required pursuant to SFAS No. 5, ACCOUNTING
FOR CONTINGENCIES.
Fees related to the credit enhancement transaction for the years ended December
31, 2004, were approximately $1.0 million, compared to $1.1 million in 2003 and
$1.3 million in 2002.
YIELD GUARANTEES
We have entered into several agreements with either Merrill Lynch or IXIS
Financial Products, Inc. (each a "Primary Guarantor") to guarantee agreed-upon
rates of return for pools of multifamily properties each owned by a local
partnership which in turn, is majority-owned by affiliates of RCC. In return, we
have or will receive guarantee fees, generally at the start of each guarantee
period. There are seven agreements guaranteeing returns through the construction
and lease-up phases of the properties and there are seven other agreements
guaranteeing returns from the completion of the construction and lease-up phases
through the operating phase of the properties.
Total potential exposure pursuant to these guarantees is approximately $460.0
million, assuming there is no return whatsoever by the funds. We have analyzed
the expected operations of the underlying properties and believe there is no
risk of loss at this time as we have never yet been called upon to make payments
under the guarantees and foresee no change in that regard. Should our analysis
of risk of loss change in the future, a provision for possible losses might be
required pursuant to SFAS No. 5. The fair value of these guarantees,
representing the deferral of the fee income over the guarantee periods, was
$17.1 million as of December 31, 2004. This amount is included in accounts
payable, accrued expenses and other liabilities on our consolidated balance
sheet.
Some of the local partnerships have financed their properties with the proceeds
of our revenue bonds. In these cases, the Primary Guarantor has required that
those revenue bonds be deposited into a trust pursuant to which the revenue
bonds were divided into senior and subordinated interests with approximately 50%
of each revenue bond being subordinated. We have financed the senior trust
interest as part of the Merrill Lynch P-FLOATs/RITES program (see Note 9). We
use the subordinate trust interests as collateral in our other financing
programs. In connection with these transactions, we have posted $160.2 million
as collateral with the Primary Guarantor in the form of either cash or revenue
bonds.
OTHER GUARANTEES
During December 2002, we entered into three transactions related to three
properties, Coventry Place, Canyon Springs and Arbor Ridge. Pursuant to the
terms of these deals, we will provide credit support to the construction lender
for project completion and Fannie Mae conversion and acquire subordinated bonds
to the extent the construction period bonds do not fully convert.
Up until the point of completion, we will guarantee the construction lender
reimbursement of any draw on its construction letter of credit up to 40% of the
stated amount of the letter of credit. Following completion, up until the
97
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
project loan converts to permanent loan status, we will guarantee the full
amount of the letter of credit. We closely monitor these properties, and believe
there is currently no need to provide for any potential loss.
The developer has also issued several guarantees to the construction lender,
each of which would be called upon before our guarantees, and each of which
would be assigned to us should its guarantees be called.
Once the construction loans convert to permanent loans, we are obligated to
acquire subordinated loans for the amount by which each construction loan
exceeds the corresponding permanent loan, if any. The subordinated bonds will
bear interest at 10%. Under FNMA guidelines, the size of the subordinated bonds
will be limited to a 1.0x debt service coverage based on 75% of the cash flow
after the senior debt.
Our maximum exposure, related to these three transactions, is 40% of the stated
amount of the Letter of Credit of approximately $27.0 million.
LEASE OBLIGATIONS
The future minimum payments for operating leases as of December 31, 2004 are as
follows:
(In thousands)
Year Ending December 31
----------------------------------------
2005 $ 3,914
2006 5,754
2007 5,774
2008 6,182
2009 5,929
THEREAFTER 43,665
-------
Total $71,218
=======
OTHER CONTINGENCIES
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
NOTE 21 - SUBSEQUENT EVENTS
REVENUE BOND ACQUISITIONS
In March 2005, we exercised our option to terminate our fixed rate
securitization trust, and paid down $100 million borrowed through this facility
with proceeds from bonds securitized through the P-FLOATs program.
In January and February 2005, we acquired seven revenue bonds with a total
aggregate face amount of approximately $86.5 million, secured by 1,678
multifamily units.
In the first quarter of 2005, we extended and converted the loan made to Capri
in July 2004. Upon conversion, we held two participating loans, one of which
allowed us to participate in the cash flows of, and in turn was convertible into
a 100% ownership interest in, Capri Capital Finance ("CCF"). The other allows us
to participate in the cash flows of, and is convertible into a 49% ownership
interest in, Capri Capital Advisors ("CCA"), a pension fund advisory business.
In the first quarter of 2005, we converted the CCF loan and acquired the
business as an addition to our Mortgage Banking segment. Management currently
expects to convert the CCA loan into an equity ownership prior to the end of the
loan term, no later than August 2006.
Also in the first quarter of 2005, we purchased the 13% of CMC that we had not
previously owned. The purchase price was $7.5 million, which we paid in cash.
During the first quarter of 2005, AMAC repaid to us the $4.6 million of advances
outstanding at December 31, 2004.
98
CHARTERMAC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Disclosure Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in Rule 15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Refer to MANAGEMENT'S REPORT ON
THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING on
page 50.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have been no
changes in our internal control over financial reporting during
the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. However,
to address the material weaknesses identified, subsequent to
December 31, 2004, our management has taken specific actions
described in MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF INTERNAL
CONTROL OVER FINANCIAL REPORTING, (see page 50).
99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY
Our board of trustees directs the management of the business of our
Company but retains our subsidiary, Related Capital, to manage our
day-to-day affairs.
TRUSTEES AND EXECUTIVE OFFICERS
Our trustees and executive officers are as follows:
YEAR FIRST
BECAME TERM
NAME AGE OFFICES HELD INDEPENDENCE OFFICER/TRUSTEE EXPIRES
-----------------------------------------------------------------------------------------------------
Stephen M. Ross 64 Managing Trustee, Non-Independent 1999 2006
Non-Executive Chairman
of the Board
Stuart J. Boesky 48 Managing Trustee, Non-Independent 1997 2006
Chief Executive Officer
Marc D. Schnitzer 44 Managing Trustee, Non-Independent 2003 2005
President
Alan P. Hirmes 50 Managing Trustee, Non-Independent 1997 2005
Chief Financial Officer and
Chief Operating Officer
Denise L. Kiley 45 Managing Trustee, Non-Independent 2003 2007 (1)
Chief Credit Officer
Peter T. Allen 59 Managing Trustee Independent 1997 2007
Charles L. Edson 70 Managing Trustee Independent 2001 2005
Andrew L. Farkas 44 Managing Trustee Independent 2004 2007
Jeff T. Blau 37 Managing Trustee Non-Independent 2003 2007
Robert A. Meister 63 Managing Trustee Independent 2003 2007
Jerome Y. Halperin 74 Managing Trustee Independent 2003 2006
Nathan Gantcher 64 Managing Trustee Independent 2003 2006
Robert L. Loverd 62 Managing Trustee Independent 2003 2006
Janice Cook Roberts 44 Managing Trustee Independent 2003 2005
Thomas W. White 66 Managing Trustee Non-Independent 2000 2005
(1) On February 25, 2005, we announced Ms. Kiley's intention to
retire in 2005.
STEPHEN M. ROSS is the non-executive Chairman of the board of
trustees of our Company. Mr. Ross is the founder, Chairman, Chief
Executive Officer and Managing General Partner of The Related
Companies, LP ("TRCLP"). Mr. Ross began his career working for the
accounting firm of Coopers & Lybrand in Detroit as a tax attorney.
Later, he moved to New York where he worked for two large Wall Street
investment banking firms in their real estate and corporate finance
departments before founding TRCLP in 1972. Mr. Ross graduated from
the University of Michigan School of Business Administration with a
Bachelor of Science degree and from Wayne State School of Law with a
Juris Doctor degree. He then received a Master of Laws degree in
Taxation from New York University School of Law. Mr. Ross endowed the
Stephen M. Ross School of Business at the University of Michigan. Mr.
Ross is a member of the Executive Committee of the Board of Directors
of the Real Estate Board of New York and is a trustee of the National
Building Museum. Mr. Ross is also a member of the Executive Committee
of the Board of Directors of NYC2012, a committee that is targeting
New York City's bid for the 2012 Summer Olympic Games. Mr. Ross also
serves on the Board of Directors of the Juvenile Diabetes Research
Foundation and the Guggenheim Museum.
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STUART J. BOESKY is a managing trustee and the Chief Executive
Officer of our Company, the Chairman of our subsidiary CharterMac
Mortgage Capital and the Managing Director of our subsidiary Related
Capital. Mr. Boesky is responsible for our strategic planning and new
product development. He oversees all of our debt products, including
our portfolio investing and mortgage banking operations, capital
markets and research. Mr. Boesky practiced real estate and tax law
with the law firm of Shipley & Rothstein from 1984-1986, when he
joined Related Capital. From 1983 to 1984, he practiced law with the
Boston office of Kaye, Fialkow, Richman and Rothstein. Previously,
Mr. Boesky was a consultant at the accounting firm of Laventhol &
Horwath. Mr. Boesky graduated with high honors from Michigan State
University with a Bachelor of Arts degree and from Wayne State School
of Law with a Juris Doctor degree. He then received a Master of Laws
degree in Taxation from Boston University School of Law. Mr. Boesky
is Chairman of the board of trustees of American Mortgage Acceptance
Company ("AMAC"), a public company managed by an affiliate of our
Company. Mr. Boesky is a regular speaker at industry conferences and
on television. Mr. Boesky is also a member of the board of directors
of the National Association of Affordable Housing Lenders and the
Investment Program Association.
MARC D. SCHNITZER is a managing trustee and the President of our
Company and the Chief Executive Officer of Related Capital. Mr.
Schnitzer is also on the board of directors of CharterMac Mortgage
Capital. Mr. Schnitzer directs our tax credit group, which has
invested in excess of $5.5 billion in affordable housing tax credit
properties since 1987, and is responsible for structuring and
marketing our institutional tax credit offerings. Mr. Schnitzer is a
frequent speaker at industry conferences sponsored by the National
Council of State Housing Agencies, the National Housing and
Rehabilitation Association and the National Association of
Homebuilders. He is a member of the Executive Committee of the Board
of Directors of the National Multi-Housing Council and a Vice
President and member of the Executive Committee of the Affordable
Housing Tax Credit Coalition. Mr. Schnitzer joined Related Capital in
1988 after receiving his Masters of Business Administration degree
from The Wharton School of the University of Pennsylvania in 1987.
From 1983 to 1986, Mr. Schnitzer was a Financial Analyst with First
Boston Corporation, an international investment bank. Mr. Schnitzer
received a Bachelor of Science degree in business administration,
summa cum laude, from the Boston University School of Management in
1983.
ALAN P. HIRMES is a managing trustee, the Chief Financial Officer and
Chief Operating Officer of our Company, a member of the board of
directors of CharterMac Mortgage Capital and the President of Related
Capital, both of which are subsidiaries of our Company. Mr. Hirmes is
responsible for managing the overall administration of our Company,
as well as any new initiatives or special projects. Mr. Hirmes
oversees the finance and accounting, human resources, information
technology and investor services departments and the joint venture
development program. Mr. Hirmes has been a Certified Public
Accountant in New York since 1978. Mr. Hirmes currently serves as
Chairman Emeritus of the Affordable Housing Tax Credit Coalition, a
national organization dealing with issues relating to the Tax Credit
Program. He is also a member of the Advisory Board of the LIHTC
Monthly Report and of the National Housing Conference, and he serves
on the Executive Board of the National Multi Housing Council. Prior
to joining Related Capital in October 1983, Mr. Hirmes was employed
by Weiner & Co., certified public accountants, where he specialized
in real estate and partnership taxation. Mr. Hirmes graduated from
Hofstra University with a Bachelor of Arts degree. Mr. Hirmes also
serves on the board of trustees of AMAC.
DENISE L. KILEY is a managing trustee, the Chief Credit Officer of
our Company and the Chief Operating Officer of Related Capital. Ms.
Kiley is also on the Board of Directors of CharterMac Mortgage
Capital. Ms. Kiley is the Director of our Company's Asset Management
and Underwriting Divisions, where she is responsible for overseeing
the due diligence and asset management of all multifamily residential
properties invested in Related Capital-sponsored corporate, public
and private equity and debt funds. Prior to joining Related Capital
in 1990, Ms. Kiley was a First Vice President with Resources Funding
Corporation, where she was responsible for acquiring, financing, and
asset managing multifamily residential properties. From 1981-1985 she
was an auditor with Price Waterhouse. Ms. Kiley is a Member of the
Advisory Committee for the Joint Center for Housing at Harvard
University; she is on the Multifamily Leadership Board for the
National Association of Home Builders; and she is a member of the
National Housing & Rehabilitation Association. Ms. Kiley received a
Bachelor of Science degree in accounting from The Carroll School of
Management at Boston College. As noted above, Ms. Kiley is retiring
from the Company.
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PETER T. ALLEN is a managing trustee (independent trustee) of our
Company and the President of Peter Allen & Associates, Inc., a real
estate development and management firm in which capacity he has been
responsible for the leasing, refinancing, and development of major
commercial properties. Mr. Allen has also been an Adjunct faculty
member of the Graduate School of Business at the University of
Michigan since 1981. Mr. Allen received a Bachelor of Arts
Degree in history/economics from DePauw University and a Masters
Degree in Business Administration with Distinction from the
University of Michigan. Mr. Allen is the chairman of our Compensation
Committee and a member of our Audit Committee.
CHARLES L. EDSON is a managing trustee (independent trustee) of our
Company. Mr. Edson, as senior counsel of the law firm Nixon Peabody
LLP, is no longer engaged in the practice of law. From 1968 to 2002
his practice included service as counsel to several governmental,
trade and public interest entities and groups on housing and
legislative matters. He still serves as the Co-Editor-in-Chief for
the Housing and Development Reporter, a news and information service
published by The West Group. Mr. Edson is an Adjunct Professor of Law
at Georgetown University Law Center, where he teaches a seminar on
federally assisted housing programs. During his career, he has served
as the Transition Director for the Department of Housing and Urban
Development on President Carter's transition staff and has also held
the position of Chief in the Public Housing Section at the Office of
General Counselor at the Department of Housing and Urban Development.
Mr. Edson received a Bachelor of Arts, magna cum laude, from Harvard
College and a Juris Doctor degree from Harvard Law School. Mr. Edson
is a member of our Investment Committee.
ANDREW L.FARKAS is a managing trustee (independent trustee) of our
Company and the founder of Island Capital and is its Managing Member,
Chairman and President. Mr. Farkas was previously Chairman and Chief
Executive Officer of Insignia Financial Group, Inc., a global real
estate services company that was merged with CB Richard Ellis in July
2003. Mr. Farkas founded Insignia in 1990. By 2003, Insignia had
become the leading commercial real estate firm in both New York and
London and operated throughout the United States, the United Kingdom
and France. Mr. Farkas received a Bachelor of Arts degree from
Harvard University in 1982, where he majored in Econometrics. Mr.
Farkas is a member of our Investment Committee and our Capital
Markets Committee.
JEFF T. BLAU is a managing trustee and the President of TRCLP. Over
the past 15 years Mr. Blau has been responsible for directing and
overseeing new developments worth over $6 billion in virtually every
sector of the real estate industry. In his position as President of
TRCLP, Mr. Blau is responsible for new development origination and
for strategic oversight of the firm's affiliated group of companies.
Mr. Blau completed his undergraduate studies at the University of
Michigan and received his Masters Degree in Business Administration
from the Wharton School of the University of Pennsylvania. Mr. Blau
is an active member of numerous professional and charitable
organizations and currently sits on the board of directors of the Doe
Fund, the 14th Street Local Development Corporation / Business
Improvement District, ABO and the YMCA of Greater New York. Mr. Blau
is a member of our Investment Committee.
ROBERT A. MEISTER is a managing trustee (independent trustee) and the
Vice Chairman of Aon Risk Services Companies, Inc. ("Aon"), an
insurance brokerage, risk consulting, reinsurance and employee
benefits company and a subsidiary of Aon Corporation and has served
in this position since 1991. Prior to Aon, Mr. Meister was the Vice
Chairman and a Director of Sedgwick James from 1985-1991 and the Vice
Chairman of Alexander & Alexander from 1975-1985. Mr. Meister is a
member of the board of directors of Ramco Gershenson Properties and
Universal Health Services and serves on each company's compensation
committee. Mr. Meister has served on the board of directors of
several charitable organizations. Mr. Meister received a Bachelor of
Science degree in Business Administration from Pennsylvania State
University. Mr. Meister is a member of our Nominating and Governance
Committee and our Conflicts Committee.
JEROME Y. HALPERIN is a managing trustee (independent trustee) of our
Company and a retired partner of PricewaterhouseCoopers, LLP, the
international accounting firm, where he spent 39 years in varied
positions. Mr. Halperin's final position at PricewaterhouseCoopers
was Chairman of the international actuarial, benefits and
compensation services group. After his retirement from
PricewaterhouseCoopers, Mr. Halperin was the president of the Detroit
Investment Fund, a private investment fund established to stimulate
economic growth in the city of Detroit. Currently, Mr. Halperin is a
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consultant on various real estate projects. He serves on the board of
directors of several charitable organizations and was the Chairman of
the Michigan Tax Forms Revisions Committee, a position he was
appointed to by the Governor of the State of Michigan. Mr. Halperin
is the co-author of "Tax Planning for Real Estate Transactions". Mr.
Halperin received a Bachelor of Business Administration from the
University of Michigan and a Juris Doctor from Harvard Law School.
Mr. Halperin is the chairman of our Audit Committee and is a member
of our Capital Markets Committee.
NATHAN GANTCHER is a managing trustee (independent trustee) of our
Company. He is the former vice chairman of CIBC World Markets
Corporation, the U.S. Section 20 broker/dealer of Canadian Imperial
Bank of Commerce ("CIBC"). CIBC acquired Oppenheimer & Company in
November 1997. Mr. Gantcher had been with Oppenheimer since 1968 and
served as its president and co-chief executive officer from 1983
until the firm was acquired in 1997. Prior to joining Oppenheimer, he
was an account executive with Young & Rubicam, the advertising firm,
for four years. Mr. Gantcher recently retired as Chairman of the
board of trustees of Tufts University, where he had been a member
since 1983 and chairman for the last eight years. He is a member of
the Council on Foreign Relations, a director of Mack-Cali Realty
Corporation, Neuberger Berman, LLC and Refco Group Ltd., LLC, a
senior adviser for RRE Investors, and a former governor of the
American Stock Exchange. Mr. Gantcher is a member of the steering
committee of the Wall Street division of the U.J.A., a past director
of the Jewish Communal Fund and a trustee of the Anti-Defamation
League Foundation. Mr. Gantcher received a Bachelor of Arts from
Tufts University and a Masters in Business Administration from
Columbia Business School. Mr. Gantcher is the chairman of our Capital
Markets Committee and is a member of our Nominating and Governance
Committee and our Compensation Committee.
ROBERT L. LOVERD is a managing trustee (independent trustee) of our
Company and the former Group Chief Financial Officer and a Founding
Partner of MC European Capital (Holdings), a London investment
banking and securities firm, which was established in 1995 and
substantially sold in 2000. From 1979 to 1994, Mr. Loverd held
various positions in New York and London in the Investment Banking
Department of Credit Suisse First Boston. Prior to that, Mr. Loverd
was a shareholder in the International Investment Banking Department
of Kidder, Peabody & Co. Incorporated. Mr. Loverd is a member of the
Board of Directors of Harbus Investors. Mr. Loverd received a
Bachelor of Arts degree from Princeton University and a Masters in
Business Administration from Harvard Business School. Mr. Loverd is
the chairman of our Nominating and Governance Committee and a member
of our Capital Markets Committee.
JANICE COOK ROBERTS is a managing trustee (independent trustee) of
our Company and an Executive Vice President at the New York City
Investment Fund, which provides financial and strategic assistance to
businesses that spur economic activity in New York City. Joining the
organization in 1996, Ms. Roberts helped launch the Fund, which has
raised over $96 million in capital and has invested in over 50
businesses since its inception. Prior to joining the New York City
Investment Fund, Ms. Roberts was employed by MCA/Universal, serving
as Executive Director of the International division from 1989 to 1996
and as Senior Auditor in the Corporate Internal Audit division from
1987 to 1989. Ms. Roberts was also Assistant Treasurer at Bankers
Trust Company from 1982 to 1985, in which capacity she performed
detailed financial analysis and modeling. Ms. Roberts received her
Bachelor of Arts degree in Political Science and French from Amherst
College and her Masters in Business Administration from the Harvard
Graduate School of Business Administration. Ms. Roberts is a member
of our Audit Committee and our Conflicts Committee.
THOMAS W. WHITE is a managing trustee of our Company. Mr. White
retired as a Senior Vice President of Fannie Mae in the multifamily
activities department, where he was responsible for the development
and implementation of policies and procedures for all Fannie Mae
multifamily programs, including the delegated underwriting and
servicing program, prior approval program and negotiated swap and
negotiated cash purchases product lines. He was also responsible for
asset management of multifamily loans in a portfolio of
mortgage-backed securities. Mr. White joined Fannie Mae in November
1987 as director of multifamily product management. He was elected
Vice President for multifamily asset acquisition in November 1998 and
assumed his position of Senior Vice President in November 1990. Prior
to joining Fannie Mae, he served as an investment banker with Bear
103
Stearns, Inc. He also was the executive vice president of the
National Council of State Housing Agencies; chief underwriter for the
Michigan State Housing Development Authority; and served as a state
legislator in the state of Michigan. In July 2001, we hired Mr. White
as a consultant. Mr. White serves on the Board of Directors of
New York Mortgage Trust, Inc. and CharterMac Mortgage Capital. Mr.
White is Chairman of our Investment Committee and Chairman of our
Conflicts Committee.
COMMITTEES OF THE BOARD OF TRUSTEES
Our board of trustees has standing audit, compensation, nominating
and governance, investment, capital markets and conflicts committees.
The functions of each committee are detailed in the respective
committee charters, which are available on our website at
http://www.chartermac.com in the "Investor Relations" section. Please
note that the information on our website is not incorporated by
reference in this filing on Form 10-K.
Audit Committee
The audit committee's duties include the periodic review of
our financial statements and meetings with our independent
auditors. The audit committee must have three members and be
comprised solely of independent trustees. The audit committee
held seven meetings during the year ended December 31, 2004
and is currently comprised of Mr. Halperin, Mr. Allen and Ms.
Roberts, each of whom the board of trustees has determined is
independent within the meaning of Securities and Exchange
Commission ("SEC") rules and regulations and the listing
standards of the American Stock Exchange. In addition, our
board of trustees has determined that Mr. Halperin is
qualified as an audit committee financial expert within the
meaning of SEC rules and regulations and the listing standards
of the American Stock Exchange.
Compensation Committee
The compensation committee's duties include the determination
of the compensation of our executive officers, the
administration of our Incentive Share Plan and the review and
approval of any material employment agreements. The
compensation committee must have at least two members and be
comprised solely of independent trustees. The compensation
committee held four meetings during the year ended December
31, 2004 and is currently comprised of Mr. Allen and Mr.
Gantcher, each of whom the board of trustees has determined is
independent within the meaning of SEC rules and regulations
and the listing standards of the American Stock Exchange.
Nominating and Governance Committee
The nominating and governance committee's duties include
recommending to the board for its approval (subject to the
conditions set forth below) the trustee nominees for election
at any annual or special meeting of our shareholders and
overseeing our compliance with legal and regulatory
requirements pertaining to corporate governance, including the
corporate governance listing requirements of the American
Stock Exchange. In evaluating a candidate for trustee, the
committee considers factors that are in the best interests of
our Company and our shareholders, including:
(i) business and/or technical experience and expertise
relevant to the needs of our Company;
(ii) leadership;
(iii) diversity;
(iv) ability to represent our shareholders; and
(v) the independence and expertise standards mandated by
SEC rules and regulations, the listing standards of the
American Stock Exchange and any other applicable
federal or state law, rule or regulation.
The nominating and governance committee must have at least two
members and be comprised solely of independent trustees. The
nominating and governance committee is currently comprised of
Mr. Loverd, Mr. Gantcher and Mr. Meister, each of whom the
board of trustees has determined is independent within the
104
meaning of SEC rules and regulations and the listing standards
of the American Stock Exchange. The nominating and governance
committee held five meetings during the year ended December
31, 2004.
Pursuant to our by-laws, any shareholder entitled to vote at
the annual meeting may submit a nomination for a trustee.
Nominations by a shareholder must be given in a timely fashion
and notice of the nomination must be given in writing to our
board of trustees. To be timely, a shareholder's notice must
be delivered to the board of trustees at our principal
executive offices not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of
the annual meeting is advanced by more than 30 days or delayed
by more than 60 days from such anniversary date, or if we have
not previously held an annual meeting, notice by a shareholder
to be timely may be delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual
meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made. Such
shareholder's notice must set forth as to each person whom the
shareholder proposes to nominate for election or reelection as
a Managing Trustee, all information relating to such person
that is required to be disclosed in solicitations of proxies
for election of Managing Trustees, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the
proxy statement as a nominee and to serving as a Managing
Trustee if elected). In the event that the number of Managing
Trustees to be elected to the board of trustees is increased
and there is no public announcement naming all of the nominees
for Managing Trustee or specifying the size of the increased
board of trustees made by us at least 70 days prior to the
first anniversary of the preceding year's annual meeting, a
shareholder's notice will also be considered timely, but only
with respect to nominees for any new positions created by such
increase, if it is delivered to the board of trustees at our
principal offices not later than the close of business on the
tenth day following the day on which we first made such public
announcement.
So long as the holders of the Special Common Units own, in the
aggregate, 7.5% or more of our outstanding voting securities,
holders of a majority of the outstanding Special Preferred
Voting Shares will have the right, instead of our board of
trustees (or our nominating and governance committee thereof)
to elect to our board of trustees any non-independent trustees
to fill a vacancy and to nominate any non-independent trustees
for election at any annual or special meeting of our
shareholders. This power of nomination will not affect the
right of the holders of our common shares to also nominate
their choices for the non-independent trustee nominees as set
forth in the previous paragraph. After the date upon which the
holders of the Special Preferred Voting shares own, in the
aggregate, less than 7.5% of our outstanding voting
securities, the nominating and governance committee will have
the right to nominate non-independent trustees to fill a
vacancy (which vacancies will be filled by the affirmative
vote of a majority of our board of trustees) or to stand for
election at any annual or special meeting.
If there is any vacancy for independent trustees, replacement
independent trustees will be nominated by the nominating and
governance committee and subject to the approval of two-thirds
of the trustees. The vacancy shall be filled by a majority
vote of the trustees electing a nominated replacement
independent trustee. All trustees have the right to recommend
to the nominating and governance committee for its
consideration their choices for the replacement independent
trustee nominees. If there is no remaining independent
trustee, any such vacancies will be filled by a majority of
the remaining managing trustees.
The nominating and governance committee approved, on behalf of
the board of trustees, a set of Corporate Governance
Guidelines and a Code of Business Conduct and Ethics for our
Company. The ongoing administration of these two policies is
overseen by the Audit Committee
Investment Committee
The investment committee's duties include the review and
oversight of our Company's investment policies and
strategies and the review and approval of new product lines
and investment transactions for which the Executive Officers
of our Company are not otherwise delegated the authority to
105
execute, pursuant to the investment committee's charter. The
investment committee must have at least three members. The
investment committee held nine meetings during the year
ended December 31, 2004 and is currently comprised of Mr.
Blau, Mr. Edson, Mr. Farkas and Mr. White.
Capital Markets Committee
The capital markets committee's duties include the review of
the annual capital plan, the review of our financing and
hedging strategies and the approval of our debt and equity
issuances and the debt and equity issuances of our
subsidiaries. The capital markets committee must have at
least three members. The capital markets committee held four
meetings during the year ended December 31, 2004 and is
currently comprised of Mr. Gantcher, Mr. Loverd, Mr. Farkas
and Mr. Halperin.
Conflicts Committee
The conflicts committee's duties include the review of
transactions with Affiliates, as defined in the conflicts
committee's charter. The conflicts committee must have at
least three members. The conflicts committee held six
meeting during the year ended December 31, 2004 and is
currently comprised of Mr. Meister, Mr. White and Ms.
Roberts.
OTHER CORPORATE GOVERNANCE INITIATIVES
We have adopted a Code of Business Conduct and Ethics as defined
under the rules of the SEC, that applies to our Executive Officers
and all professionals in finance and finance-related departments, as
well as our trustees and officers and employees of our subsidiaries.
We regularly monitor developments in the area of corporate governance
and continue to enhance our corporate governance structure based upon
a review of new developments and recommended best practices. Our
corporate governance materials, including our Corporate Governance
Guidelines, Code of Business Conduct and Ethics, Whistle Blower
Policy (which is incorporated in our Code of Business Conduct and
Ethics) and standing committee charters may be found on our website
at http://www.chartermac.com in the "Investor Relations" section.
Copies of these materials are also available to shareholders upon
written request to our Secretary, CharterMac, 625 Madison Avenue, New
York, New York, 10022.
RELATED CAPITAL
We and our subsidiaries (with the exception of CharterMac Mortgage
Capital) operate our day-to-day activities utilizing the services and
advice provided by our subsidiary, Related Capital, subject to the
supervision and review of our board of trustees and our subsidiaries'
board of trustees (or directors), as applicable.
EXECUTIVE OFFICERS
The executive officers of Related Capital are set forth below:
NAME AGE OFFICE
--------------------------------------------------------------------
Marc D. Schnitzer 44 Chief Executive Officer
Stuart J. Boesky 48 Managing Director
Alan P. Hirmes 50 President
Denise L. Kiley (1) 45 Chief Operating Officer
(1) On February 25, 2005, we announced Ms. Kiley's intention to
retire in 2005.
Biographical information may be found above, beginning on pages 100.
106
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and 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.
These persons are required by regulation of the SEC to furnish us
with copies of all Section 16(a) forms they file.
During the year ended December 31, 2004, two of our trustees, Mr.
Gantcher and Mr. Farkas, did not comply with all applicable Section
16(a) filing requirements. Mr. Gantcher purchased shares of our
Company on October 8, 2004 and October 9, 2004 and he did not file
the applicable Section 16(a) filing until October 15, 2004, which is
longer than the two business day requirement of the SEC for filing
Section 16(a) filings. In addition, Mr. Farkas received shares of our
Company in connection with his service as independent trustees on
December 31, 2004 and did not file the applicable Section 16(a)
filings until January 6, 2005, which is longer than the two business
day requirement of the SEC for filing Section 16(a) filings. Other
than Mr. Gantcher and Mr. Farkas, the remaining trustees, executive
officers and greater than ten percent beneficial owners complied with
all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
TRUSTEE COMPENSATION
Each independent trustee receives annual compensation at the rate of
$50,000, payable $25,000 in cash (or, at a trustee's option, common
shares) and common shares having an aggregate value of $25,000, based
on the fair market value at the date of issuance. The trustees have
the option to have their common shares cliff-vest after a three-year
period. In addition, independent trustees are eligible for an expense
reimbursement for attending meetings of the board of trustees and the
committees. The chairman of the audit committee receives an
additional $5,000 per year for serving as chairman.
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth the compensation during each of the
Company's last three years paid to our CEO and the three other most
highly compensated Executive Officers based on compensation earned
during the year ended December 31, 2004.
SECURITIES
UNDERLYING
SHARE
NAME AND OTHER ANNUAL RESTRICTED OPTIONS
PRINCIPAL POSITION AT COMPENSATION (1) SHARE (NUMBER OF
DECEMBER 31, 2004 YEAR SALARY ($) BONUS ($) ($) AWARDS ($) SHARES)
---------------------------------------------------------------------------------------------------------
Stuart J. Boesky 2004 $521,323 $500,000 $29,432 $400,009(2) 220,765(3)
CHIEF EXECUTIVE OFFICER 2003 $ 61,538(4) 50,000(5) $ -- $ -- --
2002 $ -- $ -- $ -- $ -- --
Alan P. Hirmes 2004 $521,323 $500,000 $23,280 $317,060(2) 174,985(3)
CHIEF FINANCIAL OFFICER 2003 $ 61,538(4) $ 50,000(5) $ -- $ -- --
2002 $ -- $ -- $ -- $ -- --
Marc D. Schnitzer 2004 $521,323 $500,000 $29,758 $400,009(2) 220,765(3)
PRESIDENT 2003 $ 61,538(4) $ 50,000(5) $ -- $ -- --
2002 -- -- $ -- $ -- --
Denise L. Kiley* 2004 $521,323 $500,000 $25,884 $ -- --
CHIEF CREDIT OFFICER 2003 $ 61,538(4) $ 50,000(5) $ -- $ -- --
2002 $ -- $ -- $ -- $ -- --
* On February 25, 2005, we announced Ms. Kiley's intention to
retire in 2005.
107
(1) Includes 401(K) match, premiums paid by the Company with respect
to life insurance and health insurance; with respect to Mr.
Boesky, an apartment allowance; and, with respect to Mr. Hirmes,
Mr. Schnitzer and Ms. Kiley, an auto allowance.
(2) The value of the grants of restricted common shares effective
January 3, 2005, is based upon the closing price of $24.44 of
the Company's common shares on the trading day prior to the
effective date of the grants. These restricted common shares
vest over a three year period, with one third vesting on the
first anniversary of the effective date of the grants.
(3) Options have a strike price of $24.44 and vest over a three year
period, with one third vesting on the first anniversary of the
effective date of the grant, which was January 3, 2005.
(4) Mr. Boesky, Mr. Hirmes, Mr. Schnitzer and Ms. Kiley are
employees of Related Capital, which became our subsidiary on
November 17, 2003. Therefore, their salaries on this chart for
2003 are the actual dollar amounts received for the period of
time that they were employees of a subsidiary of our Company
(November 17, 2003-December 31, 2003) based on their annual
salaries ($500,000). For the period of January 1, 2003- November
16, 2003 and the year ended December 31, 2002, Mr. Boesky, Mr.
Hirmes, Mr. Schnitzer and Ms. Kiley did not receive any direct
compensation from our Company. Rather, they received
compensation from Related Capital, which, prior to the
acquisition, provided management services to our Company
pursuant to a management contract.
(5) Represents bonus payments for the period of November 17, 2003 to
December 31, 2003.
SHARE OPTION GRANTS, EXERCISES AND HOLDINGS
No share options were granted during 2004, although share options
granted in 2005 as noted in (3) above pertained to 2004 services.
2004 YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR-END AT YEAR-END
---------------------------------- -------------------------
SHARES
ACQUIRED
ON VALUE
NAME (1) EXERCISE (#) REALIZED (2) EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE UNEXERCISABLE
---------------------- ------------ ------------ ---------------------------------- -------------------------
Stuart J. Boesky 1,739 $20,107 -- -- $ -- $ --
Alan P. Hirmes -- $ -- -- -- $ -- $ --
Marc D. Schnitzer 1,739 $20,107 -- -- $ -- $ --
Denise L. Kiley -- $ -- -- -- $ -- $ --
(1) See Executive Compensation Summary Table for title of the
persons named above.
(2) The value realized is calculated based upon the number of shares
acquired on exercise times the strike price of the options,
which was $11.5625.
EMPLOYMENT AGREEMENTS
The material terms of the employment agreements with Mr. Boesky, Mr.
Hirmes, Mr. Schnitzer and Ms. Kiley are as follows:
108
Compensation
Each of the executives receives a base salary at an annual
rate of $500,000, which amount may be increased from time to
time at the discretion of the compensation committee of our
board of trustees. This notwithstanding, an executive's base
salary will, at a minimum, increase annually by the lesser of
(a) 5% or (b) the percentage equal to the increase, if any, in
the Consumer Price Index measured for the twelve (12) month
period immediately preceding the effective date of the
increase.
Term
Each employment agreement is for a term of three years,
provided however that this term will automatically be extended
for additional periods of one year commencing on the third
anniversary of the effective date of the agreement and each
anniversary thereof unless terminated by either party upon
notice.
Non-competition/Non-solicitation
During the course of employment and for a period of 18 months
thereafter, each executive has agreed not to engage, directly
or indirectly, in a "competitive business" anywhere in the
United States, provided that in the event that an executive
terminates his or her employment for good reason or the
executive's employment is terminated by us without cause, the
duration of the non-competition period will be reduced to a
period of 12 months following termination. "Competitive
business" means arranging for or providing, directly or
indirectly, debt and/or equity financing products or services
to developers and owners of multifamily housing.
In addition, for a period of 18 months following the
termination of an executive's employment (or 12 months in the
event that executive terminates his or her employment for good
reason or the executive's employment is terminated by us
without cause) such individual will not, directly or
indirectly, contact, solicit or do business of any kind in any
competitive business with, any person who, during the two-year
period preceding the date of termination of employment, sold
or developed, or owned an interest in a tax credit property or
a tax credit syndication interest sponsored by CCC or any of
its affiliates.
Termination
Employment may be terminated at any time during the term of
employment (a) by us with or without cause; (b) by the
executive upon notice of resignation delivered to the company;
(c) upon death of the executive; and (d) by us at any time
after six months of an executive's disability.
Upon termination of employment (a) by the executive for good
reason or by the company without cause, (b) by the executive
within one year after a change in control for good reason or
if we terminate the executive's employment in anticipation of,
or within one year after a change of control, or (c) upon
death or disability during the course of employment, such
executive managing partner will be entitled to:
Termination other than in connection with a change in control.
If employment is terminated by the executive for good reason
or by us without cause, the executive will be entitled to (a)
any unvested options awarded to the executive under the
incentive share option plan and (b) severance compensation in
an amount equal to 12 months of his or her base salary plus
75% of the amount of his or her most recently declared and
paid annual bonus compensation, payable in a lump sum within
30 days of the date of termination of employment. As an
example of the computation of the severance payment which
could be payable in a circumstance other than a change of
control, assume that the executive is terminated in year 3 and
his or her then current base salary is $551,250 (the original
base salary plus the minimum 5% increase per year) and the
annual bonus paid in year 2 was $50,000. In this example, the
severance compensation would equal $588,750.
109
Termination in connection with a change in control.
In the event employment is terminated by the executive within
one year after a change in control for good reason or by us in
anticipation of, or within one year after, a change in
control, the severance payable will be equal to 200% of the
severance compensation payable in connection with a
termination other than in the event of a change in control. As
an example of the computation of the severance payment which
could be payable in connection with a change of control,
assume the same facts as above in "Termination other than in
connection with a change in control". In this example, the
severance compensation would equal $588,750 multiplied by 2 or
$1,177,500.
Death; disability.
In the event employment is terminated due to death or
disability during the course of employment, such executive
(and his or her estate or designated beneficiary) will be
entitled to receive a cash payment equal to 12 months of base
salary plus 75% of the amount of the executive's annual bonus
compensation. As an example of the computation of the
severance payment which could be payable in connection with
death or disability, assume the same facts as above in
"Termination other than in connection with a change in
control". In this example, the severance compensation would
equal the same as for "Termination other than in connection
with a change in control" (i.e., $588,750).
Other Benefits
During employment, each executive is also eligible to (i)
participate in all bonus and incentive compensation plans made
available from time to time, which will be considered at least
annually by the compensation committee and have opportunities
for cash bonuses; (ii) receive options as the same may be
awarded from time to time by the compensation committee under
our incentive share option plan; and (iii) participate in the
various medical, life insurance, pension and other employee
benefit plans maintained by us.
110
STOCK PERFORMANCE GRAPH
The following share performance graph compares our performance to
the S&P 500 and the Russell 2000 stock index. We are currently one
of the companies included in the Russell 2000 stock index, an index
that measures the performance of small market capitalization
companies. The graph assumes a $100 investment on December 31, 1999.
All stock price performance figures include the reinvestment of
dividends.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
CUMULATIVE TOTAL RETURN
12/99 12/00 12/01 12/02 12/03 12/04
------------------------------------------------------------------
CharterMac $100.00 $114.38 $138.30 $147.83 $179.83 $208.00
S&P 500 100.00 90.89 80.09 62.39 80.29 89.02
Russell 2000 100.00 96.98 99.39 79.03 116.38 137.71
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
See COMMITTEES OF THE BOARD OF TRUSTEES - COMPENSATION COMMITTEE
above. Each of the committee members is independent and none of the
committee members have any "interlocking" relationships.
111
Board Compensation Committee Report on Executive Compensation
STATEMENT OF PHILOSOPHY
The compensation committee's duties include the determination of the
compensation of our executive officers, the administration of our
Amended and Restated Incentive Share Plan ("Incentive Share Plan")
and the review and approval of any material employment agreements
entered into by Related Capital. We seek to attract and retain highly
qualified individuals at all levels, and in particular, those whose
performance is most critical to our Company's success.
Our Company's success depends on developing, motivating and retaining
individuals who have the skills and expertise to lead our Company.
Our Company's executive compensation program is designed to help
achieve these objectives. It is comprised of the following three main
components: (i) competitive base salaries; (ii) bonuses; and (iii)
long-term incentives.
OVERVIEW
In connection with our acquisition of Related Capital, each of our
executive officers entered into three-year contracts, the terms of
which are summarized under the heading "Employment Agreements",
below. Under those contracts, each of the executive officers receives
a base salary of $500,000 per year which is not subject to
adjustment. We may determine to pay bonus compensation which we have
done in the past and may do in the future based on the criteria set
forth under the headings "Cash Bonuses" and "Long-Term Incentives".
SALARIES
In keeping with the long-term and highly technical nature of our
business, we generally take a long-term approach to executive
compensation. Each year following the expiration of the three-year
contracts entered into with each of the executive officer, the
compensation committee will evaluate Related Capital's salary
structure based on competitive positioning (comparing the Company's
salary structure with salaries paid by other peer companies); the
Company's own business performance; and general economic factors.
Specific considerations are expected to include cash available for
distribution growth, total return to shareholders and contributions
to Company-wide achievement. In conducting its assessment, the
compensation committee will review compensation data for comparable
companies to the extent available
CASH BONUSES
The bonus an executive receives, including the CEO, in large part
depends on the executive's individual performance and level of
responsibility. Each year, we assess performance based on factors
including business results, technical expertise, leadership and
management skills.
LONG-TERM INCENTIVES
Long-term incentive awards are intended to develop and retain strong
management through share ownership and incentive awards that
recognize future performance. We have adopted our Incentive Share
Plan, the purpose of which is to (i) permit our Company and its
subsidiaries to attract and retain qualified individuals as trustees
and officers and (ii) to provide incentive and to more closely align
their financial interests with the interests of our shareholders by
providing these individuals with substantial financial interest in
our success. The compensation committee administers our Incentive
Share Plan.
Under the Incentive Share Plan, the compensation committee may grant
options, restricted shares, deferred shares, performance units, and
performance shares (collectively, "Awards") to our trustees and
officers (and the trustees, officers and employees of our
subsidiaries) as authorized by our board of trustees.
The maximum number of shares that may be subject to Awards granted
under the Incentive Share Plan (determined at the time each Award is
granted) is the lesser of (i) ten percent (10%) of our outstanding
112
shares (which includes Common Shares, preferred shares and any other
securities that have the same economic attributes as our Common
Shares) as of the December 31 of the immediately preceding calendar
year, and (ii) the limit prescribed by listing standards of the
American Stock Exchange or any other national securities exchange or
quotation system on which our shares are then listed.
All options granted by the compensation committee will have an
exercise price equal to or greater than the fair market value of the
Common Shares on the date of the grant. The maximum option term is
ten years from the date of grant. All Common Share options granted
pursuant to the Incentive Share Plan may vest immediately upon
issuance or in accordance with the determination of the compensation
committee.
Grants of restricted Common Shares to executive officers also form a
part of the Company's long-term incentive package. Typically, some
portion of such grants would vest annually over a period of several
years, so long as the executive officer remains employed by the
Company. The recipients of such grants receive dividends and have
voting rights with respect to unvested as well as vested shares. The
CEO and certain other executive officers received 2004 bonuses in the
form of cash and grants of options and restricted Common Shares which
are summarized under the heading "Executive Compensation Summary
Table" below.
The number of options granted to executive officers, including the
CEO, is based on individual performance and level of responsibility.
For this purpose, the compensation committee measures performance the
same way as described above for cash bonuses. Long-term incentive
awards must be sufficient in size to provide a strong incentive for
executives to work for long-term business interests.
CEO COMPENSATION
As previously discussed above, each of our executive officers,
including our CEO, entered into three-year employment contracts in
connection with our acquisition of Related Capital. The terms of
these employment contracts, including the terms of the employment
contract of the CEO, are summarized under the heading "Employment
Agreements", below.
IMPLICATIONS OF INTERNAL REVENUE CODE SECTION 162 (M) FOR EXECUTIVE
COMPENSATION
It is the responsibility of the compensation committee to address the
issues raised by the provisions in the tax laws, which make certain
non-performance-based compensation to executives of public companies
in excess of $1,000,000 non-deductible to the Company. In this
regard, the compensation committee is responsible for considering
whether any actions with respect to this limit should be taken by the
Company. The Incentive Share Plan has been designed in a manner to
allow certain cash and stock based incentives to be treated as
performance based and, therefore, not subject to the $1,000,000
limitation. The compensation committee is expected to continue to
monitor the $1,000,000 limitation and is expected to make necessary
recommendations if it is warranted in the future.
SUMMARY
The compensation committee is responsible for seeing that the
Company's compensation program serves the best interests of its
shareholders. In the opinion of the compensation committee, the
Company has an appropriate and competitive compensation program,
which has served the Company and shareholders well. The combination
of base salary, cash bonuses, and emphasis on long-term incentives
provides a balanced and stable foundation for effective executive
leadership.
COMPENSATION COMMITTEE
Peter Allen -- Chairman
Nathan Gantcher
113
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 2005, the following shareholder is the beneficial
owner of more than 5% of our outstanding common shares.
AMOUNT AND PERCENTAGE OF
NATURE OF COMMON SHARES
NAME AND ADDRESS BENEFICIAL OWNERSHIP OUTSTANDING
-----------------------------------------------------------------------------------------
Related General II, LP
625 Madison Avenue
New York, NY 10022 10,195,085(1) 20%
(1) Related General II, L.P. owns:
685 common shares and
10,194,400 Special Common Units of CCC, which are convertible
into common shares of CharterMac on a one-to-one basis,
subject to certain restrictions, and the associated
10,194,400 special preferred voting shares.
Related General II, LP is owned by TRCLP. Mr. Ross owns 92% of
TRCLP and Mr. Blau owns the remaining 8%.
As of March 31, 2005, Trustees and Executive Officers of CharterMac
own directly or beneficially Common Shares as follows:
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME TITLE OWNERSHIP CLASS(12)
-------------------------------------------------------------------------------------------------------------
Stephen M. Ross Chairman 10,652,735 (1) 14.43%
Stuart J. Boesky Managing Trustee and Chief Executive 1,561,240 (2) 2.11%
Officer
Marc D. Schnitzer Managing Trustee and President 1,139,347 (3) 1.54%
Alan P. Hirmes Managing Trustee, Chief Financial 1,549,490 (4) 2.10%
Officer and Chief Operating Officer
Denise L. Kiley Managing Trustee and Chief Credit Officer 703,776 (5) *
Jeff T. Blau Managing Trustee 10,245,085 (6) 13.88%
Thomas W. White Managing Trustee 972 *
Peter T. Allen Managing Trustee (independent trustee) 8,449 *
Charles L. Edson Managing Trustee (independent trustee) 5,701 (7) *
Andrew L. Farkas Managing Trustee (independent trustee) 1,023 *
Nathan Gantcher Managing Trustee (independent trustee) 135,595 (8) *
Jerome Y. Halperin Managing Trustee (independent trustee) 2,148 *
Robert L. Loverd Managing Trustee (independent trustee) 3,795 *
Robert A. Meister Managing Trustee (independent trustee) 32,295 (9) *
Janice Cook Roberts Managing Trustee (independent trustee) 2,295 (10) *
All Executive Officers and Trustees of CharterMac as a group (15 persons) 15,764,233 (11) 21.35%
* Less than 1% of the outstanding common shares.
(1) Includes (i) 236,493 common shares owned directly by Mr. Ross;
(ii) 21,157 shares owned by RelCap Holding Company, LLC
("RelCap"), of which Mr. Ross owns indirectly 65%; (iii)
10,194,400 Special Common Units and 685 common shares owned by
Related General II, LP. TRCLP owns 100% of Related General II
114
and Mr. Ross owns 92% of TRCLP; (iv) 200,000 options
exercisable for common shares on a one-for-one basis (which
are exercisable within 60 days)
(2) Includes (i) 59,386 common shares owned directly by Mr.
Boesky; (ii) 21,157 shares owned by RelCap, of which Mr.
Boesky owns indirectly 9.69%; (iii) 1,464,330 Special Common
Units owned by SJB Associates, LP, of which Mr. Boesky owns
100%; and (iv) 16,367 restricted common shares, which vest
over a three year period, commencing on January 3, 2005.
(3) Includes (i) 22,594 common shares owned directly by Mr.
Schnitzer; (ii) 21,157 shares owned by RelCap, of which Mr.
Schnitzer owns indirectly 9.69%; (iii) 1,079,229 Special
Common Units owned by Marc Associates, LP, of which Mr.
Schnitzer owns 100%; and (iv) 16,367 restricted common shares,
which vest over a three year period, commencing on January 3,
2005.
(4) Includes (i) 51,030 common shares owned directly by Mr.
Hirmes; (ii) 21,157 shares owned by RelCap, of which Mr.
Hirmes owns indirectly 9.69%; (iii) 1,464,330 Special Common
Units owned by APH Associates, LP, of which Mr. Hirmes owns
100%; and (iv) 12,973 restricted common shares, which vest
over a three year period, commencing on January 3, 2005.
(5) Includes (i) 23,091 common shares owned directly by Ms. Kiley;
(ii) 21,157 shares owned by RelCap, of which Ms. Kiley owns
indirectly 5.93%; and (iii) 659,528 Special Common Units owned
by DLK Associates, LP, of which Ms. Kiley owns 100%. On
February 25, 2005, we announced Ms. Kiley's intention to
retire in 2005.
(6) Includes (i) 50,000 common shares owned directly by Mr. Blau;
and (ii) 10,194,400 Special Common Units and 685 common shares
owned by Related General II, LP. TRCLP owns 100% of Related
General II and Mr. Blau owns 8% of TRCLP.
(7) The common shares are owned by the Charles L. Edson Revocable
Trust.
(8) Includes: (i) 80,300 common shares owned directly by Mr.
Gantcher; (ii) 30,000 common shares owned by Gantcher Family
Partners, LLC; (iii) 15,000 shares held by Alice Gantcher, who
is Mr. Gantcher's wife; (iv) 8,000 shares held by Gantcher
Family 1986 Trust; (v) 1,272 restricted common shares, which
cliff-vest on June 30, 2007; and (vi) 1,023 restricted common
shares, which cliff-vest on December 31, 2007.
(9) Includes: (i) 30,000 common shares owned directly by Mr.
Meister; (ii) 1,272 restricted common shares, which cliff-vest
on June 30, 2007; and (iii) 1,023 restricted common shares,
which cliff-vest on December 31, 2007.
(10) Includes: (i) 1,272 restricted common shares, which cliff-
vest on June 30, 2007; and (ii) 1,023 restricted common
shares, which cliff-vest on December 31, 2007.
(11) Includes (i) 21,157 common shares owned by RelCap; (ii) 685
common shares owned by Related General II, LP (iii) 200,000
options exercisable for common shares on a one-for-one basis
(which are exercisable within 60 days); (iv) 14,861,817
Special Common Units; and (v) 52,592 restricted common shares.
(12) Based on the common shares outstanding as March 31, 2005
(51,323,062) plus the common shares issuable upon the
conversion of (i) all options to purchase common shares which
are exercisable within 60 days (200,000); (ii) all CRA
Preferred Shares (6,552,070); (iii) all restricted common
shares (586,957); and (iv) all Special Common Units
(15,172,217).
115
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have and will continue to have certain relationships with Related
Capital and our other affiliates.
MANAGEMENT AND SERVICING AGREEMENTS
We and our subsidiaries (with the exception of CharterMac Mortgage
Capital) operate our day-to-day activities utilizing the services and
advice provided by our subsidiaries, Related Capital and CM Corp.,
subject to the supervision and review of our board of trustees and
our subsidiaries' board of trustees (or directors), as applicable.
Although our board of trustees and each board of trustees (or
directors) of our subsidiaries has continuing exclusive authority
over the respective entity's management, affairs, and disposition of
assets, our board of trustees (and the board of trustees of our
subsidiaries, as applicable) has delegated to Related Capital and CM
Corp. the power and duty to perform some or all of the following
management services pursuant to management agreements and servicing
agreements:
(i) manage the day-to-day operations of such entity;
(ii) acquire, retain or sell such entity's assets;
(iii) seek out, present and recommend investment
opportunities consistent with such entity's investments
or the dispositions thereof;
(iv) when appropriate, cause an affiliate to serve as the
mortgagee of record for mortgage investments of such
entity and in that capacity hold escrow on behalf of
mortgagors in connection with the servicing of
mortgages;
(v) obtain for such entity such services as may be required
in acquiring and disposing of investments, disbursing
and collecting the funds of such entity, paying the
debts and fulfilling the obligations of such entity,
and handling, prosecuting and settling any claims of
such entity, including foreclosing and otherwise
enforcing mortgages and other liens securing
investments;
(vi) obtain for us and our subsidiaries such services as may
be required for property management, mortgage brokerage
and servicing, and other activities relating to the
investment portfolio;
(vii) evaluate, structure and negotiate prepayments or sales
of such entity's investments;
(viii) monitor operations and expenses; and
(ix) performance of the foregoing services.
The term of our management agreement with Related Capital is five
years, ending November 17, 2008. The term of each of our
subsidiaries' management and servicing agreements with Related
Capital and CM Corp. respectively are each five years ending November
17, 2008; provided that if our management agreement with Related
Capital is terminated or not renewed, we may terminate each of the
management agreements with such subsidiaries. The management
agreements and servicing agreements may be renewed, subject to
evaluation and approval by the relevant entity's board of trustees.
Each management agreement may be terminated
(i) with or without cause by Related Capital, or
(ii) for cause by a majority of the applicable entity's
independent trustees, in each case without penalty and
each upon 60 days prior written notice to the
non-terminating party.
Each servicing agreement may be terminated
116
(i) with or without cause by either party upon 30 days
prior written notice to the non-terminating party, or
(ii) upon the occurrence of a servicer default upon five
days prior written notice to CM Corp.
Each management and servicing agreement provides that each entity
will indemnify the manager and its affiliates under certain
circumstances.
MANAGEMENT AND SERVICING FEES
Under our management agreement with Related Capital, Related Capital
or its designees is entitled to receive reimbursement of all costs
incurred by Related Capital and its designees in performing services
for us under the management agreement plus an amount equal to a
market based percentage, as jointly determined from time to time by
our Company and Related Capital.
Under the management agreements with our subsidiaries, Related
Capital is entitled to receive a management fee equal to 0.10% of the
aggregate original amount invested from time to time in investments
plus reimbursement for its reasonable, actual out-of-pocket expenses
incurred in connection with its duties under the management
agreements; provided, however, that the amounts paid under the
management agreements will be credited against the amounts owed by us
to Related Capital pursuant to our management agreement with Related
Capital. Under our and our subsidiaries' servicing agreements with CM
Corp., CM Corp. is entitled to receive a revenue bond servicing fee
equal to 0.15% per annum based on the outstanding principal amount of
the revenue bonds held by such subsidiary. CM Corp. is also permitted
to earn miscellaneous compensation which may include, without
limitation, construction fees, escrow interest, property management
fees, leasing commissions and insurance brokerage fees. The payment
of any such compensation is generally limited to the competitive rate
for the services being performed.
AFFILIATED TRANSACTIONS
Information regarding affiliated transactions is included in Note 17
to our consolidated financial statements.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services
rendered by Deloitte & Touche LLP, the member firms of Deloitte
Touche Tohmatsu, and their respective affiliates (collectively,
"Deloitte") for the audit of our financial statements for the years
ended December 31, 2004 and December 31, 2003, and fees for other
services rendered by Deloitte during those periods.
2004 2003
---------------------------------------
Audit Fees (a) $ 969,500 $ 711,000
Audit-Related Fees (b) 283,500 559,400
Tax Fees (c) 252,700 187,700
All Other Fees (d) -- --
---------------------------------------
Total $1,505,700 $1,458,100
=======================================
(a) Fees for audit services billed for 2004 and 2003 consisted of
the audit of the Company's annual financial statements,
reviews of the Company's quarterly financial statements,
comfort letters, consents and other services related to SEC
matters.
(b) Fees for audit-related services consisted of due diligence
services associated with our loan to Capri in 2004 and the
acquisition of Related Capital in 2003.
117
(c) Fees for tax services billed in 2004 and 2003 consisted of tax
compliance services. Tax compliance services are services
rendered based upon facts already in existence or transactions
that have already occurred to document, compute, and obtain
government approval for amounts to be included in tax filings
and consisted of Federal, state and local income tax return
assistance.
(d) No other services were rendered by Deloitte during 2004 or
2003.
All audit-related services, tax services and other services were
pre-approved by the audit committee, which concluded that the
provision of those services by Deloitte was compatible with the
maintenance of Deloitte's independence in the conduct of its auditing
functions.
POLICY ON PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES
The audit committee is responsible for appointing, setting
compensation and overseeing the work of the independent auditors.
The audit committee has established a policy regarding pre-approval
of all audit and non-audit services provided by our Company's
independent auditors.
On an on-going basis, management communicates specific projects and
categories of service for which the advance approval of the audit
committee is requested. The audit committee reviews these requests
and advises management if the audit committee approves the
engagement of the independent auditors. The audit committee may also
delegate the ability to pre-approve audit and permitted non-audit
services to one or more of its members, provided that any
pre-approvals are reported to the audit committee at its next
regularly scheduled meeting.
118
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Sequential
Page
---------------
(a)1. Financial Statements
Report of Independent Registered Public Accounting Firm 48
Consent of Independent Registered Public Accounting Firm 49
Management's Report on the Effectiveness of Internal Control over
Financial Reporting 50
Report of Independent Registered Public Accounting Firm On Internal
Control over Financial Reporting 52
Consolidated Balance Sheets as of December 31, 2004 and 2003 54
Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002 55
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 56
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002 58
Notes to Consolidated Financial Statements 60
(a)2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant 143
Schedule II - Valuation and Qualifying Accounts 148
All other schedules have been omitted because they are not applicable
or the required information is included in the consolidated financial
statements and the notes thereto.
(a)3. Exhibits
--------
3.1(a) Certificate of Business Trust dated as of August 12, 1996 (incorporated
by reference to our Registration Statement on Form 10, filed with the
Commission on August 1, 1997).
3.1(b) Certificate of Amendment of the Restated Certificate of Business Trust
(incorporated by reference to our Registration Statement on Form S-8,
filed with the Commission on November 24, 2003).
3.1(c) Second Amended and Restated Trust Agreement dated as of November 17,
2003 (incorporated by reference to our Registration Statement on Form
S-8, filed with the Commission on November 24, 2003).
3.2 Third Amended and Restated Bylaws (incorporated by reference to Exhibit
10.6 in our September 30, 2004 Quarterly Report on Form 10-Q).
119
4.1 Specimen Copy of Share Certificate for shares of our beneficial
interest (incorporated by reference to our Registration Statement on
Form S-8, filed with the Commission on November 24, 2003).
4.2 Certificate of Designation of Special Preferred Voting Shares, dated
November 17, 2003 (incorporated by reference to our Current Report on
Form 8-K, filed with the Commission on December 1, 2003).
10(a) Management Agreement dated as of November 17, 2003, between us and
Related Capital Company LLC (incorporated by reference to Exhibit 10(a)
in our December 31, 2003 Annual Report on Form 10-K).
10(b) Insurance Agreement among MBIA, CharterMac, Origination Trust, Owner
Trust, CharterMac Floater Certificate Trust ("Floater Certificate
Trust"), First Tennessee Bank National Association ("First Tennessee"),
Related Charter LP, and Bayerische Landesbank Girozentrale, New York
Branch ("Bayerische") dated as of May 21, 1998 (incorporated by
reference to Exhibit 10 (aaay) in our June 30, 1998 Quarterly Report on
Form 10-Q).
10(c) Liquidity Agreement among Owner Trust, Floater Certificate Trust, First
Tennessee, MBIA and Bayerische dated as of May 21, 1998 (incorporated
by reference to Exhibit 10 (aaaz) in our June 30, 1998 Quarterly Report
on Form 10-Q).
10(d) Liquidity Pledge and Security Agreement among Origination Trust, Owner
Trust, Floater Certificate Trust, MBIA, First Tennessee and Bayerische
dated as of May 21, 1998 (incorporated by reference to Exhibit 10
(aaaaa) in our June 30, 1998 Quarterly Report on Form 10-Q).
10(e) Fee Agreement among Wilmington Trust Company, Floater Certificate Trust
and CharterMac dated as of May 21, 1998 (incorporated by reference to
Exhibit 10 (aaaab) in our June 30, 1998 Quarterly Report on Form 10-Q).
10(f) Certificate Placement Agreement (incorporated by reference to Exhibit
10 (aaaac) in our June 30, 1998 Quarterly Report on Form 10-Q).
10(g) Remarketing Agreement (incorporated by reference to Exhibit 10 (aaaad)
in our June 30, 1998 Quarterly Report on Form 10-Q).
10(h) Contribution Agreement dated as of December 17, 2002 (incorporated by
reference to our Preliminary Proxy Statement on Schedule 14A filed on
February 2, 2003).
10(i) Amended and Restated Operating Agreement of CharterMac Capital Company
LLC, dated as of November 17, 2003 (incorporated by reference to our
Current Report on Form 8-K, filed with the Commission on December 1,
2003).
10(j) Special Preferred Voting Shares Purchase Agreement, dated as of
November 17, 2003, by and among the Company and APH Associates L.P.,
DLK Associates L.P., Marc Associates, L.P., Related General II, L.P.
and SJB Associates L.P. (incorporated by reference to our Current
Report on Form 8-K, filed with the Commission on December 1, 2003).
10(k) Standstill Agreement, dated as of November 17, 2003, by and among the
Company and APH Associates L.P., DLK Associates L.P., Marc Associates,
L.P., Related General II, L.P. and SJB Associates L.P. (incorporated by
reference to our Current Report on Form 8-K, filed with the Commission
on December 1, 2003).
120
10(l) Voting Agreement, dated as of November 17, 2003, by and among the
Company and APH Associates L.P., DLK Associates L.P., Marc Associates,
L.P., Related General II, L.P. and SJB Associates L.P. (incorporated by
reference to our Current Report on Form 8-K, filed with the Commission
on December 1, 2003).
10(m) Exchange Rights Agreement, dated as of November 17, 2003, by and among
CharterMac Capital Company, LLC, CharterMac Corporation, APH Associates
L.P., DLK Associates L.P, Marc Associates, L.P., Related General II,
L.P. and SJB Associates L.P. (incorporated by reference to our Current
Report on Form 8-K, filed with the Commission on December 1, 2003).
10(n) Lock-up Agreement of Denise L. Kiley, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(o) Lock-up Agreement of Alan P. Hirmes, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(p) Lock-up Agreement of Marc D. Schnitzer, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(q) Lock-up Agreement of Stuart J. Boesky, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(r) Lock-Up Agreement of Stephen M. Ross, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(s) Employment Agreement of Denise L. Kiley, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(t) Employment Agreement of Alan P. Hirmes, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(u) Employment Agreement of Marc D. Schnitzer, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003)
10(v) Employment Agreement of Stuart J. Boesky, dated November 17, 2003
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(w) Future Relations Agreement, dated as of November 17, 2003, by and among
Stephen Ross, Related General II L.P., RCMP Management Inc., the
Related Companies, L.P., and CharterMac Capital Company, LLC
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(x) Ross Non-Qualified Share Option Agreement (incorporated by reference to
our Registration Statement on Form S-8, filed on November 24, 2003).
10(y) Registration Rights Agreement, dated as of November 17, 2003, by and
among our Company and APH Associates L.P., DLK Associates L.P., Marc
121
Associates, L.P., Related General II, L.P. and SJB Associates L.P.
(incorporated by reference to our Registration Statement on Form S-8,
filed on November 24, 2003).
10(z) Shared Services Agreement, dated as of November 17, 2003, by and among
The Related Companies, L.P., Related Management Company, and CharterMac
Capital Company (incorporated by reference to our Current Report on
Form 8-K, filed with the Commission on December 1, 2003).
10(aa) Other Services Agreement, dated November 17, 2003, by and between
Relcap Holding Company LLC and CharterMac Capital Company, LLC
(incorporated by reference to our Current Report on Form 8-K, filed
with the Commission on December 1, 2003).
10(ab) Trade Name License Agreement and Acknowledgement, dated as of November
17, 2003, by and between The Related Companies, L.P. and CharterMac
Capital Company, LLC (incorporated by reference to our Current Report
on Form 8-K, filed with the Commission on December 1, 2003).
10(ac) CharterMac Guaranty, dated December 17, 2002 (incorporated by reference
to our Current Report on Form 8-K, filed with the Commission on
December 1, 2003).
10(ad) Restricted Share Plan (incorporated by reference to our Registration
Statement on Form S-8, filed with the Commission on November 24, 2003).
10(ae) Amended and Restated Incentive Share Plan (incorporated by reference
to our Form S-8/A, filed with the Commission on March 2, 2004).
10(af) Form of Non-Qualified Share Option Award Agreement.* 125
10(ag) Form of Restricted Share Award Agreement.* 131
12 Ratio of earnings to fixed charges and preferred dividends.* 137
21 Subsidiaries of our Company.* 138
31.1 Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* 139
31.2 Chief Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* 140
32.1 Chief Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* 141
32.2 Chief Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* 142
* Filed herewith.
122
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTERMAC
(COMPANY)
Date: April 7, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee
and Chief Executive Officer
Date: April 7, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Operating Officer
and Chief Financial Officer
123
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky and Alan P. Hirmes, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing whatsoever requisite or desirable to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all acts and things
that said attorneys-in-fact and agents, or either of them, or their substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of us and in the
capacities and on the dates indicated:
Signature Title Date
- -------------------- ---------------------------- ----------------
/s/ Stuart J. Boesky
- ---------------------- Managing Trustee and
Stuart J. Boesky Chief Executive Officer April 7, 2005
/s/ Stephen M. Ross
- ------------------- Managing Trustee and
Stephen M. Ross Chairman of the Board April 7, 2005
/s/ Alan P. Hirmes
- ------------------ Managing Trustee,
Alan P. Hirmes Chief Operating Officer and
Chief Financial Officer April 7, 2005
/s/ Peter T. Allen
- ------------------
Peter T. Allen Managing Trustee April 7, 2005
/s/ Andrew L. Farkas
- --------------------
Andrew L. Farkas Managing Trustee April 7, 2005
/s/ Thomas W. White
- -------------------
Thomas W. White Managing Trustee April 7, 2005
/s/ Charles L. Edson
- --------------------
Charles L. Edson Managing Trustee April 7, 2005
/s/ Marc D. Schnitzer
- --------------------- Managing Trustee,
Marc D. Schnitzer President April 7, 2005
/s/ Denise L. Kiley
- ------------------- Managing Trustee,
Denise L. Kiley Chief Credit Officer April 7, 2005
/s/ Jeff T. Blau
- ----------------
Jeff T. Blau Managing Trustee April 7, 2005
/s/ Robert A. Meister
- ---------------------
Robert A. Meister Managing Trustee April 7, 2005
/s/ Jerome Y. Halperin
- ----------------------
Jerome Y. Halperin Managing Trustee April 7, 2005
/s/ Janice Cook Roberts
- -----------------------
Janice Cook Roberts Managing Trustee April 7, 2005
/s/ Nathan Gantcher
- -------------------
Nathan Gantcher Managing Trustee April 7, 2005
/s/ Robert L. Loverd
- --------------------
Robert L. Loverd Managing Trustee April 7, 2005
124
Exhibit 10 (af)
CHARTERMAC
--------------------------
NON-QUALIFIED SHARE OPTION AWARD AGREEMENT
------------------------------
Effective this __ day of _______, 20__ (the "Grant Date"), you (the "Optionee")
are hereby awarded the option ("Option") to purchase common shares of beneficial
interest ("Shares") of CharterMac (the "Company") subject to the terms and
conditions set forth in this Non-Qualified Share Award Agreement ("Award") and
in the CharterMac Amended and Restated Incentive Share Plan ("Plan"), which is
attached hereto as EXHIBIT A. A summary of the Plan appears in its Prospectus,
which is attached as EXHIBIT B. You should carefully review these documents, and
consult with your personal financial advisor before exercising this Option, in
order to fully understand the implications of this Award, including your tax
alternatives and their consequences.
By executing this Award, you agree to be bound by all of the Plan's terms and
conditions as if they had been set out verbatim in this Award. In addition, you
recognize and agree that all determinations, interpretations, or other actions
respecting the Plan and this Award will be made by the Committee, and shall
(unless arbitrary and capricious) be final, conclusive and binding on all
parties, including you and your successors in interest. Capitalized terms are
defined in the Plan or in this Award.
WHEREAS, the Company has adopted the Plan in order to provide additional
incentives to certain officers and employees of the Company, its Subsidiaries
and its Manager;
WHEREAS, the Committee responsible for administration of the Plan has
determined to grant an option to the Optionee as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option.
---------------
1.1 The Company hereby grants to the Optionee the right and option (the
"Option") to purchase all or any part of an aggregate of ___,____ common shares
of beneficial interest ("Shares") subject to, and in accordance with, the terms
and conditions set forth in this Share Option Agreement. The Option is not
intended to qualify as an Incentive Stock Option within the meaning of Section
422 of the Code.
1.2 This Share Option Agreement shall be construed in accordance and
consistent with, and subject to, the provisions of the Plan (the provisions of
which are incorporated herein by reference).
2. Purchase Price.
--------------
The price at which the Optionee shall be entitled to purchase Shares
upon the exercise of the Option shall be $__.__ per Share (which is the Fair
Value per Share on the Grant Date, as determined by the Committee pursuant to
Section 21 of the Plan).
3. Duration of Option.
------------------
The Option shall be exercisable to the extent and in the manner
provided herein for a period of ten (10) years from the Grant Date (the
"Exercise Term"); provided, however, that the Option may be earlier terminated
as provided in Section 6 hereof.
4. Exercisability of Option.
------------------------
Unless otherwise provided in this Share Option Agreement or the Plan,
the Option shall entitle the Optionee to purchase, in whole at any time or in
part from time to time, one-third (1/3) of the total number of Shares covered by
125
the Option after the expiration of one (1) year from the Grant Date and an
additional one-third (1/3) of the total number of Shares covered by the Option
after the expiration of each of the second and third anniversaries of the Grant
Date, and each such right of purchase shall be cumulative and shall continue,
unless sooner exercised or terminated as herein provided during the remaining
period of the Exercise Term. Any fractional number of Shares resulting from the
application of the foregoing percentages shall be rounded to the next higher
whole number of Shares, but shall not exceed the total number of Shares subject
to the Option.
5. Manner of Exercise and Payment.
------------------------------
5.1 Subject to the terms and conditions of this Share Option Agreement
and the Plan, the Option may be exercised by delivery of written notice to the
Company, in the form attached hereto as Appendix I, at its principal executive
office. Such notice shall state that the Optionee is electing to exercise the
Option and the number of Shares in respect of which the Option is being
exercised and shall be signed by the person or persons exercising the Option. If
requested by the Committee, such person or persons shall (i) deliver this Share
Option Agreement to the Secretary of the Company who shall endorse thereon a
notation of such exercise and (ii) provide satisfactory proof as to the right of
such person or persons to exercise the Option.
5.2 The notice of exercise described in Section 5.1 hereof shall be
accompanied by the full purchase price for the Shares in respect of which the
Option is being exercised, with the approval of the Committee, by any one or a
combination of the following: (i) cash (by check), (ii) transferring fully paid
Shares held at least six (6) months to the Company with a Fair Value equal to
the aggregate purchase price, or (iii) if requested by the Optionee and agreed
to by the Committee in its sole discretion, pursuant to a full recourse
promissory note upon such terms as the Committee deems appropriate.
Notwithstanding the foregoing, the Committee shall have discretion to determine
at any later date (up to and including the date of exercise) the form of payment
acceptable in respect of the exercise of the Option. In addition, the Optionee
may provide instructions to the Company that upon receipt of the Option purchase
price in cash, certified check, or wire transfer of immediately available funds,
from a broker or dealer acting at the direction of the Optionee, in payment for
any Shares pursuant to the exercise of the Option, the Company shall issue such
Shares directly to the designated broker or dealer.
5.3 Upon receipt of notice of exercise and full payment for the Shares
in respect of which the Option is being exercised, the Company shall subject to
Section 13 of the Plan, take such action as may be necessary to effect the
transfer to the Optionee of the number of Shares as to which such exercise was
effective, and may issue the Shares to an account maintained in the Optionee's
name by Equiserve or another transfer agent if the Optionee has not provided
contrary instructions.
5.4 The Optionee shall not be deemed to be the holder of, or to have
any of the rights of a holder with respect to any Shares subject to the Option
until (i) the Option shall have been exercised pursuant to the terms of this
Share Option Agreement and the Optionee shall have paid the full purchase price
for the number of Shares in respect of which the Option was exercised, (ii) the
Company shall have issued and delivered the Shares to the Optionee, and (iii)
the Optionee's name shall have been entered as a shareholder of record on the
books of the Company, whereupon the Optionee shall have full voting and other
ownership rights with respect to such Shares.
6. Termination of Employment.
-------------------------
6.1 Death, Disability. If the employment of the Optionee with the
Company, a Subsidiary, the Manager or any affiliate of the Manger, as the case
may be, is terminated as a result of the Optionee's death or disability (within
the meaning of Section 22(e)(3) of the Code), or the Optionee dies within three
(3) months of the Optionee's termination of employment with or service to the
Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case
may be, for any reason other than Cause, the Option may be exercised in whole or
in part (to the extent vested on the date of the Optionee's termination of
employment or service) at any time within the period of one (1) year after the
date of such termination of employment or service, but in no event after the
expiration of the Exercise Term. In the event of the Optionee's death, the
Option shall be exercisable, to the extent provided in the Plan and this Share
Option Agreement, by the legatee or legatees under the Optionee's will, or by
the Optionee's personal representatives or distributees and such person or
persons shall be substituted for the Optionee each time the Optionee is referred
to herein.
6.2 Termination of Employment for Cause. If the employment or service
of the Optionee with the Company, a Subsidiary, the Manager or any affiliate of
126
the Manager, as the case may be, is terminated for Cause, the right to exercise
the Option shall terminate immediately upon the Optionee's termination of
employment or service, whether or not vested.
6.3 Other Termination of Employment. If the employment or service of
the Optionee with the Company, a Subsidiary, the Manager or any affiliate of the
Manager, as the case may be, is terminated for any reason other than the reasons
set forth in Section 6.1 or 6.2 hereof (including the Optionee's ceasing to be
employed or engaged by a Subsidiary as a result of the sale of such Subsidiary
or an interest in such Subsidiary), the right to exercise the Option, to the
extent vested, shall terminate three (3) months after the Optionee's termination
of employment or service, but in no event after the expiration of the Exercise
Term.
6.4 Assignment of Unvested Option
At the time that employment or service of the Optionee with the
Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case
may be, is terminated for any reason, Optionee, at the Company's request, shall
assign Optionee's then unvested Options to the Company or its designee. If the
Company does not request Optionee to assign such Options, the Options shall be
forfeited to the Company.
7. Nontransferability.
------------------
The Option shall not be assignable or transferable by the Optionee
to whom it is granted, either voluntarily or by operation of law, except by will
or the laws of descent and distribution. During the life of the Optionee, the
Option shall be exercisable only by or on behalf of such person.
8. No Right to Continued Employment.
--------------------------------
Nothing in this Share Option Agreement or the Plan shall be
interpreted or construed to confer upon the Optionee any right with respect to
continuance of employment or service by or with the Company, a Subsidiary, the
Manager or any affiliate of the Manger, as the case may be, nor shall this Share
Option Agreement or the Plan interfere in any way with the right of the Company,
a Subsidiary, the Manager or any affiliate of the Manager, as the case may be,
to terminate the Optionee's employment or service at any time.
9. Adjustments.
-----------
In the event of a change in capitalization, the Committee may make
appropriate adjustments to the number and class of Shares or other shares or
securities subject to the Option and the purchase price for such Shares or other
shares or securities. The Committee's adjustment shall be made in accordance
with the provisions of Section 15 of the Plan and shall be effective and final,
binding and conclusive for all purposes of the Plan and this Share Option
Agreement.
10. Reorganization.
--------------
Upon the effective date of (i) a merger or consolidation of the Company
with another entity or person other than an Affiliate, where the Company is not
a surviving entity (a "Transaction"), or (ii) all or substantially all of the
assets or more than 20% of the outstanding equity securities of the Company
entitled to vote for trustees is acquired by any other entity or person other
than an Affiliate or an entity or person or any Affiliate thereof owning 5% or
more of the outstanding voting shares of the Company, or (iii) there is a
reorganization or liquidation of the Company, the Committee, or board of
directors of any corporation assuming the obligations of the Company, shall as
to the Option, either (x) in the case of a merger, consolidation or
reorganization of the Company, make appropriate provision for the protection of
the Option by the substitution on an equivalent basis of appropriate shares or
other securities of the Company or of the merged, consolidated or otherwise
reorganized corporation that will be issuable in respect of the Shares (provided
that no additional benefits shall be conferred upon the Optionee as a result of
such substitution), or (y) upon written notice to the Optionee, provide that the
Option must be exercised within a specified number of days of the date of such
notice or the Option will be terminated, or (z) upon written notice to the
Optionee, provide that the Option shall be purchased by the Company or its
successor within a specified number of days of the date of such notice at a
price equal to the value the Optionee would have received if they then exercised
the Option and immediately received full payment in respect of such exercise, as
determined in good faith by the Committee.
127
11. Withholding of Taxes and Notice of Disposition.
----------------------------------------------
The Company shall have the right to deduct from any distribution of
cash to the Optionee an amount equal to the federal, state and local income
taxes and other amounts as may be required by law to be withheld (the
"Withholding Taxes") with respect to the Option. In addition, if the Optionee is
entitled to receive Shares upon exercise of the Option, the Optionee shall pay
the Withholding Taxes to the Company in cash prior to the issuance, or release
from escrow, of such Shares. In satisfaction of the obligation to pay
Withholding Taxes to the Company, the Committee may, in its discretion and
subject to compliance with applicable securities laws and regulations, withhold
Shares having an aggregate Fair Value on the date preceding the date of such
issuance equal to the Withholding Taxes. In addition, such withholding of Shares
shall occur if the Optionee fails to pay the Withholding Taxes to the Company
(in accordance with the terms of this paragraph) promptly after they become due
and payable.
12. Optionee Receipt of a Plan Summary.
----------------------------------
The Optionee hereby acknowledges receipt of a summary of the Plan.
13. Modification of Share Option Agreement.
--------------------------------------
This Share Option Agreement may be modified, amended, suspended, or
terminated, and any terms or conditions may be waived, but only by a written
instrument executed by the parties hereto.
14. Severability.
------------
Should any provision of this Share Option Agreement be held by a court
of competent jurisdiction to be unenforceable or invalid for any reason, the
remaining provisions of this Share Option Agreement shall not be affected by
such holding and shall continue in full force in accordance with their terms.
15. Governing Law.
-------------
The validity, interpretation, construction and performance of this
Share Option Agreement shall be governed by the laws of the State of Delaware
without giving effect to the conflicts of laws principles thereof.
16. Successors in Interest.
----------------------
This Share Option Agreement shall inure to the benefit of and be
binding upon any successor to the Company. This Share Option Agreement shall
inure to the benefit of the Optionee's legal representatives. All obligations
imposed upon the Optionee and all rights granted to the Company under this Share
Option Agreement shall be final, binding and conclusive upon the Optionee's
heirs, executors, administrators and successors.
17. Resolution of Disputes.
----------------------
Any dispute or disagreement which may arise under, or as a result of,
or in any way relate to, the interpretation, construction or application of this
Share Option Agreement shall be determined by the Committee. Any determination
made hereunder shall be final, binding and conclusive on the Optionee and
Company for all purposes.
COMPANY:
CHARTERMAC
By: --------------------------------------------
Name:
--------------------
Title:
-------------------
OPTIONEE:
-------------------------------------------
Printed Name:
---------------------------------------
128
Appendix I
NOTICE OF EXERCISE OF OPTION UNDER THE
CHARTERMAC
NON-QUALIFIED SHARE OPTION AGREEMENT
CharterMac
625 Madison Avenue
New York, New York 10022
Attn: Corporate Secretary
Gentlemen:
I hereby exercise my option to purchase common shares of beneficial
interest in CharterMac (the "Company"), par value $.01 per share (the "Shares"),
under the terms and conditions of that certain Non-Qualified Share Option
Agreement, dated ________ __, 2005 by and between ___________ and the Company,
as follows:
(1) Number of shares:
(2) Option price per share:
(3) Aggregate purchase price [(1) x (2)]:
Enclosed is payment in the form of:
(a) CASH. Cash, certified check, bank draft or money order in United
States dollars payable to the order of the Company in the amount
of the aggregate purchase price [(3) above].
(b) SHARES (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE).
Certificates duly endorsed in blank for Shares of the Company with
a Fair Value on the day preceding the date of this notice equal to
the aggregate purchase price [(3) above].
(c) PROMISSORY NOTE (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE).
Note made by the Optionee in favor of the Company upon such terms
as approved in advance by the Company in the amount of the
aggregate purchase price [(3) above].
(d) SURRENDER OF OTHER SHARES (ONLY WITH THE PRIOR APPROVAL OF THE
COMMITTEE). Surrender of my vested right to exercise this Option
for Shares whose in-the-money value on the date of the surrender
(determined by the excess of the Fair Market Value of the
surrendered Shares over their Exercise Price) equals the aggregate
purchase price [(3) above]. I RECOGNIZE THAT THIS VALUE WILL BE
TAXABLE INCOME TO ME.
(e) ANY COMBINATION OF THE ABOVE (ONLY WITH THE PRIOR APPROVAL OF THE
COMMITTEE).
NOTE: If any portion of the payment is to be made in Shares, please
consult the Company prior to submitting this form as to the proper
method of payment.
Upon receipt of the aggregate purchase price [(3) above], please issue
the certificates as follows:
(a) In my name; or
(b) In the name of my designated broker or
dealer, to the extent the Company has
received in cash, certified check or wire
transfer of immediately available funds, the
aggregate purchase price [(3) above] from
such broker or dealer acting at my
direction.
129
Please deliver the certificates (including those representing excess
shares submitted) and/or any excess cash to:
Issue to: Mail or Deliver to:
- ----------------------------------------- -------------------------------------
Name Name
- ----------------------------------------- -------------------------------------
Address Address
- ----------------------------------------- -------------------------------------
City State Zip Code City State Zip Code
- ----------------------------------------- -------------------------------------
Social Security Number
- -----------------------------------------
Dated:
---------------------------------- -------------------------------------
(Signature)
130
Exhibit 10 (ag)
CHARTERMAC
------------------------------
RESTRICTED SHARE AWARD AGREEMENT
------------------------------
You are hereby awarded restricted common shares of beneficial interest
("Restricted Shares") of CharterMac (the "Company") subject to the terms and
conditions set forth in this Restricted Share Award Agreement ("Award") and in
the CharterMac Amended and Restated Incentive Share Plan ("Plan"), which is
attached hereto as Exhibit A. A summary of the Plan appears in its Prospectus,
which is attached as Exhibit B. You should carefully review these documents, and
consult with your personal financial advisor, in order to fully understand the
implications of this Award, including your tax alternatives and their
consequences.
By executing this Award, you agree to be bound by all of the Plan's
terms and conditions as if they had been set out verbatim in this Award. In
addition, you recognize and agree that all determinations, interpretations, or
other actions respecting the Plan and this Award will be made by the Committee,
and shall (unless arbitrary and capricious) be final, conclusive and binding on
all parties, including you and your successors in interest. Capitalized terms
are defined in the Plan or in this Award.
SPECIFIC TERMS. Your Restricted Shares have the following terms:
- --------------
- ---------------------------------- ---------------------------------------------
Name of Participant
- ---------------------------------- ---------------------------------------------
Number of Shares Subject to Award
- ---------------------------------- ---------------------------------------------
Grant Date
- ---------------------------------- ---------------------------------------------
Vesting Over __ years - [1/3][1/4][1/5] of the
Restricted Shares under this Award shall vest
and become nonforfeitable upon each
anniversary of the Grant Date provided you
are an employee of the Company or
a Subsidiary on each such date. All unvested
Restricted Awards shall automatically vest if
you are an employee of the Company or
a Subsidiary at the time of your death.
Notwithstanding anything to the contrary
contained herein, the Restricted Shares shall
be subject to any vesting terms provided in
an employment or other written agreement by
and between you and the Company that makes
reference to this Award, which terms shall
prevail over anything to the contrary
contained herein
- ---------------------------------- ---------------------------------------------
1. DIVIDENDS AND VOTING RIGHTS. For any period during which you are the owner of
record of Restricted Shares that the Company has issued pursuant to this Award,
you will be entitled to collect all cash dividends on your Restricted Shares, as
well as to vote them in accordance with the terms and conditions that apply
generally to the Company's shareholders (unless the underlying Shares are
forfeited). Any stock dividends on your Restricted Shares will be issued in the
form of additional Restricted Shares that have the same terms and conditions
(including those relating to vesting and forfeiture).
2. INVESTMENT PURPOSES. You acknowledge that you are acquiring your Restricted
Shares for investment purposes only and without any present intention of selling
or distributing them unless the Restricted Shares are registered for sale or the
sale is in accordance with an available exemption from registration.
131
3. CERTIFICATES. Restricted Shares will be evidenced by a book-entry in the
Company's records. Upon vesting, you may request a physical certificate for your
vested shares, and the Company may issue such certificate at any time after
vesting (in either case only after satisfaction of the conditions set forth in
the next paragraph), provided that the Company may issue the Shares to an
account maintained in your name by Equiserve or another transfer agent if the
Optionee has not provided contrary instructions.
4. SHARE ISSUANCE; WITHHOLDING. Restricted Shares, whether certificated or not,
will not be issued to you unless you have made arrangements satisfactory to the
Administrator to satisfy tax-withholding obligations, if any. The Company shall
have the right to deduct from any distribution of cash to you an amount equal to
the federal, state and local income taxes and other amounts as may be required
by law to be withheld (the "Withholding Taxes") with respect to the Restricted
Shares. In addition, whenever you recognize taxable income with respect to your
Restricted Shares, you shall pay the Withholding Taxes to the Company in cash
prior to the issuance, or release from escrow, of such Shares. In satisfaction
of the obligation to pay Withholding Taxes to the Company, the Committee may, in
its discretion and subject to compliance with applicable securities laws and
regulations, withhold Shares having an aggregate Fair Value on the date
preceding the date of such issuance equal to the Withholding Taxes. In addition,
such withholding of Shares shall occur if you fail to pay the Withholding Taxes
to the Company (in accordance with the terms of this paragraph) promptly after
they become due and payable.
5. SECTION 83(B) ELECTION NOTICE. If you elect under Code Section 83(b) to be
taxed immediately on your Restricted Shares when they were granted to you, you
promise to notify the Company of the election within 10 days of filing that
election with the Internal Revenue Service. Exhibit B is a suggested form of
Section 83(b) election.
6. NOT A CONTRACT OF EMPLOYMENT. By executing this Award Agreement, you
acknowledge and agree that (1) any person who is terminated before full vesting
of an Award, such as the one granted to you by this Award Agreement, could claim
that he or she was terminated to preclude vesting; (2) you promise never to make
such a claim; (3) nothing in this Award Agreement or the Plan confers on you any
right to continued Company or Subsidiary employment or restricts the Company's
or Subsidiary's right to terminate your employment at any time for any or no
reason; and (4) the Company would not have granted this Award to you but for
these acknowledgements and agreements.
7. SEVERABILITY. Every provision of this Award Agreement and the Plan is
intended to be severable, and any illegal or invalid term shall not affect the
validity or legality of the remaining terms.
8. NOTICES. Any notice, payment or communication required or permitted to be
given by any provision of this Award shall be in writing and shall be delivered
personally or sent by certified mail, return receipt requested, addressed as
follows: (i) if to the Company, at the address set forth on the signature page,
to the attention of: Administrator of the CharterMac Restricted Share Plan; (ii)
if to you, at the address set forth below your signature on the signature page.
Each party may, from time to time, by notice to the other party hereto, specify
a new address for delivery of notices relating to this Award. Any such notice
shall be deemed to be given as of the date such notice is personally delivered
or properly mailed.
9. BINDING EFFECT. Every provision of this Award shall be binding on and inure
to the benefit the parties' respective heirs, legatees, legal representatives,
successors, transferees, and assigns.
10. HEADINGS. Headings shall be ignored in interpreting this Award.
11. COUNTERPARTS. This Award may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute the same instrument.
BY YOUR SIGNATURE BELOW, along with the signature of the Company's
representative, you and the Company agree that the Restricted Shares are awarded
under and governed by the terms and conditions of this Award Agreement and the
Plan.
132
CHARTERMAC
By: -----------------------------------
Name: Stuart J. Boesky
Title: Chief Executive Officer
Address: 625 Madison Avenue
New York, New York 10022
THE UNDERSIGNED PARTICIPANT HEREBY ACCEPTS THE TERMS OF THIS AWARD AGREEMENT AND
THE PLAN.
By:
-----------------------------------
Name of Participant:
Address:
133
EXHIBIT A
---------
CHARTERMAC
AMENDED AND RESTATED INCENTIVE SHARE PLAN
134
EXHIBIT B
---------
SECTION 83(B) ELECTION FORM
Attached is an Internal Revenue Code Section 83(b) Election Form. If you wish to
make a Section 83(b) election, you must do so within 30 days of the date the
restricted shares were granted to you. In order to make the election, you must
completely fill out the attached form and file one copy with the Internal
Revenue office where you file your tax return. In addition, one copy of the
statement also must be submitted with your income tax return for the taxable
year in which you make this election. Finally, you also must submit a copy of
the election form to the Company. Section 83(b) election normally cannot be
revoked.
135
CHARTERMAC
--------------------------------------------------------------
ELECTION TO INCLUDE VALUE OF RESTRICTED SHARES IN GROSS INCOME
IN YEAR OF TRANSFER UNDER INTERNAL REVENUE CODE SECTION 83(B)
--------------------------------------------------------------
Pursuant to Section 83(b) of the Internal Revenue Code, I hereby elect
within 30 days of receiving the property described herein to be taxed
immediately on its value specified in item 5 below.
1. My General Information:
Name: -------------------------------
Address: -------------------------------
-------------------------------
S.S.N.
or T.I.N.: -------------------------------
2. Description of the property with respect to which I am making this
election:
---------- common shares of beneficial interest of CharterMac.
("Restricted Shares").
3. The Restricted Shares were transferred to me on ------------ -----,
200--. This election relates to the 20-- calendar taxable year.
4. The Restricted Shares are subject to the following restrictions:
The Restricted Shares are forfeitable until they are earned in
accordance with the CharterMac Amended and Restated Incentive
Share Plan ("Plan"), my Restricted Share Award Agreement
("Award") or other Award or Plan provisions. The Restricted
Shares generally are not transferable until my interest
becomes vested and nonforfeitable, pursuant to the Award and
the Plan.
5. Fair market value:
The fair market value at the time of transfer (determined
without regard to any restrictions other then restrictions
which by their terms never will lapse) of the Restricted
Shares with respect to which I am making this election is
$_____ per share.
6. Amount paid for Restricted Shares:
The amount I paid for the Restricted Shares is $0.
7. Furnishing statement to employer:
A copy of this statement has been furnished to my employer,
CharterMac.
8. Award or Plan not affected:
Nothing contained herein shall be held to change any of the
terms or conditions of the Award or the Plan.
Dated: ------------ -----, 200--.
------------------------------
Taxpayer
136
Exhibit 12
Ratio of Earnings to Combined Fixed Charges and Preference Dividends
(Dollars in thousands)
DECEMBER 31,
-----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
Interest expense $ 52,233 $ 23,919 $ 19,004 $ 16,132 $ 16,489
Amortized capitalized costs related to
indebtedness 3,310 2,163 940 727 479
Preference security dividend requirements
of consolidated subsidiaries 22,840 18,897 17,266 12,578 8,594
------------- ------------- ------------- ------------- -------------
Total fixed charges $ 78,383 $ 44,979 $ 37,210 $ 29,437 $ 25,562
============= ============= ============= ============= =============
Net income before minority interests $ (143,462) $ 64,498 $ 62,613 $ 38,985 $ 30,091
Add: Total fixed charges 78,383 44,979 37,210 29,437 25,562
Less: Preference security dividend
requirements of consolidated subsidiaries (22,840) (18,897) (17,266) (12,578) (8,594)
------------- ------------- ------------- ------------- -------------
Earnings $ (87,919) $ 90,580 $ 82,557 $ 55,844 $ 47,059
============= ============= ============= ============= =============
Ratio of Earnings to Combined Fixed
Charges and Preference Dividends See NOTE 2.0:1 2.2:1 1.9:1 1.8:1
For the purposes of computing the ratio of earnings to fixed charges and
preference dividends, earnings were calculated using income before minority
interest adding back total fixed charges less preference security dividend
requirements of consolidated subsidiaries. Fixed charges consist of interest
expense, recurring fees and amortization of capitalized costs related to
indebtedness and preference security dividend requirements of consolidated
subsidiaries.
NOTE: For the year ended December 31, 2004, Earnings (as defined in Regulation
S-K) were insufficient to cover Combined Fixed Charges and Preference Dividends
(also as defined in Regulation S-K) by $166.3 million, yielding a ratio of
earnings to combined fixed charges and preference dividends of -1.1:1. This
shortfall is due to the consolidation of partnerships deemed to be variable
interest entities ("VIEs") pursuant to Financial Interpretation 46(R) ("FIN
46(R)"). Pursuant to Regulation S-K, the definition of Earnings does not permit
the subtraction of amounts allocated to minority interests in consolidated
subsidiaries if those subsidiaries incur fixed charges. The inclusion of the
VIEs in the consolidated financial statements affected this ratio as follows:
o Combined Fixed Charges and Preference Dividends (which, as defined,
totaled $78.4 million) includes VIE interest expense of $21.4 million,
although these expenses are paid directly by the VIEs; and
o Earnings (which, as defined, was a loss of $87.9 million) includes VIE
operating losses totaling $220.0 million, although such operating
losses are currently absorbed by the limited partners of the VIEs.
137
Exhibit 21
Subsidiaries of the Company as of December 31, 2004
---------------------------------------------------
CM Holding Trust, a Delaware statutory trust
CharterMac Equity Issuer Trust, a Delaware statutory trust
CharterMac Corporation, a Delaware corporation
Charter Credit Enhancement I, LLC, a Delaware limited liability company
Subsidiaries of CharterMac Equity Issuer Trust, a Delaware business trust
-------------------------------------------------------------------------
CharterMac Origination Trust I, a Delaware statutory trust
CharterMac Owner Trust I, a Delaware statutory trust
Subsidiaries of CharterMac Corporation
--------------------------------------
CharterMac Mortgage Capital Corp., Inc. a Delaware corporation
CharterMac Capital Company, LLC, a Delaware limited liability company
CharterMac Guarantor LLC, a Delaware limited liability company
CharterMac Investor LLC, a Delaware limited liability company
Subsidiaries of CharterMac Capital Company
------------------------------------------
Related Capital Company LLC, a Delaware limited liability company
Related Equities Corporation, a Delaware corporation
Related Capital Partners Inc., a Delaware corporation
RCC Manager LLC, a Delaware limited liability company
RCC Credit Facility LLC, , a Delaware limited liability company
Related AMI Associates Inc., a Delaware corporation
Subsidiary of CM Guarantor LLC
------------------------------
Related Charter L.P., a Delaware
138
Exhibit 31.1
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this annual report on Form 10-K of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 7, 2005 By: /s/ Stuart J. Boesky
---------------- --------------------
Stuart J. Boesky
Chief Executive Officer
139
Exhibit 31.2
CERTIFICATION
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this annual report on Form 10-K of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 7, 2005 By: /s/ Alan P. Hirmes
---------------- ------------------
Alan P. Hirmes
Chief Financial Officer
140
Exhibit 32.1
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of CharterMac (the "Company") on Form 10-K
for the year ending December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Stuart J. Boesky, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
April 7, 2005
A signed original of this written statement required by Section 906 has
been provided to CharterMac and will be retained by CharterMac and
furnished to the Securities and Exchange Commission or its staff upon
request.
141
Exhibit 32.2
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of CharterMac (the "Company") on Form 10-K
for the year ending December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Alan P. Hirmes, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Chief Financial Officer
April 7, 2005
A signed original of this written statement required by Section 906 has
been provided to CharterMac and will be retained by CharterMac and
furnished to the Securities and Exchange Commission or its staff upon
request.
142
CHARTERMAC
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In thousands)
Summarized condensed financial information of registrant
(not including its consolidated subsidiaries)
CONDENSED BALANCE SHEETS
December 31,
--------------------------
2004 2003
--------- ---------
ASSETS
Revenue bonds-at fair value $ 109,672 $ 93,293
Cash and cash equivalents 12,957 16,763
Deferred costs - net of amortization of $5,935 and $4,473 9,432 10,017
Due from subsidiaries 126,528 101,254
Intangible assets - net of amortization of $2,158 and
$1,813 949 1,294
Investment in subsidiaries 632,894 590,590
Other investments 25,596 25,001
Other assets 1,572 1,751
Loan to affiliate 4,600 --
--------- ---------
Total Assets $ 924,200 $ 839,963
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other
liabilities 294 3,455
Distributions payable 23,915 18,851
--------- ---------
Total liabilities 24,209 22,306
--------- ---------
Commitments and contingencies
Shareholders' equity
Beneficial owners equity - convertible CRA
shareholders (6,552 and 8,180 shares issued and
outstanding in 2004 and 2003, respectively) 108,744 138,748
Beneficial owners equity - special preferred voting
shares; no par value (15,172 shares outstanding) 152 161
Beneficial owners equity - other common shareholders
no par value (100,000 shares authorized; 51,363
issued and 51,229 outstanding in 2004 and 42,726
issued and 42,704 outstanding in 2003) 773,166 644,641
Deferred compensation (7,922) (19,385)
Treasury shares of beneficial interest - common, at
cost (134 shares in 2004 and 23 shares in 2003) (2,970) (378)
Accumulated other comprehensive income 28,821 53,870
--------- ---------
Total shareholders' equity 899,991 817,657
--------- ---------
Total liabilities and shareholders' equity $ 924,200 $ 839,963
========= =========
See accompanying notes to financial statements
143
CHARTERMAC
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Revenues:
Revenue bonds interest income $ 7,948 $ 8,309 $ 4,701
Other income 4,212 4,191 1,219
-------- -------- --------
Total revenues 12,160 12,500 5,920
-------- -------- --------
Expenses:
Interest expense 35 -- 3
General and administrative 6,958 7,146 4,574
Depreciation and amortization 1,630 1,140 876
Loss on impairment of assets 147 -- --
-------- -------- --------
Total expenses 8,770 8,286 5,453
-------- -------- --------
Income before equity in earnings of subsidiaries
and investments and loss on repayment of revenue bonds 3,390 4,214 467
Equity in earnings of subsidiaries 59,792 60,604 59,637
Equity in earnings of investments 2,219 2,219 1,116
Loss on repayment of revenue bonds (38) (451) (387)
-------- -------- --------
Net income $ 65,363 $ 66,586 $ 60,833
-------- -------- --------
Allocation of net income to:
Special distribution to Manager $ -- $ 5,332 $ 4,872
-------- -------- --------
Manager $ -- $ 6 $ 56
-------- -------- --------
Common shareholders $ 56,786 $ 54,608 $ 52,516
Convertible CRA shareholders 8,577 6,640 3,389
-------- -------- --------
Total for shareholders $ 65,363 $ 61,248 $ 55,905
-------- -------- --------
See accompanying notes to financial statements
144
CHARTERMAC
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65,363 $ 66,586 $ 60,833
Adjustments to reconcile net income to net cash used in
operating activities:
Loss on repayment of revenue bonds 38 451 387
Loss on impairment of assets 147 -- --
Depreciation and amortization 1,630 1,140 876
Income from investment in subsidiaries (59,792) (60,604) (59,637)
Non-cash compensation expense 597 -- --
Other non-cash expense 525 1,534 2,127
Changes in operating assets and liabilities:
Other assets 180 (205) (1,134)
Accounts payable, accrued expenses and other liabilities (3,160) (3,079) 4,452
Loans to affiliates (4,600) -- --
Due to / from subsidiaries (25,275) (59,963) (52,377)
-------- -------- --------
Net cash used in operating activities (24,347) (54,140) (44,473)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of revenue bonds 2,935 18,006 553
Purchase of revenue bonds (2,390) (12,708) (16,101)
Deferred investment acquisition costs -- (767) (13,657)
Investment in subsidiaries 3,108 29,135 2,394
Other investments (742) (3,631) (9,232)
-------- -------- --------
Net cash provided by (used in) investing activities 2,911 30,035 (36,043)
-------- -------- --------
145
CHARTERMAC
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (84,395) (65,121) (56,441)
Issuance of common shares and convertible CRA shares 111,119 104,841 125,599
Offering costs relating to issuance of common and convertible CRA shares (5,261) (495) (723)
Treasury share purchases (2,592) (275) --
Redemption of special preferred voting shares (10) -- --
Deferred financing costs (1,231) (2,456) (921)
--------- --------- ---------
Net cash provided by financing activities 17,630 36,494 67,514
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,806) 12,389 (13,002)
Cash and cash equivalents at the beginning of the period 16,763 4,374 17,376
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 12,957 $ 16,763 $ 4,374
========= ========= =========
Supplemental information
Interest paid $ -- $ -- $ 3
========= ========= =========
Supplemental disclosure of non-cash activities:
Contribution of revenue bonds to subsidiaries $ -- $ 69,266 $ --
========= ========= =========
Contribution of notes receivable to subsidiaries $ -- $ -- $ --
========= ========= =========
Distribution of revenue bonds from subsidiaries $ 12,664 $ -- $ 128,693
========= ========= =========
Distribution of notes receivable from subsidiaries $ -- $ -- $ 4,503
========= ========= =========
See accompanying notes to financial statements
146
CHARTERMAC
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation
Basis of Financial Information
The accompanying condensed financial statements (the "Parent Company Financial
Statements") are for CharterMac (not including its consolidated subsidiaries).
The Parent Company Financial Statements, including the notes thereto, should be
read in conjunction with our consolidated financial statements and the notes
thereto which are included in this Form 10-K.
2. Cash Dividends received from subsidiaries
The table below reflects the cash dividends received for each of the last three
fiscal years from consolidated subsidiaries and 50% or less owned persons
accounted for under the equity method.
(In thousands) 2004 2003 2002
---------- --------- ---------
Consolidated subsidiaries CMC $2,200 $1,942 $ 400
Equity method ARCap 2,219 2,219 2,219
3. Guarantees
In connection with the CMC warehouse line, both we and our subsidiary, CM Corp.,
have entered into guarantees for the benefit of Bank of America, guaranteeing
the total advances drawn under the line, up to the maximum of $100 million,
together with interest, fees, costs, and charges related to the CMC warehouse
line.
147
Schedule II
Valuation and Qualifying Accounts
December 31, 2004
Additions
----------------------------
(IN THOUSANDS) Charged to
Balance at Charged to Other Balance at
beginning costs and Accounts - Deductions - end of
Description of period expenses Describe Describe period
- ------------------------------- -------------- ------------ ------------ -------------- ------------
Loan Loss Reserve
2004 $ 6,746 $ 634 $ -- $ (900) (1) $ 6,480
2003 4,272 2,899 -- (425) (2) 6,746
2002 1,556 2,716 -- -- 4,272
Allowance for Doubtful Accounts
2004 $ 107 $ 2,272 $ -- $ -- $ 2,379
2003 -- 107 -- -- 107
(1) Reversal of reserves for 3 DUS loan losses. Actual expense reflected on DUS
loan loss line in income statement.
(2) Reversal of reserves for 1 DUS loan loss. Actual expense reflected on DUS
loan loss line in income statement.
148