UNITED
STATES


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, 2008




OR




[  ]           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934




For the
transition period from _________ to __________




Commission
file number: 1-32733




RESOURCE
CAPITAL CORP.


(Exact
name of registrant as specified in its charter)


Maryland
            
            20-2287134(State
      or other  jurisdiction
              of
      incorporation or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)712
      5th
      Avenue, 10th
      Floor
              New
      York, NY
            
            10019(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant’s
      telephone number, including area code:
            
            212-506-3870


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


Title of each class
              
              Name of each exchange on which
      registeredCommon
      Stock, $.001 par value
              
              New
      York Stock Exchange (NYSE)




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


None




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




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x
Yes  ̈
No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one).




Large accelerated filer  ̈
            Accelerated
      filer                                xNon-accelerated filer  
       ̈
            Smaller reporting
      company               ̈




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


The
aggregate market value of the voting common equity held by non-affiliates of the
registrant, based on the closing price of such stock on the last business day of
the registrant’s most recently completed second fiscal quarter (June 30, 2008)
was approximately $125,340,291.
  The
number of outstanding shares of the registrant’s common stock on March 2, 2009
was 24,819,046 shares.




DOCUMENTS
INCORPORATED BY REFERENCE


[None]


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


INDEX
TO ANNUAL REPORT


ON FORM 10-K





PagePART
      IForward-Looking
      Statements
            3Item 1:
            Business
            3Item 1A:
            Risk Factors
            15Item 1B:
            Unresolved Staff Comments
            32Item 2:
            Properties
            32Item 3:
            Legal Proceedings
            32Item 4:
            Submission of Matters to a Vote of Security
      Holders
            32PART
      IIItem 5:
            Market for Registrant's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            33Item 6:
            Selected Financial Data
            35Item 7:
            Management’s
      Discussion and Analysis of Financial Condition andResults
      of Operations
            36Item 7A:
            Quantitative and Qualitative Disclosures About Market
      Risk
            64Item 8:
            Financial Statements and Supplementary
    Data
            66Item 9:
            Changes
      in and Disagreements with Accountants on Accounting andFinancial
      Disclosures
            103Item 9A:
            Controls and Procedures
            103Item 9B:
            Other
      Information
            105PART
      IIIItem 10:
            Directors and Executive Officers and Corporate
      Governance
            105Item 11:
            Executive Compensation
            108Item 12:
            Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
            114Item 13:
            Certain Relationships and Related Transactions and Director
      Independence
            116Item 14:
            Principal Accountant Fees and Services
            118PART
      IVItem 15:
            Exhibits and Financial Statement
    Schedules
            119SIGNATURES
            121





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FORWARD-LOOKING
STATEMENTS





This report contains certain
forward-looking statements. Forward-looking statements relate to expectations,
beliefs, projections, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical
facts.  In some cases, you can identify forward-looking statements by
terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,”
“may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the
negative of these terms or other comparable terminology.





Forward-looking statements contained in
this report are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to
us.  These beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are known to us or
are within our control.  If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements.  Forward-looking
statements we make in this report are subject to various risks and uncertainties
that could cause actual results to vary from our forward-looking statements,
including:




·
            the
      factors described in this report, including those set forth under the
      sections captioned “Risk Factors” and
  “Business;”




·
            changes
      in our industry, interest rates, the debt securities markets, real estate
      markets or the general economy;




·
            increased
      rates of default and/or decreased recovery rates on our
      investments;




·
            availability,
      terms and deployment of capital;




·
            availability
      of qualified personnel;




·
            changes
      in governmental regulations, tax rates and similar
  matters;




·
            changes
      in our business strategy;




·
            availability
      of investment opportunities in commercial real estate-related and
      commercial finance assets;




·
            the
      degree and nature of our
competition;




·
            the
      adequacy of our cash reserves and working capital;
  and




·
            the
      timing of cash flows, if any, from our
  investments.





We caution you not to place undue
reliance on these forward-looking statements which speak only as of the date of
this report.  All subsequent written and oral forward-looking
statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section.  Except to the extent required by applicable law
or regulation, we undertake no obligation to update these forward-looking
statements to reflect events or circumstances after the date of this filing or
to reflect the occurrence of unanticipated events.








PART
I





ITEM
1.                      BUSINESS





General





We are a specialty finance company that
focuses primarily on commercial real estate and commercial
finance.  We are organized and conduct our operations to qualify as a
real estate investment trust, or REIT, for federal income tax
purposes.  Our objective is to provide our stockholders with total
returns over time, including quarterly distributions and capital appreciation,
while seeking to manage the risks associated with our investment
strategy.  We invest in a combination of commercial real estate debt
and other real estate-related assets and, to a lesser extent, higher-yielding
commercial finance assets.  We have financed a substantial portion of
our portfolio investments through borrowing strategies seeking to match the
maturities and repricing dates of our financings with the maturities and
repricing dates of those investments, and to mitigate interest rate risk through
derivative instruments.





We are externally managed by Resource
Capital Manager, Inc., which we refer to as the Manager, a wholly-owned indirect
subsidiary of Resource America, Inc. (NASDAQ: REXI), a specialized asset
management company that uses industry specific expertise to generate and
administer investment opportunities for its own account and for outside
investors in the commercial finance, real estate, and financial fund management
sectors.  As of December 31, 2008, Resource America managed
approximately $17.5 billion of assets in these sectors.  To provide
its services, the Manager draws upon Resource America, its management team and
their collective investment experience.





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Our investments target the following
asset classes:





Asset
      Class
            
            Principal
      InvestmentsCommercial
      real estate-related assets
            
            ·First
      mortgage loans, which we refer to as whole loans
              
              ·First
      priority interests in first mortgage real estate loans, which we refer to
      as A notes
              
              ·Subordinated
      interests in first mortgage real estate loans, which we refer to as B
      notes
              
              ·Mezzanine
      debt related to commercial real estate that is senior to the borrower’s
      equity position but subordinated to other third-party
      financing
              
              ·Commercial
      mortgage-backed securities, which we refer to as CMBSCommercial
      finance assets
            
            ·Senior
      secured corporate loans, which we refer to as bank loans
              
              ·Other
      asset-backed securities, which we refer to as other ABS,
              
              ·Equipment
      leases and notes, principally small- and middle-ticket commercial direct
      financing leases and notes
              
              ·Debt
      tranches of collateralized debt obligations, which we refer to as
      CDOs




Beginning in the second half of 2007,
there have been unprecedented disruptions in the credit markets, abrupt and
significant devaluations of assets directly or indirectly linked to the U.S.
real estate finance markets, and the attendant removal of liquidity, both long
and short term, from the capital markets.  These conditions have had,
and we expect will continue to have, an adverse effect on us and companies we
finance.  During the years ended December 31, 2008 and 2007, we
recorded provisions for loan and lease losses of $46.2 million and $6.2 million,
respectively.  We also recorded $26.3 million in asset impairments
during the year ended December 31, 2007.  In addition, we recorded
losses through other comprehensive income of $46.9 million and $22.6 million on
our CMBS-private placement portfolio as of December 31, 2008 and 2007,
respectively, all as a result of the unprecedented disruptions in the credit
markets.


The events occurring in the credit
markets have impacted our financing strategies.  The market for
securities issued by new securitizations collateralized by assets similar to
those in our investment portfolio has largely disappeared.  While we
were able to sponsor two new securitizations in 2007, we expect our ability to
sponsor new securitizations will be severely limited, if not gone for the
foreseeable future.  The availability of short-term financing through
warehouse lines of credit and repurchase agreements has contracted severely as a
result of the increased volatility in the valuation of assets similar to those
we originate.  These events have impacted (and we expect will continue
to impact) our ability to grow and finance our business on a long-term,
match-funded basis and our ability to build our investment portfolio
securities.





Beginning in the second half of 2007
and continuing throughout 2008, we have focused on managing our exposure to
liquidity risks primarily by reducing our exposure to possible margin calls
under repurchase agreements and seeking to conserve our liquidity.  As
a result, we have substantially reduced our repurchase agreement debt to $17.1
million at December 31, 2008 from $116.4 million at December 31,
2007.  We have continued to manage our liquidity and originate new
assets primarily through capital recycling as payoffs occur and through existing
capacities within our completed securitizations.  While we recorded
significant allowances for loan and lease loss reserves as a result of the
developments in the credit markets resulting in a net loss during 2008, we
declared common dividends of $1.60 per share on estimated REIT taxable income of
$1.57 per share.





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 We calculate our distributions to our shareholders based on our estimate of our
REIT taxable income, which may vary greatly from our net income calculated in
accordance with U.S. generally accepted accounting principles, or GAAP. We
expect that our REIT taxable income will be comprised primarily of our net
investment income and our fee income.  We expect that our REIT taxable
income will be greater than our GAAP net income primarily because asset
impairments and provisions for loan and lease losses are not deductible until
realized for tax purposes as well as net book to tax adjustments for our taxable
foreign REIT subsidiaries and fee income received by our taxable REIT
subsidiaries, or TRSs, that is dividended to us and included in our REIT taxable
income but deferred or eliminated for GAAP purposes.  For further
discussion, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”





Our
Business Strategy





The core components of our business
strategy are:





Managing our
investment portfolio.  As of December
31, 2008, we managed $1.9 billion of assets, including $1.7 billion of assets
held in CDOs.  The core of our management process is credit analysis
which we use to actively monitor our existing investments and as a basis for
evaluating new investments.  Senior management of our Manager and
Resource America has extensive experience in underwriting the credit risk
associated with our targeted asset classes, and conducts detailed due diligence
on all credit-sensitive investments, including the use of proprietary credit
stratifications and collateral stresses.  After making an investment,
the Manager and Resource America engage in active monitoring of our investments
for early detection of troubled and deteriorating securities.  If a
default occurs, we will use our senior management team’s asset management skills
to mitigate the severity of any losses, and we will seek to optimize the
recovery from assets if we foreclose upon them.





Managing our
interest rate and liquidity risk.  We generally seek to manage
interest rate and liquidity risk so as to reduce the effects of interest rate
changes on us.  On our long-term financing we seek to match the
maturity and repricing dates of our investments with the maturities and
repricing dates of our financing.  Historically, we have used CDO
vehicles structured for us by our Manager to achieve this
goal.  Currently, we finance new investments through existing capacity
in our CDOs or through cash available from principal repayments on or payoffs of
existing investments.  We also seek to mitigate interest rate risk
through derivative instruments.





Historically, we have managed our
interest rate and liquidity risk on our short-term financing, principally
repurchase agreements, by limiting the amount of our financial exposure under
the facilities to either a stated investment amount or a fixed guaranty
amount.  During the past 18 months, we have managed these risks by
substantially reducing the amount of our short-term financing.  As of
December 31, 2008, we had $17.1 million of outstanding short term
debt.





Investment in
real estate and commercial finance assets.  We expect to
continue to invest in commercial real estate whole loans, B notes, mezzanine
debt, CMBS rated below AAA by Standard & Poors, or S&P, commercial
finance assets, including bank loans, and to a lesser extent, direct financing
leases and notes, subject to the availability of investment funds and
financing.  Our equity at December 31, 2008 was invested 72% in
commercial real estate loans, 25% in commercial bank loans and 3% in direct
financing lease and notes.  In 2009, we expect to recycle capital
within our CDO structures to make a limited amount of new investments to replace
loans that have been paid down or paid off and to replace loans that may be
sold.





Diversification
of investments.  We seek to manage our investment risk by
maintaining a diversified portfolio of real estate-related and commercial
finance assets.  As funds become available for investment or
reinvestment, we seek to maintain that diversification while allocating our
capital to those sectors that we believe are the most economically
attractive.  The percentage of assets that we may invest in certain of
our targeted asset classes is subject to the federal income tax requirements for
REIT qualification and the requirements for exclusion from Investment Company
Act regulation.





Our
Operating Policies and Strategies





Investment
guidelines.We have established investment policies,
procedures and guidelines that are reviewed and approved by our investment
committee and board of directors.  The investment committee meets
regularly to monitor the execution of our investment strategies and our progress
in achieving our investment objectives.  As a result of our investment
strategies and targeted asset classes, we acquire our investments primarily for
income.  We do not have a policy that requires us to focus our
investments in one or more particular geographic areas.





Financing
policies.We have used leverage in order to increase potential
returns to our stockholders and for financing our portfolio.  We do
not speculate on changes in interest rates.  While we have identified
our leverage targets for each of our targeted asset classes, our investment
policies require no minimum or maximum leverage and our investment committee has
the discretion, without the need for further approval by our board of directors,
to increase the amount of leverage we incur above our targeted range for
individual asset classes.





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We have historically used borrowing and
securitization strategies, substantially through CDOs, to accomplish our
long-term match funding, financing strategy.  However, the
developments in the credit markets, particularly since the second half of 2007,
have significantly limited our ability to execute our long term financing
strategy.  In the foreseeable future, we will seek to finance our
investments through investing restricted cash and reinvesting loan repayments
received under our current securitized financings, and to a lesser extent, bank
lines of credit and other methods that preserve our capital.





Hedging and
interest rate management strategy.We use derivative financial
instruments to hedge a portion of the interest rate risk associated with our
borrowings.  Under the federal income tax laws applicable to REITs, we
generally will be able to enter into certain transactions to hedge indebtedness
that we may incur, or plan to incur, to acquire or carry real estate assets,
provided that our total gross income from such hedges and other non-qualifying
sources must not exceed 25% of our total gross income.  These hedging
transactions may include interest rate swaps, collars, caps or floors, puts and
calls and options.





Credit and risk
management policies.Our Manager focuses its attention on
credit and risk assessment from the earliest stage of the investment selection
process.  In addition, the Manager screens and monitors all potential
investments to determine their impact on maintaining our REIT qualification
under federal income tax laws and our exclusion from investment company status
under the Investment Company Act of 1940.  Risks related to portfolio
management, including the management of risks related to credit losses, interest
rate volatility, liquidity and counterparty credit are generally managed on a
portfolio-by-portfolio basis by each of Resource America’s asset management
divisions, although there is often interaction and cooperation between divisions
in this process.





Our
Investment Strategy





The following table describes certain
characteristics of our commercial real estate loans, bank loans, CMBS, other ABS
and direct financing leases and notes as of December 31, 2008 (dollars in
thousands):





Amortized
                  cost
              
              
              Estimated
                  fair
      value (1)
              
              
              Percent
      of
                  portfolio
              
              
              Weighted
      average couponLoans
      Held for InvestmentCommercial real estate
      loans:Mezzanine
loans
              
              $
              210,733
              
              
              $
              197,458
              
              
              
              13.0%
              
              
              
              5.46%B notes
              
              
              89,069
              
              
              
              88,529
              
              
              
              5.8%
              
              
              
              6.21%Whole loans
              
              
              519,337
              
              
              
              519,524
              
              
              
              34.2%
              
              
              
              7.25%Bank loans
              
              
              937,507
              
              
              
              582,416
              
              
              
              38.3%
              
              
              
              5.13%1,756,646
              
              
              
              1,387,927
              
              
              
              91.3%Investments
      in Available-for-Sale SecuritiesCMBS
              
              
              70,458
              
              
              
              29,215
              
              
              
              1.9%
              
              
              
              4.36%Other ABS
              
              
              5,665
              
              
              
              45
              
              
              
              0.0%
              
              
              
              −%76,123
              
              
              
              29,260
              
              
              
              1.9%Investments
      in direct financing leases and notes
              
              
              105,116
              
              
              
              104,015
              
              
              
              6.8%
              
              
              
              9.35%Total portfolio/weighted
      average
              
              $
              1,937,885
              
              
              $
              1,521,202
              
              
              
              100.0%
              
              
              
              6.21%


(1)
            The
      fair value of our investments represents our management’s estimate of the
      price that a market participant would pay seller for such
      assets.  Management bases this estimate on the underlying
      interest rates and credit spreads for fixed-rate securities and, to the
      extent available, quoted market
  prices.





Commercial
Real Estate-Related Investments




Whole
loans.  We originate first mortgage loans, or whole loans,
directly to borrowers.  The direct origination of whole loans enables
us to better control the structure of the loans and to maintain direct lending
relationships with the borrowers.  We may create senior tranches of a
loan, consisting of an A note (described below), B notes (described below),
mezzanine loans or other participations, which we may hold or sell to third
parties.  We do not obtain ratings on these
investments.  Our whole loan investments have loan to value, or LTV,
ratios of up to 80%.  We expect to hold our whole loans to their
maturity.




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Senior interests
in whole loans (A notes).  We invest in senior interests in whole loans, referred to as A notes, either directly
originated or purchased from third parties.  A notes are loans that,
generally, consist of senior participations in, or a senior tranche within a
first mortgage.  We do not obtain ratings on these
investments.  Our A note investments have LTV ratios of up to
70%.  We expect to hold our A note investments to their
maturity.
 
 Subordinate
interests in whole loans (B notes).  We invest in
subordinate interests in whole loans, referred to as B notes, which we either
directly originate or purchase from third parties.  B notes are loans
secured by a first mortgage and subordinated to an A note.  The
subordination of a B note is generally evidenced by an intercreditor or
participation agreement between the holders of the A note and the B
note.  In some instances, the B note lender may require a security
interest in the stock or partnership interests of the borrower as part of the
transaction.  B note lenders have the same obligations, collateral and
borrower as the A note lender, but typically are subordinated in recovery upon a
default to the A note lender.  B notes share certain credit
characteristics with second mortgages in that both are subject to greater credit
risk with respect to the underlying mortgage collateral than the corresponding
first mortgage or A note.  We do not obtain ratings on these
investments.  Our B note investments have LTV ratios of between 55%
and 80%.  Typical B note investments will have terms of three years to
five years, and are generally structured with an original term of up to three
years, with one year extensions that bring the loan to a maximum term of five
years.  We expect to hold our B note investments to their
maturity.
 
 In
addition to the interest payable on the B note, we may earn fees charged to the
borrower under the note or additional income by receiving principal payments in
excess of the discounted price (below par value) we paid to acquire the
note.  Our ownership of a B note with controlling class rights may, in
the event the financing fails to perform according to its terms, cause us to
elect to pursue our remedies as owner of the B note, which may include
foreclosure on, or modification of, the note.  In some cases, the
owner of the A note may be able to foreclose or modify the note against our
wishes as owner of the B note.  As a result, our economic and business
interests may diverge from the interests of the owner of the A
note.
 
 Mezzanine
financing. We invest in
mezzanine loans that are senior to the borrower’s equity in, and subordinate to
a first mortgage loan on, a property.  These loans are secured by
pledges of ownership interests, in whole or in part, in entities that directly
own the real property.  In addition, we may require other collateral
to secure mezzanine loans, including letters of credit, personal guarantees of
the principals of the borrower, or collateral unrelated to the
property.  We may structure our mezzanine loans so that we receive a
stated fixed or variable interest rate on the loan as well as a percentage of
gross revenues and a percentage of the increase in the fair market value of the
property securing the loan, payable upon maturity, refinancing or sale of the
property.  Our mezzanine loans may also have prepayment lockouts,
penalties, minimum profit hurdles and other mechanisms to protect and enhance
returns in the event of premature repayment.  Our mezzanine
investments have LTV ratios between 65% and 90%.  We expect the
stated maturity of our mezzanine financings to range from three to five
years.  Mezzanine loans may have maturities that match the maturity of
the related mortgage loan but may have shorter or longer terms.  We
expect to hold these investments to maturity.




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The
following charts describe the loan type, property type and the geographic
breakdown of our commercial real estate loan portfolio as of December 31, 2008
(based on par value):




Loan
Type









Property
Type









Geographic
by State







As these charts demonstrate, our
portfolio contains a diversified mix of property types with approximately 94% of
the portfolio focus on four types, Multifamily 30%, Office 23%, Hotel 27% and
Retail 14%.
 
 Our geographic mix includes
approximately 38% in California, or CA, which we split into Southern (21%) and
Northern (17%) regions.  Within the Southern CA region, we have 84% of
our portfolio in whole loans and 83% in four property types, Hotel 48%, Office
16%, Retail 12% and Multifamily 7%.  Within the Northern CA region, we
have 89% of our portfolio in whole loans and 89% in two property types,
Multifamily 73% and Retail 16%.  As noted in these statistics, this
portfolio is made up primarily of whole loans where we are able to better
control the structure of the loan and maintain a direct lending relationship
with the borrower.  We view the investment and credit strategy as
being adequately diversified across property type and loan type across both the
Southern and Northern CA regions.
 
 CMBS. We invest in
CMBS, which are securities that are secured by or evidence interests in a pool
of mortgage loans secured by commercial properties.  These securities
may be senior or subordinate and may be either investment grade or
non-investment grade.  The majority of our CMBS investments have been
rated by at least one nationally recognized rating
agency.


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The yields on CMBS depend on the timely
payment of interest and principal due on the underlying mortgage loans and
defaults by the borrowers on such loans may ultimately result in deficiencies
and defaults on the CMBS.  In the event of a default, the trustee for
the benefit of the holders of CMBS has recourse only to the underlying pool of
mortgage loans and, if a loan is in default, to the mortgaged property securing
such mortgage loan.  After the trustee has exercised all of the rights
of a lender under a defaulted mortgage loan and the related mortgaged property
has been liquidated, no further remedy will be available.  However,
holders of relatively senior classes of CMBS will be protected to a certain
degree by the structural features of the securitization transaction within which
such CMBS were issued, such as the subordination of the relatively more junior
classes of the CMBS.





Residential
Real Estate-Related Investments





Historically, we had invested in agency
RMBS and non-agency ABS-RMBS portfolios.  We sold our agency RMBS
portfolio in September 2006.  We sold 10% of the equity invested in an
ABS-RMBS portfolio in November 2007 and wrote down the investment materially in
September 2007.  As a result of the sale, we deconsolidated the
variable interest entity that owned the portfolio in the quarter ended December
31, 2007 and recovered the balance of our remaining investment in
2008.  We do not anticipate investing in agency RMBS or non-agency
RMBS for the foreseeable future.





Commercial
Finance Investments





Subject to limitations imposed by REIT
qualification standards and requirements for exclusion from regulation under the
Investment Company Act of 1940, which we refer to as the Investment Company Act,
we may invest in the following commercial finance assets:





Bank
loans.  We acquire senior
and subordinated, secured and unsecured loans made by banks or other financial
entities.  Bank loans may also include revolving credit facilities,
under which the lender is obligated to advance funds to the borrower under the
credit facility as requested by the borrower from time to time.  We
expect that some amount of these loans will be secured by mortgages and liens on
the assets of the borrowers.  Certain of these loans may have an
interest-only payment schedule, with the principal amount remaining outstanding
and at risk until the maturity of the loan.  These loans may include
restrictive financial and operating covenants.  We also have invested,
to a lesser extent, in bonds which pay holders a coupon periodically until
maturity of the bonds, when the face value is due.





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The following chart describes the
industry breakdown of our bank loans as of December 31, 2008 (based on par
value):





Bank
Loans by Industry








(1)
            All
      other is made up of the following industries (by
    percentage):


CDO
                3.1%Telecommunications
                3.0%Beverage,
      food and tobacco
                2.9%Diversified/conglomerate
      manufacturing
                2.8%Aerospace
      and defense
                2.6%Personal
      and nondurable consumer products
                2.4%Buildings
      and real estate
                2.2%Containers,
      packaging and glass
                2.2%Personal
      transportation
                2.2%Electronics
                2.0%Ecological
                2.0%Cargo
      transport
                0.7%Personal
      and nondurable consumer products
                0.7%Textiles
      and leather
                0.6%Mining,
      steel, iron and non-precious metals
                0.6%Machinery
      (non-agriculture, non-construction, non-electronic)
                0.5%Insurance
                0.3%Farming
      and agriculture
                0.3%Home
      and office furnishings, housewares and durable consumer
      products
                0.2%Diversified
      natural resources, precious metals and minerals
                0.3%





Equipment leases
and notes.  We invest in
small- and middle-ticket full payout equipment leases and
notes.  Under full payout leases and notes, the payments we receive
over the term of the financing will return our invested capital plus an
appropriate return without consideration of the value of the leased equipment at
the end of the lease or note term, known as the residual, and the obligor will
acquire the equipment at the end of the payment term.  We focus on
equipment and other assets that are essential for businesses to conduct their
operations so that end users will be highly motivated to make required monthly
payments.  We focus on equipment in the following areas:




·
            general
      office equipment, such as office machinery, furniture and telephone and
      computer systems;




·
            medical
      and dental practices and equipment for diagnostic and treatment
      use;




·
            energy
      and climate control systems;




·
            industrial
      equipment, including manufacturing, material handling and electronic
      diagnostic systems; and




·
            agricultural
      equipment and facilities.




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The following charts describe the
industry and the geographic breakdown of our equipment leases and notes as of
December 31, 2008 (based on par value):





Equipment
Lease and Notes by Industry





Geographic
by State







Trust preferred
securities and other ABS.  We have one
investment (less than 0.1% of our total assets) in trust preferred
securities.  Trust preferred securities are issued by a special
purpose trust that holds a subordinated debenture or other debt obligation
issued by a company to the trust.  We hold the equity interest in the
trust, with the preferred securities of the trust being sold to
investors.  The trust invests the proceeds of the preferred securities
in the sponsoring company through the purchase of the debenture issued by
us.  Issuers of trust preferred securities are generally affiliated
with financial institutions because, under current regulatory and tax
structures, unlike the proceeds from debt securities the proceeds from trust
preferred securities may be treated as primary regulatory capital by the
financial institution, while it may deduct the interest it pays on the debt
obligation held by the trust from its income for federal income tax
purposes.





Competition





See “Risk Factors” - “Risks Relating to
Our Business”





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Management
Agreement





We have a management agreement with the
Manager and Resource America under which the Manager provides the day-to-day
management of our operations.The management
agreement requires the Manager to manage our business affairs in conformity with
the policies and the investment guidelines established by our board of
directors.  The Manager’s role as manager is under the supervision and
direction of our board of directors.  The Manager is responsible for
the selection, purchase and sale of our portfolio investments, our financing
activities, and providing us with investment advisory services.  The
Manager receives fees and is reimbursed for its expenses as
follows:




·
            A
      monthly base management fee equal to 1/12th of the amount of our equity
      multiplied by 1.50%.  Under the management agreement, ‘‘equity’’
      is equal to the net proceeds from any issuance of shares of common stock
      less offering related costs, plus or minus our retained earnings
      (excluding non-cash equity compensation incurred in current or prior
      periods) less any amounts we have paid for common stock
      repurchases.  The calculation is adjusted for one-time events
      due to changes in accounting principles generally accepted in the United
      States, which we refer to as GAAP, as well as other non-cash charges, upon
      approval of our independent
directors.




·
            Incentive
      compensation calculated as follows: (i) twenty-five percent
      (25%) of the dollar amount by which (A) our Adjusted Operating
      Earnings (before Incentive Compensation but after the Base Management Fee)
      for such quarter per Common Share (based on the weighted average number of
      Common Shares outstanding for such quarter) exceeds (B) an
      amount equal to (1) the weighted average of the price per share of
      the Common Shares in the initial offering by us and the prices per share
      of the Common Shares in any subsequent offerings by us, in each case at
      the time of issuance thereof, multiplied by (2) the greater of
      (a) 2.00% and (b) 0.50% plus one-fourth of the Ten Year Treasury
      Rate for such quarter, multiplied by (ii) the weighted average number
      of Common Shares outstanding during such quarter subject to adjustment; to
      exclude events pursuant to changes in GAAP or the application of GAAP, as
      well as non-recurring or unusual transactions or events, after discussion
      between the Manager and the Independent Directors and approval by a
      majority of the Independent Directors in the case of non-recurring or
      unusual transactions or
events.




·
            Reimbursement
      of out-of-pocket expenses and certain other costs incurred by the Manager
      that relate directly to us and our
operations.





Incentive compensation will be paid
quarterly.  Up to seventy-five percent (75%) of the incentive
compensation will be paid in cash and at least twenty-five percent (25%) will be
paid in the form of a stock award.  The Manager may elect to receive
more than 25% of its incentive compensation in stock.  All shares are
fully vested upon issuance.  However, the Manager may not sell such
shares for one year after the incentive compensation becomes due and payable
unless the management agreement is terminated.  Shares payable as
incentive compensation are valued as follows:




·
            if
      such shares are traded on a securities exchange, at the average of the
      closing prices of the shares on such exchange over the thirty day period
      ending three days prior to the issuance of such
  shares;




·
            if
      such shares are actively traded over-the-counter, at the average of the
      closing bid or sales price as applicable over the thirty day period ending
      three days prior to the issuance of such shares;
  and




·
            if
      there is no active market for such shares, at the fair market value as
      reasonably determined in good faith by our board of
    directors.





The
current term of the management agreement expires on March 31,
2009.  The management agreement will automatically renew for a
one-year term on that date and each anniversary date thereafter.  Our
board of directors will review the Manager’s performance
annually.  The management agreement may be terminated annually upon
the affirmative vote of at least two-thirds of our independent directors, or by
the affirmative vote of the holders of at least a majority of the outstanding
shares of our common stock, based upon unsatisfactory performance that is
materially detrimental to us or a determination by our independent directors
that the management fees payable to the Manager are not fair, subject to the
Manager’s right to prevent such a compensation termination by accepting a
mutually acceptable reduction of management fees. Our board of directors must
provide 180 days’ prior notice of any such termination.  The Manager
will be paid a termination fee equal to four times the sum of the average annual
base management fee and the average annual incentive compensation earned by the
Manager during the two 12-month periods immediately preceding the date of
termination, calculated as of the end of the most recently completed fiscal
quarter before the date of termination.





We may
also terminate the management agreement for cause with 30 days’ prior written
notice from our board of directors.  No termination fee is payable
with respect to a termination for cause.  The management agreement
defines cause as:




·
            the
      Manager’s continued material breach of any provision of the management
      agreement following a period of 30 days after written notice
      thereof;




·
            the
      Manager’s fraud, misappropriation of funds, or embezzlement against
      us;




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·
            the
      Manager’s gross negligence in the performance of its duties under the
      management agreement;




·
            the
      bankruptcy or insolvency of the Manager, or the filing of a voluntary
      bankruptcy petition by the Manager;




·
            the
      dissolution of the Manager; and




·
            a
      change of control (as defined in the management agreement) of the Manager
      if a majority of our independent directors determines, at any point during
      the 18 months following the change of control, that the change of control
      was detrimental to the ability of the Manager to perform its duties in
      substantially the same manner conducted before the change of
      control.





Cause
does not include unsatisfactory performance that is materially detrimental to
our business.





The
management agreement will terminate at the Manager’s option, without payment of
the termination fee, in the event we become regulated as an investment company
under the Investment Company Act, with such termination deemed to occur
immediately before such event.





Regulatory
Aspects of Our Investment Strategy:  Exclusion from Regulation Under
the Investment Company Act.





We operate our business so as to be
excluded from regulation under the Investment Company Act.  Because we
conduct our business through wholly-owned subsidiaries, we must ensure not only
that we qualify for an exclusion from regulation under the Investment Company
Act, but also that each of our subsidiaries so qualifies.





We believe that RCC Real Estate, Inc.,
the subsidiary that as of December 31, 2008 held all of our commercial real
estate loan assets, is excluded from Investment Company Act regulation under
Sections 3(c)(5)(C) and 3(c)(6), provisions designed for companies that do
not issue redeemable securities and are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate.  To qualify for this exclusion, at least 55% of RCC Real
Estate’s assets must consist of mortgage loans and other assets that are
considered the functional equivalent of mortgage loans for purposes of the
Investment Company Act, which we refer to as “qualifying real estate
assets.”  Moreover, 80% of RCC Real Estate’s assets must consist of
qualifying real estate assets and other real estate-related
assets.  RCC Real Estate has not issued, and does not intend to issue,
redeemable securities.





We treat our investments in whole
mortgage loans, specific types of B notes and specific types of mezzanine loans
as qualifying real estate assets for purposes of determining our eligibility for
the exclusion provided by Section 3(c)(5)(C) to the extent such treatment
is consistent with guidance provided by the SEC or its staff. We believe that
SEC staff guidance allows us to treat B notes as qualifying real estate assets
where we have unilateral rights to instruct the servicer to foreclose upon a
defaulted mortgage loan, replace the servicer in the event the servicer, in its
discretion, elects not to foreclose on such a loan, and purchase the A note in
the event of a default on the mortgage loan.  We believe, based upon
an analysis of existing SEC staff guidance, that we may treat mezzanine loans as
qualifying real estate assets where (i) the borrower is a special purpose
bankruptcy-remote entity whose sole purpose is to hold all of the ownership
interests in another special purpose entity that owns commercial real property,
(ii) both entities are organized as limited liability companies or limited
partnerships, (iii) under their organizational documents and the loan
documents, neither entity may engage in any other business, (iv) the
ownership interests of either entity have no value apart from the underlying
real property which is essentially the only asset held by the property-owning
entity, (v) the value of the underlying property in excess of the amount of
senior obligations is in excess of the amount of the mezzanine loan,
(vi) the borrower pledges its entire interest in the property-owning entity
to the lender which obtains a perfected security interest in the collateral, and
(vii) the relative rights and priorities between the mezzanine lender and
the senior lenders with respect to claims on the underlying property is set
forth in an intercreditor agreement between the parties which gives the
mezzanine lender certain cure and purchase rights in case there is a default on
the senior loan.  If the SEC staff provides guidance that these
investments are not qualifying real estate assets, we will treat them, for
purposes of determining our eligibility for the exclusion provided by
Section 3(c)(5)(C), as real estate-related assets or miscellaneous assets,
as appropriate.  Historically, we have held “whole pool certificates”
in mortgage loans, although, at December 31, 2008, we had no whole pool
certificates in our portfolios.  We consider whole pool certificates
to be qualifying real estate assets.  A whole pool certificate is a
certificate that represents the entire beneficial interest in an underlying pool
of mortgage loans.  By contrast, a certificate that represents less
than the entire beneficial interest in the underlying mortgage loans is not
considered to be a qualifying real estate asset for purposes of the 55% test,
but constitutes a real estate-related asset for purposes of the 80%
test.  We do not expect that investments in CDOs, other ABS, bank
loans, equipment leases and notes, trust preferred securities and private equity
will constitute qualifying real estate assets.  Moreover, to the
extent that these investments are not backed by mortgage loans or other
interests in real estate, they will not constitute real estate-related
assets.  Instead, they will constitute miscellaneous assets, which can
constitute no more than 20% of RCC Real Estate’s assets.





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To the extent RCC Real Estate holds its
commercial real estate loan assets through wholly-owned CDO subsidiaries, RCC
Real Estate also intends to conduct its operations so that it will not come
within the definition of an investment company set forth in Section 3(a)(1)(C)
of the Investment Company Act because less than 40% of the value of its total
assets on an unconsolidated basis will consist of “investment securities,” which
we refer to as the 40% test.  “Investment securities” exclude U.S.
government securities and securities of majority-owned subsidiaries that are not
themselves investment companies and are not relying on the exception from the
definition of investment company under Section 3(c)(1) or
Section 3(c)(7) of the Investment Company Act.  Certain of the
wholly-owned CDO subsidiaries of RCC Real Estate rely on Section 3(c)(5)(C)
for their Investment Company Act exemption, with the result that RCC Real
Estate’s interests in the CDO subsidiaries do not constitute “investment
securities” for the purpose of the 40% test.





Our other subsidiaries, RCC Commercial,
Inc. and Resource TRS, Inc. do not qualify for the Section 3(c)(5)(C)
exclusion.  However, we believe they qualify for exclusion under
either Section 3(c)(1) or 3(c)(7).  As required by these
exclusions, we will not allow either entity to make, or propose to make, a
public offering of its securities.  In addition, with respect to those
subsidiaries for which we rely upon the Section 3(c)(1) exclusion, and as
required thereby, we limit the number of holders of their securities to not more
than 100 persons calculated in accordance with the attribution rules of Section
3(c)(1) and, with respect to those subsidiaries for which we rely on the Section
3(c)(7) exclusion, and as required thereby, we limit ownership of their
securities to “qualified purchasers.”  If we form other subsidiaries,
we must ensure that they qualify for an exemption or exclusion from regulation
under the Investment Company Act.





Moreover, we must ensure that Resource
Capital Corp. itself qualifies for an exclusion from regulation under the
Investment Company Act. We will do so by monitoring the value of our interests
in our subsidiaries.  At all times, we must ensure that Resource
Capital Corp. meets the 40% test.  Our interest in RCC Real Estate
does not constitute an “investment security” for purposes of the 40% test, but
our interest in RCC Commercial does, and our interest in Resource TRS may in the
future, constitute “investment securities.”  Accordingly, we must
monitor the value of our interest in these two subsidiaries to ensure that the
value of our interests in them never exceeds 40% of the value of our total
assets.





We have not received, nor have we
sought, a no-action letter from the SEC regarding how our investment strategy
fits within the exclusions from regulation under the Investment Company
Act.  To the extent that the SEC provides more specific or different
guidance regarding the treatment of assets as qualifying real estate assets or
real estate-related assets, we may have to adjust our investment
strategy.  Any additional guidance from the SEC could further inhibit
our ability to pursue our investment strategy.





Employees





We have no direct
employees.  Under our management agreement, the Manager provides us
with all management and support personnel and services necessary for our
day-to-day operations.  We depend upon the Manager and Resource
America for personnel and administrative infrastructure.  To provide
its services, the Manager draws upon the expertise and experience of Resource
America.  As of December 31, 2008, 808 employees were involved in
asset management, including 144 asset management professionals and 664 asset
management support personnel, respectively.





Corporate Governance and Internet
Address





We
emphasize the importance of professional business conduct and ethics through our
corporate governance initiatives.  Our board of directors consists of
a majority of independent directors; the audit, compensation and
nominating/corporate governance committees of our board of directors are
composed exclusively of independent directors.  We have adopted
corporate governance guidelines and a code of business conduct and ethics, which
delineate our standards for our officers and directors, and employees of our
manager.





Our internet address is www.resourcecapitalcorp.com.  We
make available, free of charge through a link on our site, all reports filed
with the SEC as soon as reasonably practicable after such filing.  Our
site also contains our code of business conduct and ethics, corporate governance
guidelines and the charters of the audit committee, nominating and governance
committee and compensation committee of our board of directors.




The New York Stock Exchange, or NYSE,
requires the chief executive officer of each listed company to certify annually
that he is not aware of any violation by the company of the NYSE corporate
governance listing standards as of the date of the certification, qualifying the
certification to the extent necessary. The Chief Executive Officer provided such
certification to the NYSE in 2008 without qualification.  In addition,
the certifications of the Chief Executive Officer and Chief Financial Officer
required by Sections 302 and 906 of the Sarbanes-Oxley Act have been included as
exhibits to this report.


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ITEM
1A.                      RISK
FACTORS





This section describes material risks
affecting our business. In connection with the forward-looking statements that
appear in this annual report, you should carefully review the factors discussed
below and the cautionary statements referred to in “Forward-Looking
Statements.”





Impact
of Current Economic Conditions





Continuance
of current economic conditions could further harm our financial condition,
income and ability to make distributions to our stockholders.





Beginning in mid-2007 and continuing
through the date of this report, the financial system in the United States,
including credit markets and markets for real estate and real estate-related
assets, has been subject to unprecedented turmoil.  This turmoil has
resulted in severe limitations on the availability of credit, significant
declines in the value of real estate and real estate related assets, impairment
of the ability of many borrowers to repay their obligations and illiquidity in
the markets for real estate and real estate-related assets.  These
events have had significant adverse effects on us including incurrence of
impairment charges with respect to investments we hold, significant increases in
our provision for loan losses and the unavailability of financing to support new
investments.  As a result, our income, our ability to make
distributions and the price of our common stock have declined
significantly.  Continuation of current economic conditions could
further harm our financial condition, income and ability to make distributions
to our stockholders.





Actions
taken by the U.S. government and governmental agencies may not reverse, or even
stabilize, current economic conditions.





In response to current economic and
market conditions, the U.S. government and a number of governmental agencies
have established or proposed a series of programs designed to stabilize the
financial system and credit markets, including programs established pursuant to
the Emergency Economic Stabilization Act of 2008 and the American Recovery and
Reinvestment Tax Act of 2009.  We cannot predict whether these
programs will have their intended effect, or, if they do, whether they will have
a beneficial impact upon our financial condition, income or ability to make
distributions to our stockholders.





Risks
Related to Our Financing





Our
portfolio has been financed in material part through the use of leverage, which
may reduce the return on our investments and cash available for
distribution.





Our portfolio has been financed in
material part through the use of leverage.  Using leverage subjects us
to risks associated with debt financing, including the risks that:




·
            the
      cash provided by our operating activities will not be sufficient to meet
      required payments of principal and
interest,




·
            the
      cost of financing will increase relative to the income from the assets
      financed, reducing the income we have available to pay distributions,
      and




·
            our
      investments may have maturities that differ from the maturities of the
      related financing and, consequently, the risk that the terms of any
      refinancing we obtain will not be as favorable as the terms of existing
      financing.





If we are unable to secure refinancing
of our currently outstanding financing, when due, on acceptable terms, we may be
forced to dispose of some of our assets upon disadvantageous terms or to obtain
financing at unfavorable terms, either of which may result in losses to us or
reduce the cash flow available to meet our debt service obligations or to pay
distributions.





Financing that we may obtain and
financing we have obtained through CDOs, does require us to maintain a specified
ratio of the amount of the financing to the value of the assets
financed.  A decrease in the value of these assets may lead to margin
calls or calls for the pledge of additional assets which we will have to
satisfy.  We may not have sufficient funds or unpledged assets to
satisfy any such calls.





Under
current economic and market conditions we are significantly constrained in our
ability to obtain the capital and financing necessary for growth.  As
a result, our profitability, ability to make distributions and the market price
of our common stock have been harmed. Continuation or further deterioration of
current conditions could further harm our profitability, ability to make
distributions and the market price of our common stock.




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We depend upon the availability of
adequate funding and capital for our operations.  Our ability to
obtain financing or capital has been significantly constrained as a result of
current economic and market conditions, which has impaired our profitability,
our abilityto make
distributions and the market price of our common stock.  Moreover, as
a REIT, we must distribute annually at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid and excluding net
capital gain, to our stockholders and are therefore not able to retain
significant amounts of our earnings for new investments.  While the
newly-promulgated Rev. Proc. 2008-68, allows us to satisfy this requirement by
distributing common shares for up to 90% of the amount of a required
distribution, such regulatory relief is currently only available for
2009.  Moreover, although Resource TRS, our TRS, may retain earnings
as new capital, we are subject to REIT qualification requirements which limit
the relative value of TRS stock and securities to the other assets owned by a
REIT.  Consequently, we depend upon the availability of financing and
additional capital to provide us with the funding necessary to permit
growth.  Continuation or further deterioration of current economic and
market conditions could further impair our profitability, ability to make
distributions and the market price of our common shares.  Moreover,
even if funding or capital were availability, we cannot assure you that it would
be on acceptable terms.





Historically,
we have financed most of our investments through CDOs and have retained the
equity. CDO equity receives distributions from the CDO only if the CDO generates
enough income to first pay the holders of its debt securities and its
expenses.





We have financed most of our
investments through CDOs in which we retained the equity
interest.  Depending on market conditions, credit availability, and
resolution of current credit market conditions, we may seek to use CDOs to
finance our investments in the future.  The equity interests of a CDO
are subordinate in right of payment to all other securities issued by the
CDO.  The equity is usually entitled to all of the income generated by
the CDO after the CDO pays all of the interest due on the debt securities and
other expenses.  However, there will be little or no income available
to the CDO equity if there are excessive defaults by the issuers of the
underlying collateral which would significantly reduce the value of that
interest.  Reductions in the value of the equity interests we have in
a CDO, if we determine that they are other than temporary, will reduce our
earnings.  In addition, the equity securities of CDOs are generally
illiquid, and because they represent a leveraged investment in the CDO’s assets,
the value of the equity securities will generally have greater fluctuations than
the value of the underlying collateral.




If
our CDO financings fail to meet their performance tests, including
over-collaterization requirements, our net income and cash flow from these CDOs
will be eliminated.
 
 Our CDOs generally provide that the
principal amount of their assets must exceed the principal balance of the
related securities issued by them by a certain amount, commonly referred to as
“over-collateralization.”   The CDO terms provide that, if
delinquencies and/or losses exceed specified levels based on the analysis by the
rating agencies (or any financial guaranty insurer) of the characteristics of
the assets collateralizing the securities issued by the CDO issuer, the required
level of over-collateralization may be increased or may be prevented from
decreasing as would otherwise be permitted if losses or delinquencies did not
exceed those levels.  In addition, a failure by a CDO to satisfy an
over-collateralization test typically results in accelerated distributions to
the holders of the senior debt securities issued by the CDO entity. Our equity
holdings and, when we acquire debt interests in CDOs, our debt interests, if
any, are subordinate in right of payment to the other classes of debt securities
issued by the CDO entity.  Accordingly, if overcollateralization tests
are not met, distributions on the subordinated debt and equity we hold in these
CDOs will cease, resulting in a substantial reduction in our cash
flow.  Other tests (based on delinquency levels or other criteria) may
restrict our ability to receive cash distributions from assets collateralizing
the securities issued by the CDO entity.  Although at December 31,
2008, all of our CDOs met their performance tests, we cannot assure you that our
CDOs will satisfy the performance tests in the future.
 
 If any of our CDOs fails to meet
collateralization tests relevant to the most senior debt issued and outstanding
by the CDO issuer, an event of default may occur under that CDO.  If
that occurs, our Manager’s ability to manage the CDO likely would be terminated
and our ability to attempt to cure any defaults in the CDO would be limited,
which would increase the likelihood of a reduction or elimination of cash flow
and returns to us in those CDOs for an indefinite time.
 
 If
we issue debt securities, the terms may restrict our ability to make cash
distributions, require us to obtain approval to sell our assets or otherwise
restrict our operations in ways which could make it difficult to execute our
investment strategy and achieve our investment objectives.
 
 Any debt securities we may issue in the
future will likely be governed by an indenture or other instrument containing
covenants restricting our operating flexibility.  Holders of senior
securities may be granted the right to hold a perfected security interest in
certain of our assets, to accelerate payments due under the indenture if we
breach financial or other covenants, to restrict distributions, and to require
approval to sell assets.  These covenants could limit our ability to
operate our business or manage our assets effectively.  Additionally,
any convertible or exchangeable securities that we issue may have rights,
preferences and privileges more favorable than those of our common
stock.  We, and indirectly our stockholders, will bear the cost of
issuing and servicing such securities.


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Depending
upon market conditions, we may in the future seek financing through CDOs, which
would expose us to risks relating to the accumulation of assets for use in the
CDOs.


Historically, we have financed a
significant portion of our assets through the use of CDOs, and have accumulated
assets for these financings through short-term credit facilities, typically
repurchase agreement facilities.  Depending upon market conditions, we
may seek similar financing arrangements in the future.  These
arrangements could expose us to a number of credit risks, including the
following:




·
            If
      we accumulate assets for a CDO on a short-term credit facility and do not
      complete the CDO financing, or if a default occurs under the facility, the
      short-term lender will sell the assets and we would be responsible for the
      amount by which the original purchase price of the assets exceeds their
      sale price, up to the amount of our investment or
  guaranty.




·
            An
      event of default under one short-term facility may constitute a default
      under other credit facilities we may have, potentially resulting in asset
      sales and losses to us, as well as increasing our financing costs or
      reducing the amount of investable funds available to
  us.




·
            We
      may be unable to acquire a sufficient amount of eligible assets to
      maximize the efficiency of a CDO issuance, which would require us to seek
      other forms of term financing or liquidate the assets.  We may
      not be able to obtain term financing on acceptable terms, or at all, and
      liquidation of the assets may be at prices less than those we paid,
      resulting in losses to us.




·
            Using
      short-term financing to accumulate assets for a CDO issuance may require
      us to obtain new financing as the short-term financing
      matures.  Residual financing may not be available on acceptable
      terms, or at all.  Moreover, an increase in short-term interest
      rates at the time that we seek to enter into new borrowings would reduce
      the spread between the income on our assets and the cost of our
      borrowings.  This would reduce returns on our assets, which
      would reduce earnings and, in turn, cash available for distribution to our
      stockholders.




·
            We
      will lose money on our repurchase transactions if the counterparty to the
      transaction defaults on its obligation to resell the underlying security
      back to us at the end of the transaction term, or if the value of the
      underlying security has declined as of the end of the term or if we
      default on our obligations under the repurchase
  agreements.





Our
hedging transactions may not completely insulate us from interest rate risk and
may result in poorer overall investment performance than if we had not engaged
in any hedging transactions.





Subject to maintaining our
qualification as a REIT, we pursue various hedging strategies to seek to reduce
our exposure to losses from adverse changes in interest rates. Our interest rate
hedging activity varies in scope depending upon market conditions relating to,
among other factors, the level and volatility of interest rates and the type of
assets we hold.  There are practical limitations on our ability to
insulate our portfolio from all of the negative consequences associated with
changes in short-term interest rates, including:




·
            Available
      interest rate hedges may not correspond directly with the interest rate
      risk against which we seek
protection.




·
            The
      duration of the hedge may not match the duration of the related
      liability.




·
            Interest
      rate hedging can be expensive, particularly during periods of rising and
      volatile interest rates.  Hedging costs may include structuring
      and legal fees and fees payable to hedge counterparties to execute the
      hedge transaction.




·
            Losses
      on a hedge position may reduce the cash available to make distributions to
      stockholders, and may exceed the amounts invested in the hedge
      position.




·
            The
      amount of income that a REIT may earn from hedging transactions, other
      than through a TRS, is limited by federal tax provisions governing
      REITs.




·
            The
      credit quality of the party owing money on the hedge may be downgraded to
      such an extent that it impairs our ability to sell or assign our side of
      the hedging transaction.




·
            The
      party owing money in the hedging transaction may default on its obligation
      to pay.







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 We have adopted written policies and
procedures governing our hedging activities.  Under these policies and
procedures, our board of directors is responsible for approving the types of
hedging instruments we may use, absolute limits on the notional amount and term
of a hedging instrument and parameters for the credit-worthiness of hedge
counterparties.  The senior managers responsible for each of our
targeted asset classes are responsible for executing transactions using the
services of independent interest rate risk management consultants, documenting
the transactions, monitoring the valuation and effectiveness of the hedges, and
providing reports concerning our hedging activities and the valuation and
effectiveness of our hedges, to the audit committee of our board of directors no
less often than quarterly.  Our guidelines also require us to engage
one or more experienced third party advisors to provide us with assistance in
the identification of interest rate risks, the analysis, selection and timing of
risk protection strategies, the administration and negotiation of hedge
documentation, settlement or disposition of hedges, compliance with hedge
accounting requirements and measurement of hedge effectiveness and
valuation.


Hedging against a decline in the values
of our portfolio positions does not eliminate the possibility of fluctuations in
the values of the positions or prevent losses if the values of the positions
decline.  Hedging transactions may also limit the opportunity for gain
if the values of the portfolio positions should increase.  Moreover,
we may not be able to hedge against an interest rate fluctuation that is
generally anticipated by the market.





The success of our hedging transactions
will depend on the Manager’s ability to correctly predict movements of interest
rates.  Therefore, unanticipated changes in interest rates may result
in poorer overall investment performance than if we had not engaged in any such
hedging transactions.  In addition, the degree of correlation between
price movements of the instruments used in a hedging strategy and price
movements in the portfolio positions being hedged may vary.  Moreover,
for a variety of reasons, we may not seek to establish a perfect correlation
between such hedging instruments and the portfolio holdings being hedged. Any
such imperfect correlation may prevent us from achieving the intended hedge and
expose us to risk of loss.





Hedging
instruments often are not traded on regulated exchanges, guaranteed by an
exchange or its clearing house, or regulated by any U.S. or foreign governmental
authorities and involve risks of default by the hedging counterparty and
illiquidity.





Subject to maintaining our
qualification as a REIT, part of our investment strategy involves entering into
puts and calls on securities or indices of securities, interest rate swaps, caps
and collars, including options and forward contracts, and interest rate lock
agreements, principally Treasury lock agreements, to seek to hedge against
mismatches between the cash flows from our assets and the interest payments on
our liabilities.  Hedging instruments often are not traded on
regulated exchanges, guaranteed by an exchange or its clearing house, or
regulated by any U.S. or foreign governmental
authorities.  Consequently, there are no requirements with respect to
record keeping, financial responsibility or segregation of customer funds and
positions.  Furthermore, the enforceability of agreements underlying
derivative transactions may depend on compliance with applicable statutory and
commodity and other regulatory requirements and, depending on the identity of
the counterparty, applicable international requirements.  The business
failure of a counterparty with whom we enter into a hedging transaction will
most likely result in a default. Default by a party with whom we entered into a
hedging transaction may result in the loss of unrealized profits and force us to
cover our resale commitments, if any, at the then current market
price.  Although generally we seek to reserve the right to terminate
our hedging positions, we may not always be able to dispose of or close out a
hedging position without the consent of the hedging counterparty, and we may not
be able to enter into an offsetting contract in order to cover our
risk.  A liquid secondary market may not exist for hedging instruments
purchased or sold, and we may have to maintain a position until exercise or
expiration, which could result in losses.





We
may enter into hedging instruments that could expose us to unexpected losses in
the future.





We have entered and may in the future
enter into hedging instruments that require us to fund cash payments under
certain circumstances, for example, upon the early termination of the instrument
caused by an event of default or other early termination event, or the decision
by a counterparty to request additional collateral for margin it is
contractually owed under the terms of the instrument.  The amount due
would be equal to the unrealized loss of the open positions with the
counterparty and could also include other fees and charges.  These
liabilities will be reflected in our consolidated balance sheet, and our ability
to fund these obligations will depend on the liquidity of our assets and access
to capital at the time, and the need to fund these obligations could adversely
impact our financial condition.





Approximately
74% of our hedging arrangements are with a single counterparty and, as a
consequence, our hedging strategy may fail if that counterparty defaults in its
obligations.





As of December 31, 2008, approximately
74% of our outstanding hedges, with a notional amount of $239.1 million, were
with Credit Suisse International, or CS.  Were CS to default in its
obligations under these hedging arrangements, we would lose the hedge protection
for which we had contracted which, depending upon market conditions, could
result in significant losses to us.  We cannot assure you that we
could replace the defaulted hedges or that the terms of any replacement hedges
we could obtain would be on similar terms, or as to the cost to us of obtaining
replacement hedges.


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Risks
Related to Our Operations





We
may change our investment strategy without stockholder consent, which may result
in riskier investments than those currently targeted.





Subject to maintaining our
qualification as a REIT and our exclusion from regulation under the Investment
Company Act, we may change our investment strategy, including the percentage of
assets that may be invested in each class, or in the case of securities, in a
single issuer, at any time without the consent of our stockholders, which could
result in our making investments that are different from, and possibly riskier
than, the investments described in this report.  A change in our
investment strategy may increase our exposure to interest rate and real estate
market fluctuations, all of which may reduce the market price of our common
stock and impair our ability to make distributions to
you.  Furthermore, a change in our asset allocation could result in
our making investments in asset categories different from those described in
this report.





We
depend upon information systems to conduction our operations.  Systems
failures could significantly disrupt our business.





Our business depends on communications
and information systems. Any failure or interruption of our systems could cause
delays or other problems in our activities which could harm our operating
results, cause the market price of our common stock to decline and reduce our
ability to make distributions.





Terrorist
attacks and other acts of violence or war may affect the market for our common
stock, the industry in which we conduct our operations and our
profitability.





Terrorist attacks may harm our results
of operations and your investment.  We cannot assure you that there
will not be further terrorist attacks against the United States or U.S.
businesses.  These attacks or armed conflicts may directly impact the
property underlying our ABS or the securities markets in
general.  Losses resulting from these types of events are
uninsurable.





More generally, any of these events
could cause consumer confidence and spending to decrease or result in increased
volatility in the United States and worldwide financial markets and
economy.  Adverse economic conditions could harm the value of some or
all of the investments in our portfolio or the securities markets in general
which could harm our operating results and revenues and may result in the
volatility of the value of our securities.





If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.





If we fail to maintain an effective
system of internal controls, fail to correct any issues in the design or
operating effectiveness of internal controls over financial reporting, or fail
to prevent fraud, our shareholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our common
stock.





Some
of our investments may be illiquid, which may result in our realizing less than
their recorded value should we need to sell such investments
quickly.





We have made investments, and expect to
make additional investments, in securities that are not publicly
traded.  A portion of these securities may be subject to legal and
other restrictions on resale or will otherwise be less liquid than publicly
traded securities.  If we are required to liquidate all or a portion
of our portfolio quickly, we may realize significantly less than the value at
which we have previously recorded our investments.  In addition, we
may face other restrictions on our ability to liquidate an investment in a
business entity to the extent that we, the Manager or Resource America has or
could be attributed with material non-public information regarding such business
entity.





We
may have to repurchase assets that we have sold in connection with CDOs and
other securitizations.





If any of the assets that we originate
or acquire and sell or securitize do not comply with representations and
warranties that we make about their characteristics, the borrowers and the
underlying assets, we may have to purchase these assets from the CDO or
securitization vehicle, or replace them with substitute loans or
securities.  In addition, in the case of loans or securities that we
have sold instead of retained, we may have to indemnify purchasers for losses or
expenses incurred as a result of a breach of a representation or
warranty.  Any significant repurchases or indemnification payments
could materially reduce our liquidity, earnings and ability to make
distributions.





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We
may be exposed to environmental liabilities with respect to properties to which
we take title.





In the course of our business, we may
take title to real estate through foreclosure on collateral underlying real
estate investments.  If we do take title to any property, we could be
subject to environmental liabilities with respect to it.  In such a
circumstance, we may be held liable to a governmental entity or to third parties
for property damage, personal injury, investigation, and clean-up costs they
incur as a result of environmental contamination, or may have to investigate or
clean up hazardous or toxic substances, or chemical releases at a
property.  The costs associated with investigation or remediation
activities could be substantial and could reduce our income and ability to make
distributions.





If
our allowance for loan and lease losses is not adequate to cover actual or
estimated future loan and lease losses, our earnings may decline.





We maintain an allowance for loan and
lease losses to provide for loan defaults and non-performance by borrowers of
their obligations.  Our allowance for loan and lease losses may not be
adequate to cover actual or estimated future loan and lease losses and future
provisions for loan and lease losses could materially and adversely affect our
operating results.  Our allowance for loan and lease losses is based on
prior experience, as well as an evaluation of risks in the current portfolio.
 However, losses may exceed our current estimates.  The amount of
future losses is susceptible to changes in economic, operating and other
conditions that may be beyond our control, including changes in interest rates,
changes in borrowers’ creditworthiness and the value of collateral securing
loans and leases.  Additionally, if we seek to expand our loan and lease
portfolios, we may need to make provisions for loan and lease losses to ensure
that the allowance remains at levels deemed appropriate by our management for
the size and quality of portfolio. While we believe that our allowance for loan
and lease losses is adequate to cover our anticipated losses, we cannot assure
you that will continue to be the case or that we will not further increase the
allowance for loan and lease losses.  This occurrence could materially
affect our earnings.





Our
due diligence may not reveal all of an entity’s liabilities and other weaknesses
in its business.





Before investing in the securities of
any issuer, we will assess the strength and skills of the issuer’s management,
the value of any collateral securing debt securities, the ability of the issuer
and the collateral to service the debt and other factors that we believe are
material to the performance of the investment.  In making the
assessment and otherwise conducting customary due diligence, we will rely on the
resources available to us and, in some cases, an investigation by third
parties.  This process is particularly important and subjective with
respect to newly-organized entities because there may be little or no
information publicly available about the entities or, with respect to debt
securities, any underlying collateral. Our due diligence processes, however, may
not uncover all facts that may be relevant to an investment
decision.





Risks
Related to Our Investments





Declines
in the market values of our investments may reduce periodic reported results,
credit availability and our ability to make distributions.





We classify a substantial portion of
our assets for accounting purposes as “available-for-sale.”  As a
result, changes in the market values of those assets are directly charged or
credited to stockholders’ equity.  A decline in these values will
reduce the book value of our assets.  Moreover, if the decline in
value of an available-for-sale asset is other than temporary, we must record the
decline as an asset impairment which will reduce our earnings.  As a
result of market conditions, our “available-for-sale” investments have declined
$36.2 million in value, since December 31, 2007. All of that decline has been
deemed temporary.





A decline in the market value of our
assets may also adversely affect us in instances where we have borrowed money
based on the market value of those assets.  If the market value of
those assets declines, the lender may require us to post additional collateral
to support the loan.  If we were unable to post the additional
collateral, we would have to sell the assets under adverse market conditions,
which would reduce our earnings and, in turn, cash available to make
distributions.





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Increases
in interest rates and other factors could reduce the value of our investments,
result in reduced earnings or losses and reduce our ability to pay
distributions.




A significant risk associated with our
investment in commercial real estate-related loans, CMBS and other debt
instruments is the risk that either or both of long-term and short-term interest
rates increase significantly.  If long-term rates increase, the market
value of our assets would decline.  Even if assets underlying
investments we may own in the future are guaranteed by one or more persons,
including government or government-sponsored agencies, those guarantees do not
protect against declines in market value of the related assets caused by
interest rate changes.  At the same time, because of the short-term
nature of the financing we have historically used to acquire our investments, an
increase in short-term interest rates would increase our interest expense,
reducing our net interest spread.  This could result in reduced
profitability and distributions.


Investing
in mezzanine debt and mezzanine or other subordinated tranches of CMBS, bank
loans and other ABS involves greater risks of loss than senior secured debt
investments.





Subject to maintaining our
qualification as a REIT and exclusion from regulation under the Investment
Company Act, we invest in mezzanine debt and expect to invest in mezzanine or
other subordinated tranches of CMBS, bank loans and other ABS.  These
types of investments carry a higher degree of risk of loss than senior secured
debt investments such as our whole loan investments because, in the event of
default and foreclosure, holders of senior liens will be paid in full before
mezzanine investors and, depending on the value of the underlying collateral at
the time of foreclosure, there may not be sufficient assets to pay all or any
part of amounts owed to mezzanine investors.  Moreover, our mezzanine
and other subordinate debt investments may have higher LTV ratios than
conventional senior lien financing, resulting in less equity in the collateral
and increasing the risk of loss of principal.  If a borrower defaults
or declares bankruptcy, we may be subject to agreements restricting or
eliminating our rights as a creditor, including rights to call a default,
foreclose on collateral, accelerate maturity or control decisions made in
bankruptcy proceedings.  In addition, the prices of lower credit
quality securities are generally less sensitive to interest rate changes than
more highly rated investments, but more sensitive to economic downturns or
individual issuer developments because the ability of obligors of instruments
underlying the securities to make principal and interest payments may be
impaired.  In such event, existing credit support relating to the
securities’ structure may not be sufficient to protect us against loss of our
principal.





We
have historically invested in small- and middle-ticket equipment leases and
notes to small- and mid-size businesses which may have greater risks of default
than leases or loans to larger businesses.





We have historically invested in small-
and middle-ticket equipment leases and notes.  Many of the obligors
are small- to mid-size businesses.  As a result, we may be subject to
higher risks of lease default than if our obligors were larger
businesses.  While we will seek to repossess and re-lease or sell the
equipment subject to a defaulted lease or note, we may not be able to do so on
advantageous terms.  If an obligor files for protection under the
bankruptcy laws, we may experience difficulties and delays in recovering the
equipment.  Moreover, the equipment may be returned in poor condition
and we may be unable to enforce important lease provisions against an insolvent
obligor, including the contract provisions that require the obligor to return
the equipment in good condition.  In some cases, an obligor’s
deteriorating financial condition may make trying to recover what the obligor
owes impractical.  The costs of recovering equipment upon an obligor’s
default, enforcing the obligor’s obligations under the lease, and transporting,
storing, repairing and finding a new obligor or purchaser for the equipment may
be high.  Higher than expected lease defaults will result in a loss of
anticipated revenues.  These losses may impair our ability to make
distributions and reduce the market price of our common stock.





Private
equity investments involve a greater risk of loss than traditional debt
financing.





On occasion, we have made private
equity investments.  Typically, these investments are subordinate to
debt financing and are not secured.  Should the issuer default on our
investment, we would only be able to proceed against the entity that issued the
private equity in accordance with the terms of the security, and not any
property owned by the entity.  In the event of bankruptcy or
foreclosure, we would only be able to recoup our investment after any lenders to
the entity are paid.  As a result, we may not recover some or all of
our investment, which could result in losses.  Moreover, depending
upon the existence of a market for the issuer’s securities, the length of time
we have held the investment and any rights we may have to require registration
under the Securities Act, these investments may be highly illiquid so that we
may not be able to sell these investments at times we would like to do so or at
prices that reflect our cost or the value of the investment on our financial
statements.





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We
record some of our portfolio investments at fair value as estimated by our
management and, as a result, there will be uncertainty as to the value of these
investments.





We currently hold, and expect that we
will hold in the future, portfolio investments that are not publicly traded,
including the securities of Resource TRS.  The fair value of
securities and other investments that are not publicly traded may not be readily
determinable.  We value these investments quarterly at fair value as
determined under policies approved by our board of directors.  Because
such valuations are inherently uncertain, may fluctuate over short periods of
time and may be based on estimates, our determinations of fair value may differ
materially from the values that would have obtained if a ready market for them
existed.  The value of our common stock will likely decrease if our
determinations regarding the fair value of these investments are materially
higher than the values that we ultimately realize upon their
disposal.





Our
assets include bank loans and other ABS which will carry higher risks of loss
than our real estate-related portfolio.




Subject to maintaining our
qualification as a REIT and exclusion from regulation under the Investment
Company Act, we invest in bank loans and other ABS.  Our bank loan
investments or our other ABS investments, which are principally backed by small
business and bank loans, may not be secured by mortgages or other liens on
assets or may involve higher LTV ratios than our real estate-related
investments.  Our bank loan investments, and our ABS backed by loans,
involve loans with a par amount of $178.1 million that have an interest-only
payment schedule or a schedule that does not fully amortize principal over the
term of the loan, which will make repayment of the loan depend upon the
borrower’s liquidity or ability to refinance the loan at
maturity.  Numerous factors affect a borrower’s ability to repay or
refinance loans at maturity, including national and local economic conditions, a
downturn in a borrower’s industry, loss of one or more principal customers and
conditions in the credit markets.  A deterioration in a company’s
financial condition or prospects may be accompanied by a deterioration in the
collateral for the bank loan or any ABS backed by such company’s
loans.


Risks
Related to Our Manager





We
depend on the Manager and Resource America and may not find suitable
replacements if the management agreement terminates.





We have no employees.  Our
officers, portfolio managers, administrative personnel and support personnel are
employees of Resource America.  We have no separate facilities and
completely rely on the Manager and, because the Manager has no direct employees,
Resource America, which has significant discretion as to the implementation of
our operating policies and investment strategies.  If our management
agreement terminates, we may be unable to find a suitable replacement for
them.  Moreover, we believe that our success depends to a significant
extent upon the experience of the Manager’s and Resource America’s executive
officers and senior portfolio managers, and in particular Edward E. Cohen,
Jonathan Z. Cohen, Steven J. Kessler, Jeffrey D. Blomstrom, Joan Sapinsley,
David J. Bryant, Thomas C. Elliott, Christopher D. Allen, Gretchen Bergstresser,
David Bloom, Crit DeMent and Alan F. Feldman, whose continued service is not
guaranteed.  The departure of any of the executive officers or senior
portfolio managers could harm our investment performance.




We
must pay the Manager the base management fee regardless of the performance of
our portfolio.





The Manager is entitled to receive a
monthly base management fee equal to 1/12 of our equity, as defined in the
management agreement, times 1.50%, regardless of the performance of our
portfolio.  The Manager’s entitlement to substantial non-performance
based compensation might reduce its incentive to devote its time and effort to
seeking profitable opportunities for our portfolio.  This in turn
could hurt our ability to make distributions to our stockholders.





The
incentive fee we pay the Manager may induce it to make riskier
investments.





In addition to its base management fee,
the Manager will receive incentive compensation, payable quarterly, equal to 25%
of the amount by which our net income, as defined in the management agreement,
exceeds the weighted average prices for our common stock in all of our offerings
multiplied by the greater of 2.00% or 0.50% plus one-fourth of the average
10-year treasury rate for such quarter, multiplied by the weighted average
number of common shares outstanding during the quarter.  In evaluating
investments and other management strategies, the opportunity to earn incentive
compensation based on net income may lead the Manager to place undue emphasis on
the maximization of net income at the expense of other criteria, such as
preservation of capital, in order to achieve higher incentive
compensation.  Investments with higher yields generally have higher
risk of loss than investments with lower yields.


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The
Manager manages our portfolio pursuant to very broad investment guidelines and
our board does not approve each investment decision, which may result in our
making riskier investments.





The Manager is authorized to follow
very broad investment guidelines.  While our directors periodically
review our investment guidelines and our investment portfolio, they do not
review all of our proposed investments.  In addition, in conducting
periodic reviews, the directors may rely primarily on information provided to
them by the Manager.  Furthermore, the Manager may use complex
strategies, and transactions entered into by the Manager may be difficult or
impossible to unwind by the time they are reviewed by the
directors.  The Manager has great latitude within the broad investment
guidelines in determining the types of investments it makes for
us.  Poor investment decisions could impair our ability to make
distributions to our stockholders.





Our
management agreement was not negotiated at arm’s-length and, as a result, may
not be as favorable to us as if it had been negotiated with a third
party.





Our officers and two of our directors,
Edward E. Cohen and Jonathan Z. Cohen, are officers or directors of the Manager
and Resource America.  As a consequence, our management agreement was
not the result of arm’s-length negotiations and its terms, including fees
payable, may not be as favorable to us as if it had been negotiated with an
unaffiliated third party.





Termination
of the management agreement by us without cause is difficult and could be
costly.





Termination of our management agreement
without cause is difficult and could be costly.  We may terminate the
management agreement without cause only annually following its initial term upon
the affirmative vote of at least two-thirds of our independent directors or by a
vote of the holders of at least a majority of our outstanding common stock,
based upon unsatisfactory performance by the Manager that is materially
detrimental to us or a determination that the management fee payable to the
Manager is not fair.  Moreover, with respect to a determination that
the management fee is not fair, the Manager may prevent termination by accepting
a mutually acceptable reduction of management fees.  We must give not
less than 180 days’ prior notice of any termination.  Upon any
termination without cause, the Manager will be paid a termination fee equal to
four times the sum of the average annual base management fee and the average
annual incentive compensation earned by it during the two 12-month periods
immediately preceding the date of termination, calculated as of the end of the
most recently completed fiscal quarter before the date of
termination.





The
Manager and Resource America may engage in activities that compete with
us.





Our management agreement does not
prohibit the Manager or Resource America from investing in or managing entities
that invest in asset classes that are the same as or similar to our targeted
asset classes, except that they may not raise funds for, sponsor or advise any
new publicly-traded REIT that invests primarily in MBS in the United
States.  The Manager’s policies regarding resolution of conflicts of
interest may be varied by it if economic, market, regulatory or other conditions
make their application economically inefficient or otherwise
impractical.  Moreover, our officers, other than our chief financial
officer, and the officers, directors and employees of Resource America who
provide services to us are not required to work full time on our affairs, and
devote significant time to the affairs of Resource America.  As a
result, there may be significant conflicts between us, on the one hand, and the
Manager and Resource America on the other, regarding allocation of the Manager’s
and Resource America’s resources to the management of our investment
portfolio.




Our
Manager’s liability is limited under the management agreement, and we have
agreed to indemnify our Manager against certain liabilities.





Our Manager does not assume any
responsibility under the management agreement other than to render the services
called for under it, and will not be responsible for any action of our board of
directors in following or declining to follow its advice or
recommendations.  Resource America, the Manager, their directors,
managers, officers, employees and affiliates will not be liable to us, any
subsidiary of ours, our directors, our stockholders or any subsidiary’s
stockholders for acts performed in accordance with and pursuant to the
management agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of their duties under the
management agreement.  We have agreed to indemnify the parties for all
damages and claims arising from acts not constituting bad faith, willful
misconduct, gross negligence, or reckless disregard of duties, performed in good
faith in accordance with and pursuant to the management agreement.


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Risks
Related to Real Estate Investments





The B notes in which we invest may
be subject to additional risks relating to the privately negotiated structure
and terms of the transaction, which may result in losses to
us.





A B note is a loan typically secured by
a first mortgage on a single large commercial property or group of related
properties and subordinated to a senior note secured by the same first mortgage
on the same collateral.  As a result, if a borrower defaults, there
may not be sufficient funds remaining for B note owners after payment to the
senior note owners.  Since each transaction is privately negotiated, B
notes can vary in their structural characteristics and risks.  For
example, the rights of holders of B notes to control the process following a
borrower default may be limited in certain investments.  We cannot
predict the terms of each B note investment we will make.  Further, B
notes typically are secured by a single property, and so reflect the increased
risks associated with a single property compared to a pool of
properties.  B notes also are less liquid than other forms of
commercial real estate debt investments, such as CMBS, and, as a result we may
be unable to dispose of underperforming or non-performing
investments.  The higher risks associated with the subordinate
position of our B note investments could subject us to increased risk of
loss.





Our
real estate debt investments will be subject to the risks inherent in the real
estate securing or underlying those investments which could result in losses to
us.





Commercial mortgage loans are secured
by, and mezzanine loans depend on, the performance of the underlying,
multifamily or commercial property and are subject to risks of delinquency and
foreclosure, and risks of loss, that are greater than similar risks associated
with loans made on the security of single-family residential
property.  The ability of a borrower to repay a loan secured by or
dependent upon an income-producing property typically depends primarily upon the
successful operation of the property rather than upon the existence of
independent income or assets of the borrower.  If the net operating
income of the property is reduced, the borrower’s ability to repay the loan may
be damaged.  Net operating income of an income producing property can
be affected by, among other things:




·
            tenant
      mix, success of tenant businesses and property management
      decisions,




·
            property
      location and condition,




·
            competition
      from comparable types of
properties,




·
            changes
      in laws that increase operating expense or limit rents that may be
      charged,




·
            any
      need to address environmental contamination at the
    property,




·
            the
      occurrence of any uninsured casualty at the
  property,




·
            changes
      in national, regional or local economic conditions and/or specific
      industry segments,




·
            declines
      in regional or local real estate
values,




·
            declines
      in regional or local rental or occupancy
rates,




·
            increases
      in interest rates, real estate tax rates and other operating
      expenses,




·
            transitional
      nature of a property being converted to an alternate
  use;




·
            increases
      in costs of construction material;




·
            changes
      in governmental rules, regulations and fiscal policies, including
      environmental legislation, and




·
            acts
      of God, terrorism, social unrest and civil
  disturbances.




Although we currently hold no
residential mortgage loans in our portfolio, in the past our portfolio has
included substantial residential mortgage investments.  Residential
mortgage loans are subject to risks of delinquency and foreclosure, and risks of
loss.  The ability of a borrower to repay these loans depends upon the
borrower’s income or assets.  A number of factors, including a
national, regional or local economic downturn, acts of God, terrorism, social
unrest and civil disturbances, may impair borrowers’ abilities to repay their
loans.  Economic problems specific to a borrower, such as loss of a
job or medical problems, may also impair a borrower’s ability to repay his or
her loan.
 
 We risk loss of principal on defaulted
mortgage loans we hold to the extent of any deficiency between the value of the
collateral and the principal and accrued interest of the mortgage loan, which
would reduce our cash flow from operations.  Foreclosure of a mortgage
loan can be an expensive and lengthy process which could reduce our return on
the foreclosed mortgage loan. In a bankruptcy of a mortgage loan borrower, the
mortgage loan will be deemed to be secured only to the extent of the value of
the underlying collateral at the time of bankruptcy as determined by the
bankruptcy court, and the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent
the lien is unenforceable under state law.


(Back to Index)
 24
 (Back to Index)




For a discussion of other
risks associated with mezzanine loans, see “-Investing in mezzanine debt or
mezzanine or other subordinated tranches of CMBS, bank loans and other ABS
involves greater risks of loss than senior secured debt
instruments.”


Risks
Related to Our Organization and Structure





Our
charter and bylaws contain provisions that may inhibit potential acquisition
bids that you and other stockholders may consider favorable, and the market
price of our common stock may be lower as a result.





Our charter and bylaws contain
provisions that may have an anti-takeover effect and inhibit a change in our
board of directors.  These provisions include the
following:




·
            There are ownership limits and
      restrictions on transferability and ownership in our
      charter.  For purposes of assisting us in maintaining our
      REIT qualification under the Internal Revenue Code, our charter generally
      prohibits any person from beneficially or constructively owning more than
      9.8% in value or number of shares, whichever is more restrictive, of any
      class or series of our outstanding capital stock.  This
      restriction may:




-
            discourage
      a tender offer or other transactions or a change in the composition of our
      board of directors or control that might involve a premium price for our
      shares or otherwise be in the best interests of our stockholders;
      or




-
            result
      in shares issued or transferred in violation of such restrictions being
      automatically transferred to a trust for a charitable beneficiary,
      resulting in the forfeiture of those
shares.




·
            Our charter permits our board
      of directors to issue stock with terms that may discourage a third party
      from acquiring us.  Our board of directors may amend our
      charter without stockholder approval to increase the total number of
      authorized shares of stock or the number of shares of any class or series
      and issue common or preferred stock having preferences, conversion or
      other rights, voting powers, restrictions, limitations as to
      distributions, qualifications, or terms or conditions of redemption as
      determined by our board.  Thus, our board could authorize the
      issuance of stock with terms and conditions that could have the effect of
      discouraging a takeover or other transaction in which holders of some or a
      majority of our shares might receive a premium for their shares over the
      then-prevailing market price.




·
            Our charter and bylaws contain
      other possible anti-takeover provisions.  Our charter and
      bylaws contain other provisions that may have the effect of delaying or
      preventing a change in control of us or the removal of existing directors
      and, as a result, could prevent our stockholders from being paid a premium
      for their common stock over the then-prevailing market
    price.





Maryland
takeover statutes may prevent a change in control of us, and the market price of
our common stock may be lower as a result.





Maryland Control Share Acquisition
Act.  Maryland law provides that “control shares” of a
corporation acquired in a “control share acquisition” will have no voting rights
except to the extent approved by a vote of two-thirds of the votes eligible to
be cast on the matter under the Maryland Control Share Acquisition Act. The act
defines “control shares” as voting shares of stock that, if aggregated with all
other shares of stock owned by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
one-tenth or more but less than one-third, one-third or more but less than a
majority, or a majority or more of all voting power. A “control share
acquisition” means the acquisition of control shares, subject to specific
exceptions.




If voting rights or control shares
acquired in a control share acquisition are not approved at a stockholders’
meeting or if the acquiring person does not deliver an acquiring person
statement as required by the Maryland Control Share Acquisition Act then,
subject to specific conditions and limitations, the issuer may redeem any or all
of the control shares for fair value. If voting rights of such control shares
are approved at a stockholders’ meeting and the acquiror becomes entitled to
vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. Our bylaws contain a provision exempting acquisitions
of our shares from the Maryland Control Share Acquisition Act. However, our
board of directors may amend our bylaws in the future to repeal this
exemption.


(Back to Index)
 25
 (Back to Index)
 Business
combinations.  Under Maryland law, “business combinations”
between a Maryland corporation and an interested stockholder or an affiliate of
an interested stockholder are prohibited for five years after the most recent
date on which the interested stockholder becomes an interested
stockholder.  These business combinations include a merger,
consolidation, share exchange or, in circumstances specified in the statute, an
asset transferor issuance or reclassification of equity
securities.  An interested stockholder is defined as:
  ·
                any
      person who beneficially owns ten percent or more of the voting power of
      the corporation’s shares; or
  ·
                an
      affiliate or associate of the corporation who, at any time within the
      two-year period before the date in question, was the beneficial owner of
      ten percent or more of the voting power of the then outstanding voting
      stock of the corporation.


A person is not an interested
stockholder under the statute if the board of directors approved in advance the
transaction by which such person otherwise would have become an interested
stockholder. However, in approving a transaction, the board of directors may
provide that its approval is subject to compliance, at or after the time of
approval, with any terms and conditions determined by the board.





After the five-year prohibition, any
business combination between the Maryland corporation and an interested
stockholder generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:




·
            80%
      of the votes entitled to be cast by holders of outstanding shares of
      voting stock of the corporation;
and




·
            two-thirds
      of the votes entitled to be cast by holders of voting stock of the
      corporation other than shares held by the interested stockholder with whom
      or with whose affiliate the business combination is to be effected or held
      by an affiliate or associate of the interested
  stockholder.





These super-majority vote requirements
do not apply if the corporation’s common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of cash or other
consideration in the same form as previously paid by the interested stockholder
for its shares.





The statute permits exemptions from its
provisions, including business combinations that are exempted by the board of
directors before the time that the interested stockholder becomes an interested
stockholder.





Our
rights and the rights of our stockholders to take action against our directors
and officers are limited, which could limit your recourse in the event of
actions not in your best interests.





Our charter limits the liability of our
directors and officers to us and our stockholders for money damages, except for
liability resulting from:




·
            actual
      receipt of an improper benefit or profit in money, property or services;
      or




·
            a
      final judgment based upon a finding of active and deliberate dishonesty by
      the director or officer that was material to the cause of action
      adjudicated.





In addition, our charter authorizes us
to indemnify our present and former directors and officers for actions taken by
them in those capacities to the maximum extent permitted by Maryland
law.  Our bylaws require us to indemnify each present or former
director or officer, to the maximum extent permitted by Maryland law, in the
defense of any proceeding to which he or she is made, or threatened to be made,
a party by reason of his or her service to us.  In addition, we may be
obligated to fund the defense costs incurred by our directors and
officers.





Our
right to take action against the Manager is limited.





The obligation of the Manager under the
management agreement is to render its services in good faith.  It will
not be responsible for any action taken by our board of directors or investment
committee in following or declining to follow its advice and
recommendations.  Furthermore, as discussed above under “− Risks
Related to Our Business,” it will be difficult and costly for us to terminate
the management agreement without cause. In addition, we will indemnify the
Manager, Resource America and their officers and affiliates for any actions
taken by them in good faith.






(Back to Index)
 26
 (Back to Index)
 We
have not established a minimum distribution payment level and we cannot assure
you of our ability to make distributions in the future.  We may in the
future use uninvested offering proceeds or borrowed funds to make
distributions.
 
 We expect to make quarterly
distributions to our stockholders in amounts such that we distribute all or
substantially all of our taxable income in each year, subject to certain
adjustments.  We have not established a minimum distribution payment
level, and our ability to make distributions may be impaired by the risk factors
described in this report.  All distributions will be made at the
discretion of our board of directors and will depend on our earnings, our
financial condition, maintenance of our REIT qualification and other factors as
our board of directors may deem relevant from time to time.  We may
not be able to make distributions in the future. In addition, some of our
distributions may include a return of capital.  To the extent that we
decide to make distributions in excess of our current and accumulated taxable
earnings and profits, such distributions would generally be considered a return
of capital for federal income tax purposes.  A return of capital is
not taxable, but it has the effect of reducing the holder’s tax basis in its
investment.  Although we currently do not expect that we will do so,
we have in the past and may in the future also use proceeds from any offering of
our securities that we have not invested or borrowed funds to make
distributions.  If we use uninvested offering proceeds to pay
distributions in the future, we will have less funds available for investment
and, as a result, our earnings and cash available for distribution would be less
than we might otherwise have realized had such funds been
invested.  Similarly, if we borrow to fund distributions, our future
interest costs would increase, thereby reducing our future earnings and cash
available for distribution from what they otherwise would have
been.


Loss
of our exclusion from regulation under the Investment Company Act would require
significant changes in our operations and could reduce the market price of our
common stock and our ability to make distributions.





In order to be excluded from regulation
under the Investment Company Act, we must comply with the requirements of one or
more of the exclusions from the definition of investment
company.  Because we conduct our business through wholly-owned
subsidiaries, we must ensure not only that we qualify for an exclusion from
regulation under the Investment Company Act, but also that each of our
subsidiaries so qualifies.  If we fail to qualify for an exclusion, we
could be required to restructure our activities or register as an investment
company.  Either alternative would require significant changes in our
operations and could reduce the market price of our common stock.  For
example, if the market value of our investments in assets other than qualifying
real estate assets or real estate-related assets were to increase beyond the
levels permitted under the Investment Company Act exclusion upon which we rely
or if assets in our portfolio were deemed not to be qualifying real estate
assets as a result of SEC staff guidance, we might have to sell those assets or
acquire additional qualifying real estate assets in order to maintain our
exclusion.  Any such sale or acquisition could occur under adverse
market conditions.  If we were required to register as an investment
company, our use of leverage to fund our investment strategies would be
significantly limited, which would limit our profitability and ability to make
distributions, and we would become subject to substantial regulation concerning
management, operations, transactions with affiliated persons, portfolio
composition, including restrictions with respect to diversification and industry
concentration, and other matters.





Rapid
changes in the values of our real-estate related investments may make it more
difficult for us to maintain our qualification as a REIT or exclusion from
regulation under the Investment Company Act.





If the market value or income potential
of our real estate-related investments declines as a result of increased
interest rates, prepayment rates or other factors, we may need to increase our
real estate-related investments and income and/or liquidate our non-qualifying
assets in order to maintain our REIT qualification or exclusion from the
Investment Company Act.  If the decline in real estate asset values
and/or income occurs quickly, this may be especially difficult to
accomplish.  This difficulty may be exacerbated by the illiquid nature
of many of our non-real estate assets.  We may have to make investment
decisions that we otherwise would not make absent REIT qualification and
Investment Company Act considerations.





Tax
Risks





Complying
with REIT requirements may cause us to forego otherwise attractive
opportunities.





To qualify as a REIT for federal income
tax purposes, we must continually satisfy various tests regarding the sources of
our income, the nature and diversification of our assets, the amounts we
distribute to our stockholders and the ownership of our common
stock.  In order to meet these tests, we may be required to forego
investments we might otherwise make.  Thus, compliance with the REIT
requirements may hinder our investment performance.






(Back to Index)
 27
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 In particular, at least 75% of our
assets at the end of each calendar quarter must consist of real estate assets,
government securities, cash and cash items.  For this purpose, “real
estate assets” generally include interests in real property, such as land,
buildings, leasehold interests in real property, stock of other entities that
qualify as REITs, interests in mortgage loans secured by real property,
investments in stock or debt instruments during the one-year period following
the receipt of new capital and regular or residual interests in a real estate
mortgage investment conduit, or REMIC.  In addition, the amount of
securities of a single issuer, other than a TRS, that we hold must generally not
exceed either 5% of the value of our gross assets or 10% of the vote or value of
such issuer’s outstanding securities.
 
 Certain of the assets that we hold or
intend to hold, including interests in CDOs or corporate leveraged loans, are
not qualified and will not be qualified real estate assets for purposes of the
REIT asset tests.  ABS-RMBS and CMBS securities should generally
qualify as real estate assets.  However, to the extent that we own
non-REMIC collateralized mortgage obligations or other debt instruments secured
by mortgage loans (rather than by real property) or secured by non-real estate
assets, or debt securities that are not secured by mortgages on real property,
those securities are likely not qualifying real estate assets for purposes of
the REIT asset test, and will not produce qualifying real estate
income.  Further, whether securities held by warehouse lenders or
financed using repurchase agreements are treated as qualifying assets or as
generating qualifying real estate income for purposes of the REIT asset and
income tests depends on the terms of the warehouse or repurchase financing
arrangement.
 
 We generally will be treated as the
owner of any assets that collateralize CDO transactions to the extent that we
retain all of the equity of the securitization vehicle and do not make an
election to treat such securitization vehicle as a TRS, as described in further
detail below.  It may be possible to reduce the impact of the REIT
asset and gross income requirements by holding certain assets through our TRSs,
subject to certain limitations as described
below.




Our
qualification as a REIT and exemption from U.S. federal income tax with respect
to certain assets may depend on the accuracy of legal opinions or advice
rendered or given or statements by the issuers of securities in which we invest,
and the inaccuracy of any such opinions, advice or statements may adversely
affect our REIT qualification and result in significant corporate level
tax.





When purchasing securities, we have
relied and may rely on opinions or advice of counsel for the issuer of such
securities, or statements, made in related offering documents, for purposes of
determining whether such securities represent debt or equity securities for U.S.
federal income tax purposes, and also to what extent those securities constitute
REIT real estate assets for purposes of the REIT asset tests and produce income
which qualifies under the 75% REIT gross income test.  In addition,
when purchasing CDO equity, we have relied and may rely on opinions or advice of
counsel regarding the qualification of interests in the debt of such CDOs for
U.S. federal income tax purposes.  The inaccuracy of any such
opinions, advice or statements may adversely affect our REIT qualification and
result in significant corporate-level tax.





We
may realize excess inclusion income that would increase our tax liability and
that of our stockholders.





If we realize excess inclusion income
and allocate it to stockholders, this income cannot be offset by net operating
losses of the stockholders.  If the stockholder is a tax-exempt
entity, then this income would be fully taxable as unrelated business taxable
income under Section 512 of the Internal Revenue Code. If the stockholder
is a foreign person, it would be subject to federal income tax withholding on
this income without reduction or exemption pursuant to any otherwise applicable
income tax treaty.





Excess inclusion income could result if
we hold a residual interest in a REMIC.  Excess inclusion income also
could be generated if we issue debt obligations, such as certain CDOs, with two
or more maturities and the terms of the payments on these obligations bore a
relationship to the payments that we received on our mortgage related securities
securing those debt obligations, i.e., if we were to own an interest in a
taxable mortgage pool.  While we do not expect to acquire significant
amounts of residual interests in REMICs, we do own residual interests in taxable
mortgage pools, which means that we will likely generate significant amounts of
excess inclusion income.





If we realize excess inclusion income,
we will be taxed at the highest corporate income tax rate on a portion of such
income that is allocable to the percentage of our stock held in record name by
“disqualified organizations,” which are generally cooperatives, governmental
entities and tax-exempt organizations that are exempt from unrelated business
taxable income.  To the extent that our stock owned by “disqualified
organizations” is held in record name by a broker/dealer or other nominee, the
broker/dealer or other nominee would be liable for the corporate level tax on
the portion of our excess inclusion income allocable to the stock held by the
broker/dealer or other nominee on behalf of “disqualified
organizations.”  We expect that disqualified organizations will own
our stock.  Because this tax would be imposed on us, all of our
investors, including investors that are not disqualified organizations, would
bear a portion of the tax cost associated with the classification of us or a
portion of our assets as a taxable mortgage pool.  A regulated
investment company or other pass through entity owning stock in record name will
be subject to tax at the highest corporate rate on any excess inclusion income
allocated to its owners that are disqualified organizations.  Finally,
if we fail to qualify as a REIT, our taxable mortgage pool securitizations will
be treated as separate corporations, for federal income tax purposes that cannot
be included in any consolidated corporate tax return.






(Back to Index)
 28
 (Back to Index)
 Failure
to qualify as a REIT would subject us to federal income tax, which would reduce
the cash available for distribution to our stockholders.
 
 We believe that we have been organized
and operated in a manner that has enabled us to qualify as a REIT for federal
income tax purposes commencing with our taxable years ended on December 31,
2005 and 2006.  However, the federal income tax laws governing REITs
are extremely complex, and interpretations of the federal income tax laws
governing qualification as a REIT are limited.  Qualifying as a REIT
requires us to meet various tests regarding the nature of our assets and our
income, the ownership of our outstanding stock, and the amount of our
distributions on an ongoing basis.
 
 If we fail to qualify as a REIT in any
calendar year and we do not qualify for certain statutory relief provisions, we
will be subject to federal income tax, including any applicable alternative
minimum tax on our taxable income, at regular corporate
rates.  Distributions to stockholders would not be deductible in
computing our taxable income.  Corporate tax liability would reduce
the amount of cash available for distribution to our
stockholders.  Under some circumstances, we might need to borrow money
or sell assets in order to pay that tax. Furthermore, if we fail to maintain our
qualification as a REIT and we do not qualify for the statutory relief
provisions, we no longer would be required to distribute substantially all of
our REIT taxable income, determined without regard to the dividends paid
deduction and not including net capital gains, to our
stockholders.  Unless our failure to qualify as a REIT were excused
under federal tax laws, we could not re-elect to qualify as a REIT until the
fifth calendar year following the year in which we failed to qualify. In
addition, if we fail to qualify as a REIT, our taxable mortgage pool
securitizations will be treated as separate corporations for U.S. federal income
tax purposes.





Failure
to make required distributions would subject us to tax, which would reduce the
cash available for distribution to our stockholders.





In order to qualify as a REIT, in each
calendar year we must distribute to our stockholders at least 90% of our REIT
taxable income, determined without regard to the deduction for dividends paid
and excluding net capital gain.  To the extent that we satisfy the 90%
distribution requirement, but distribute less than 100% of our taxable income,
we will be subject to federal corporate income tax on our undistributed
income.  In addition, we will incur a 4% nondeductible excise tax on
the amount, if any, by which our distributions in any calendar year are less
than the sum of:




·
            85%
      of our ordinary income for that
year;




·
            95%
      of our capital gain net income for that year;
  and




·
            100%
      our undistributed taxable income from prior
  years.





We intend to make distributions to our
stockholders in a manner intended to satisfy the 90% distribution requirement
and to distribute all or substantially all of our net taxable income to avoid
both corporate income tax and the 4% nondeductible excise tax.  There
is no requirement that a domestic TRS distribute its after-tax net income to its
parent REIT or their stockholders and Resource TRS may determine not to make any
distributions to us.  However, non-U.S. TRSs, such as Apidos CDO I,
Apidos CDO III and Apidos Cinco CDO, which we discuss in “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations,” will
generally be deemed to distribute their earnings to us on an annual basis for
federal income tax purposes, regardless of whether such TRSs actually distribute
their earnings.





Generally, dividends payable in stock
are not treated as dividends for purposes of the deduction for dividends, or as
taxable dividends to the recipient.  A complex set of rules applies
when a distribution is made partially in stock and partially in cash and
different shareholders receive different proportions of each.  The
Internal Revenue Service, in Revenue Procedure 2009-15, has given guidance with
respect to certain stock distributions by publicly traded REITS (and
RICs).  That Revenue Procedure applies to distributions made on or
after January 1, 2008 and declared with respect to a taxable year ending on
or before December 31, 2009.  It provides that publicly-traded
REITS can distribute stock (common shares in our case) to satisfy their REIT
distribution requirements if stated conditions are met.  These
conditions include that at least 10% of the aggregate declared distributions be
paid in cash and the shareholders be permitted to elect whether to receive cash
or stock, subject to the limit set by the REIT on the cash to be distributed in
the aggregate to all shareholders.  We did not use this Revenue
Procedure with respect to any distributions for our 2008 taxable year, but may
do so for distributions with respect to 2009.





(Back to Index)
 29
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 Our taxable income may substantially
exceed our net income as determined by GAAP because, for example, realized
capital losses will be deducted in determining our GAAP net income but may not
be deductible in computing our taxable income.  In addition, we may
invest in assets that generate taxable income in excess of economic income or in
advance of the corresponding cash flow from the assets, referred to as phantom
income.  Although some types of phantom income are excluded to the
extent they exceed 5% of our REIT taxable income in determining the 90%
distribution requirement, we will incur corporate income tax and the 4%
nondeductible excise tax with respect to any phantom income items if we do not
distribute those items on an annual basis.  As a result, we may
generate less cash flow than
taxable income in a particular year.  In that event, we may be
required to use cash reserves, incur debt, or liquidate non-cash assets at rates
or times that we regard as unfavorable in order to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in that year.
  If
we make distributions in excess of our current and accumulated earnings and
profits, they will be treated as a return of capital, which will reduce the
adjusted basis of your stock. To the extent such distributions exceed your
adjusted basis, you may recognize a capital gain.
 
 Unless you are a tax-exempt entity,
distributions that we make to you generally will be subject to tax as ordinary
income to the extent of our current and accumulated earnings and profits as
determined for federal income tax purposes.  If the amount we
distribute to you exceeds your allocable share of our current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. To the extent the amount we
distribute to you exceeds both your allocable share of our current and
accumulated earnings and profits and your adjusted basis, this excess amount
will be treated as a gain from the sale or exchange of a capital
asset.  For risks related to the use of uninvested offering proceeds
or borrowings to fund distributions to stockholders, see “ − Risks Related to
Our Organization and Structure − We have not established a minimum distribution
payment level and we cannot assure you of our ability to make distributions in
the future.”





Our
ownership of and relationship with our TRSs will be limited and a failure to
comply with the limits would jeopardize our REIT qualification and may result in
the application of a 100% excise tax.





A REIT may own up to 100% of the
securities of one or more TRSs.  A TRS may earn specified types of
income or hold specified assets that would not be qualifying income or assets if
earned or held directly by the parent REIT.  Both the subsidiary and
the REIT must jointly elect to treat the subsidiary as a TRS.  A
corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a
TRS.  Overall, no more than 20% of the value of a REIT’s assets may
consist of stock or securities of one or more TRSs.  A TRS will pay
federal, state and local income tax at regular corporate rates on any income
that it earns, whether or not it distributes that income to us. In addition, the
TRS rules limit the deductibility of interest paid or accrued by a TRS to its
parent REIT to assure that the TRS is subject to an appropriate level of
corporate taxation.  The rules also impose a 100% excise tax on
certain transactions between a TRS and its parent REIT that are not conducted on
an arm’s-length basis.





Resource TRS will pay federal, state
and local income tax on its taxable income, and its after-tax net income is
available for distribution to us but is not required to be distributed to
us.  Income that is not distributed to us by Resource TRS will not be
subject to the REIT 90% distribution requirement and therefore will not be
available for distributions to our stockholders.  We anticipate that
the aggregate value of the securities of Resource TRS, together with the
securities we hold in our other TRSs, including Apidos CDO I, Apidos CDO III and
Apidos Cinco CDO, will be less than 20% of the value of our total assets,
including our TRS securities.  We will monitor the compliance of our
investments in TRSs with the rules relating to value of assets and transactions
not on an arm’s-length basis.  We cannot assure you, however, that we
will be able to comply with such rules.





Complying
with REIT requirements may limit our ability to hedge effectively.





The REIT provisions of the Internal
Revenue Code substantially limit our ability to hedge mortgage-backed securities
and related borrowings. Under these provisions, our annual gross income from
qualifying and non-qualifying hedges of our borrowings, together with any other
income not generated from qualifying real estate assets, cannot exceed 25% of
our gross income. In addition, our aggregate gross income from non-qualifying
hedges, fees and certain other non-qualifying sources cannot exceed 5% of our
annual gross income determined without regard to income from qualifying hedges.
As a result, we might have to limit our use of advantageous hedging techniques
or implement those hedges through Resource TRS. This could increase the cost of
our hedging activities or expose us to greater risks associated with changes in
interest rates than we would otherwise want to bear.





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 The
tax on prohibited transactions will limit our ability to engage in transactions,
including certain methods of securitizing mortgage loans, that would be treated
as sales for federal income tax purposes.
 
 A REIT’s net income from prohibited
transactions is subject to a 100% tax.  In general, prohibited
transactions are sales or other dispositions of property, other than foreclosure
property, but including mortgage loans, held primarily for sale to customers in
the ordinary course of business.  We might be subject to this tax if
we were able to sell or securitize loans in a manner that was treated as a sale
of the loans for federal income tax purposes.  Therefore, in order to
avoid the prohibited transactions tax, we may choose not to engage in certain
sales of loans and may limit the structures we utilize for our securitization
transactions even though such sales or structures might otherwise be beneficial
to us.
 Tax
law changes could depress the market price of our common stock.
 
 The federal income tax laws governing
REITs or the administrative interpretations of those laws may be amended at any
time.  We cannot predict when or if any new federal income tax law or
administrative interpretation, or any amendment to any existing federal income
tax law or administrative interpretation, will become effective and any such law
or interpretation may take effect retroactively.  Tax law changes
could depress our stock price or restrict our operations.
 
 Dividends
paid by REITs do not qualify for the reduced tax rates provided for under
current law.
 
 Dividends paid by REITs are generally
not eligible for the reduced 15% maximum tax rate for dividends paid to
individuals under recently enacted tax legislation.  The more
favorable rates applicable to regular corporate dividends could cause
stockholders who are individuals to perceive investments in REITs to be
relatively less attractive than investments in the stock of non-REIT
corporations that pay dividends to which more favorable rates apply, which could
reduce the value of the stocks of REITs.





We
may lose our REIT qualification or be subject to a penalty tax if the Internal
Revenue Service successfully challenges our characterization of income
inclusions from our foreign TRSs.





We likely will be required to include
in our income, even without the receipt of actual distributions, earnings from
our foreign TRSs, including from our current and contemplated equity investments
in CDOs, such as our investment in Apidos CDO I, Apidos CDO III and Apidos Cinco
CDO.  We intend to treat certain of these income inclusions as
qualifying income for purposes of the 95% gross income test applicable to REITs
but not for purposes of the REIT 75% gross income test.  The
provisions that set forth what income is qualifying income for purposes of the
95% gross income test provide that gross income derived from dividends, interest
and other enumerated classes of passive income qualify for purposes of the 95%
gross income test. Income inclusions from equity investments in our foreign TRSs
are technically neither dividends nor any of the other enumerated categories of
income specified in the 95% gross income test for U.S. federal income tax
purposes, and there is no clear precedent with respect to the qualification of
such income for purposes of the REIT gross income tests. However, based on
advice of counsel, we intend to treat such income inclusions, to the extent
distributed by a foreign TRS in the year accrued, as qualifying income for
purposes of the 95% gross income test. Nevertheless, because this income does
not meet the literal requirements of the REIT provisions, it is possible that
the IRS could successfully take the position that it is not qualifying income.
In the event that it was determined not to qualify for the 95% gross income
test, we would be subject to a penalty tax with respect to the income to the
extent it and other nonqualifying income exceeds 5% of our gross income and/or
we could fail to qualify as a REIT.  See “Federal Income Tax
Consequences of Our Qualification as a REIT.”  In addition, if such
income was determined not to qualify for the 95% gross income test, we would
need to invest in sufficient qualifying assets, or sell some of our interests in
our foreign TRSs to ensure that the income recognized by us from our foreign
TRSs or such other corporations does not exceed 5% of our gross income, or cease
to qualify as a REIT.




The
failure of a loan subject to a repurchase agreement or a mezzanine loan to
qualify as a real estate asset would adversely affect our ability to qualify as
a REIT.





We have entered into and we intend to
continue to enter into sale and repurchase agreements under which we nominally
sell certain of our loan assets to a counterparty and simultaneously enter into
an agreement to repurchase the sold assets.  We believe that we have
been and will be treated for U.S. federal income tax purposes as the owner of
the loan assets that are the subject of any such agreement notwithstanding that
the agreement may transfer record ownership of the assets to the counterparty
during the term of the agreement. It is possible, however, that the IRS could
assert that we did not own the loan assets during the term of the sale and
repurchase agreement, in which case we could fail to qualify as a
REIT.








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  In addition, we have acquired and will continue to acquire mezzanine loans,
which are loans secured by equity interest in a partnership or limited liability
company that directly or indirectly owns real property. In Revenue Procedure
2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan, if
it meets each of the requirements contained in the Revenue Procedure, will be
treated by the IRS as a real estate asset for purposes of the REIT asset tests,
and interest derived from the mezzanine loan will be treated as qualifying
mortgage interest for purposes of the REIT 75% income test.  Although
the Revenue Procedure provides a safe harbor on which taxpayers may rely, it
does not prescribe rules of substantive tax law. We have acquired and will
continue to acquire mezzanine loans that may not meet all of the requirements
for reliance on this safe harbor.  In the event we own a mezzanine
loan that does not meet the safe harbor, the IRS could challenge the loan’s
treatment as a real estate asset for purposes of the REIT asset and income
tests, and if the challenge were sustained, we could fail to qualify as a
REIT.






ITEM
1B.UNRESOLVED
STAFF COMMENTS




None.







ITEM
2.PROPERTIES




Philadelphia,
Pennsylvania:


We maintain offices through our Manager.  Our Manager maintains
executive and corporate offices at One Crescent Drive in the Philadelphia Navy
Yard under a lease for 13,484 square feet that expires in May
2019.  Certain of its financial fund management and real estate
operations are also located in these offices.  It also leases 21,554
square feet for additional executive office space and for certain of our real
estate operations at 1845 Walnut Street, Philadelphia,
Pennsylvania.  The Manager sublet a portion of this space to Atlas
America, Inc., its former energy subsidiary.  This lease, which
expired in May 2008, contains extension options through 2033 and is in an office
building in which it owns a 5% equity interest.  The Manager intends
to stay in this space and is currently negotiating terms with the
landlord.  Our Manager’s commercial finance operations are located in
another office building at One Commerce Square, 2005 Market Street, 15th Floor,
Philadelphia, Pennsylvania under a lease for 59,448 square feet that expires in
August 2013.


New
York, New
York:


Our Manager maintains additional executive offices in a 19,590 square foot
location (of which a portion is sublet to Atlas America) at 712 5th Avenue,
New York, New York under a lease agreement that expires in March
2010.






Other
Locations:




Our Manager’s commercial finance operations owns a 29,500 square foot building
at 1720A Crete Street, Moberly, Missouri.  In addition, it maintains
various office leases in the following cities:  Omaha, Nebraska; Los
Angeles and Santa Ana, California; Denver, Colorado and Columbia, South
Carolina.  The Manager also leases office space in London, England for
our European operations.







ITEM
3.LEGAL
PROCEEDINGS




We are not a party to any material legal proceedings.







ITEM
4.                 SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.





No matter was submitted to a vote of
our security holders during the fourth quarter of 2008.





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PART
II





ITEM
5.                MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED


STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY


SECURITIES





Market
Information





Our common stock has been listed on the
New York Stock Exchange under the symbol “RSO” since our initial public offering
in February 2006.  The following table sets forth for the indicated
periods the high and low prices for our common stock, as reported on the New
York Stock Exchange, and the dividends declared and paid during our past two
fiscal years:





High
                
                
                Low
                
                
                Dividends
                    DeclaredFiscal 2008Fourth
      Quarter
                
                $
                6.09
                
                
                $
                1.74
                
                
                $
                0.39
                (1)Third
      Quarter
                
                $
                7.63
                
                
                $
                4.84
                
                
                $
                0.39Second
      Quarter
                
                $
                9.78
                
                
                $
                7.21
                
                
                $
                0.41First
      Quarter
                
                $
                10.28
                
                
                $
                6.00
                
                
                $
                0.41Fiscal 2007Fourth
      Quarter
                
                $
                12.49
                
                
                $
                8.14
                
                
                $
                0.41Third
      Quarter
                
                $
                14.20
                
                
                $
                7.50
                
                
                $
                0.41Second
      Quarter
                
                $
                16.85
                
                
                $
                13.98
                
                
                $
                0.41First
      Quarter
                
                $
                18.78
                
                
                $
                14.67
                
                
                $
                0.39





(1)
            We
      distributed a regular dividend $0.39 payable on January 28, 2009, for
      stockholders of record as of December 30,
2008.





We are organized and conduct our
operations to qualify as a real estate investment trust, or a REIT, which
requires that we distribute at least 90% of our REIT taxable
income.  Therefore, we intend to continue to declare quarterly
distributions on our common stock.  No assurance, however, can be
given as to the amounts or timing of future distributions as such distributions
are subject to our earnings, financial condition, capital requirements and such
other factors as our board of directors seems relevant.




As of March 2, 2009, there were
24,819,046 common shares outstanding held by 136 persons of record.


Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities





In accordance with the provisions of
the management agreement, on April 30, 2008 and October 31, 2008 we issued
17,839 and 42,239 shares of common stock, respectively, to the
Manager.  These shares represented 25% of the Manager’s quarterly
incentive compensation fee that accrued for the three months ended March 31,
2008 and for the three months ended September 30, 2008,
respectively.  The issuance of these shares was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof.


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Performance
Graph





The following line graph presentation
compares cumulative total shareholder returns of our common stock with the
Russell 2000 Index and the NAREIT All REIT Index for the period from February
10, 2006 to December 31, 2008.  The graph and table assume that $100
was invested in each of our common stock, the Russell 2000 Index and the NAREIT
All REIT Index on February 10, 2006, and that all dividends were
reinvested.  This data was furnished by the Research Data
Group.







For information concerning securities
authorized for issuance under our equity compensation plans, see Item 12,
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”




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ITEM
6.                     SELECTED
FINANCIAL DATA





SELECTED
CONSOLIDATED FINANCIAL INFORMATION OF


RESOURCE
CAPITAL CORP AND SUBSIDIARIES





The following selected financial and
operating information should be read in conjunction with Item 7 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our financial statements, including the notes, included elsewhere herein (in
thousands, except share data).


As
      of and for the years ended
                            
                            
                            As
      of and for the Period from March 8, 2005 (date operations commenced)
      toDecember
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005Consolidated
      Statement of Operations DataREVENUESNet interest
      income:Interest
income
                            
                            $
                            134,341
                            
                            
                            $
                            176,995
                            
                            
                            $
                            137,075
                            
                            
                            $
                            61,387Interest
    expense
                            
                            
                            79,619
                            
                            
                            
                            121,564
                            
                            
                            
                            101,851
                            
                            
                            
                            43,062Net interest
    income
                            
                            
                            54,722
                            
                            
                            
                            55,431
                            
                            
                            
                            35,224
                            
                            
                            
                            18,325OPERATING
      EXPENSESManagement fees – related
      party
                            
                            
                            6,301
                            
                            
                            
                            6,554
                            
                            
                            
                            4,838
                            
                            
                            
                            3,012Equity compensation − related
      party
                            
                            
                            540
                            
                            
                            
                            1,565
                            
                            
                            
                            2,432
                            
                            
                            
                            2,709Professional
      services
                            
                            
                            3,349
                            
                            
                            
                            2,911
                            
                            
                            
                            1,881
                            
                            
                            
                            580Insurance
                            
                            
                            641
                            
                            
                            
                            466
                            
                            
                            
                            498
                            
                            
                            
                            395General and
      administrative
                            
                            
                            1,848
                            
                            
                            
                            1,581
                            
                            
                            
                            1,428
                            
                            
                            
                            1,032Income tax
    expense
                            
                            
                            (241
                            )
                            
                            
                            338
                            
                            
                            
                            67
                            
                            
                            
                            −Total operating
      expenses
                            
                            
                            12,438
                            
                            
                            
                            13,415
                            
                            
                            
                            11,144
                            
                            
                            
                            7,728NET
      OPERATING INCOME
                            
                            
                            42,284
                            
                            
                            
                            42,016
                            
                            
                            
                            24,080
                            
                            
                            
                            10,597OTHER
      (EXPENSES) REVENUESNet realized (losses) gains on
      investments
                            
                            
                            (1,637
                            )
                            
                            
                            (15,098
                            )
                            
                            
                            (8,627
                            )
                            
                            
                            311Gain on
      deconsolidation
                            
                            
                            −
                            
                            
                            
                            14,259
                            
                            
                            
                            −
                            
                            
                            
                            −Provision for loan and lease
      losses
                            
                            
                            (46,160
                            )
                            
                            
                            (6,211
                            )
                            
                            
                            −
                            
                            
                            
                            −Asset
    impairments
                            
                            
                            −
                            
                            
                            
                            (26,277
                            )
                            
                            
                            −
                            
                            
                            
                            −Gain on the extinguishment of
      debt
                            
                            
                            1,750
                            
                            
                            
                            −
                            
                            
                            
                            −
                            
                            
                            
                            −Gain on the settlement of loan
                            
                            
                            574
                            
                            
                            
                            −
                            
                            
                            
                            −
                            
                            
                            
                            −Other income
                            
                            
                            115
                            
                            
                            
                            201
                            
                            
                            
                            153
                            
                            
                            
                            −Total other (loss)
      revenue
                            
                            
                            (45,358
                            )
                            
                            
                            (33,126
                            )
                            
                            
                            (8,474
                            )
                            
                            
                            311NET
      INCOME (LOSS)
                            
                            $
                            (3,074
                            )
                            
                            $
                            8,890
                            
                            
                            $
                            15,606
                            
                            
                            $
                            10,908Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                            
                            $
                            14,583
                            
                            
                            $
                            6,029
                            
                            
                            $
                            5,354
                            
                            
                            $
                            17,729Restricted
      cash
                            
                            
                            60,394
                            
                            
                            
                            119,482
                            
                            
                            
                            30,721
                            
                            
                            
                            23,592Investment
      securities available-for-sale, pledged as collateral,
                              at fair value
                            
                            
                            22,466
                            
                            
                            
                            65,464
                            
                            
                            
                            420,997
                            
                            
                            
                            1,362,392Investment
      securities available-for-sale, at fair value
                            
                            
                            6,794
                            
                            
                            
                            −
                            
                            
                            
                            −
                            
                            
                            
                            28,285Loans,
      net of allowances of $43.9 million, $5.9 million, $0 and
$0
                            
                            
                            1,712,779
                            
                            
                            
                            1,766,639
                            
                            
                            
                            1,240,288
                            
                            
                            
                            569,873Direct
      financing leases and notes, net of allowances of
                              $450,000, $0 and $0 and net of
      unearned income
                            
                            
                            104,015
                            
                            
                            
                            95,030
                            
                            
                            
                            88,970
                            
                            
                            
                            23,317Total
      assets
                            
                            
                            1,936,031
                            
                            
                            
                            2,072,148
                            
                            
                            
                            1,802,829
                            
                            
                            
                            2,045,547Borrowings
                            
                            
                            1,699,763
                            
                            
                            
                            1,760,969
                            
                            
                            
                            1,463,853
                            
                            
                            
                            1,833,645Total
      liabilities
                            
                            
                            1,749,726
                            
                            
                            
                            1,800,542
                            
                            
                            
                            1,485,278
                            
                            
                            
                            1,850,214Total
      stockholders’ equity
                            
                            
                            186,305
                            
                            
                            
                            271,606
                            
                            
                            
                            317,551
                            
                            
                            
                            195,333Per
      Share Data:Dividends
      declared per common share
                            
                            $
                            1.60
                            
                            
                            $
                            1.62
                            
                            
                            $
                            1.49
                            
                            
                            $
                            0.86Net
      (loss) income per share − basic
                            
                            $
                            (0.12
                            )
                            
                            $
                            0.36
                            
                            
                            $
                            0.89
                            
                            
                            $
                            0.71Net
      (loss) income per share − diluted
                            
                            $
                            (0.12
                            )
                            
                            $
                            0.36
                            
                            
                            $
                            0.87
                            
                            
                            $
                            0.71Weighted
      average number of shares outstanding − basic
                            
                            
                            24,757,386
                            
                            
                            
                            24,610,468
                            
                            
                            
                            17,538,273
                            
                            
                            
                            15,333,334Weighted
      average number of shares outstanding – diluted
                            
                            
                            24,757,386
                            
                            
                            
                            24,860,184
                            
                            
                            
                            17,881,355
                            
                            
                            
                            15,405,714





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ITEM
7.                   MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND RESULTS OF
OPERATIONS





The following discussion provides
information to assist you in understanding our financial condition and results
of operations.  This discussion should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
report.  This discussion contains forward-looking
statements.  Actual results could differ materially from those
expressed in or implied by those forward looking statements.  Please
see “Forward-Looking Statements” and “Risk Factors” for a discussion of certain
risks, uncertainties and assumptions associated with those
statements.





Overview
 
 We are a specialty finance company that
focuses primarily on commercial real estate and commercial
finance.  We are organized and conduct our operations to qualify as a
REIT under Subchapter M of the Internal Revenue Code of 1986, as
amended.  Our objective is to provide our stockholders with total
returns over time, including quarterly distributions and capital appreciation,
while seeking to manage the risks associated with our investment
strategy.  We invest in a combination of real estate-related assets
and, to a lesser extent, higher-yielding commercial finance
assets.  We have financed a substantial portion of our portfolio
investments through borrowing strategies seeking to match the maturities and
repricing dates of our financings with the maturities and repricing dates of
those investments, and to mitigate interest rate risk through derivative
instruments.
 
 We are externally managed by Resource
Capital Manager, Inc., which we refer to as the Manager, a wholly-owned indirect
subsidiary of Resource America, Inc. (NASDAQ: REXI), a specialized asset
management company that uses industry specific expertise to generate and
administer investment opportunities for its own account and for outside
investors in the commercial finance, real estate, and financial fund management
sectors.  As of December 31, 2008, Resource America managed
approximately $17.5 billion of assets in these sectors.  To provide
its services, the Manager draws upon Resource America, its management team and
their collective investment experience.
 
 We generate our income primarily from
the spread between the revenues we receive from our assets and the cost to
finance the purchase of those assets and hedge interest rate
risks.  We generate revenues from the interest we earn on our whole
loans, A notes, B notes, mezzanine debt, CMBS, bank loans, payments on equipment
leases and notes and other ABS.  Historically, we have used a
substantial amount of leverage to enhance our returns and we have financed each
of our different asset classes with different degrees of
leverage.  The cost of borrowings to finance our investments comprises
a significant part of our expenses.  Our net income depends on our
ability to control these expenses relative to our revenue.  In our
bank loans, CMBS, equipment leases and notes and other ABS, we have used
warehouse facilities as a short-term financing source and CDOs, and, to a lesser
extent, other term financing as a long-term financing source.  In our
commercial real estate loan portfolio, we have used repurchase agreements as a
short-term financing source, and CDOs and have used, to a lesser extent, other
term financing as a long-term financing source.  Our other term
financing has consisted of long-term match-funded financing provided through
long-term bank financing and asset-backed financing programs, depending upon
market conditions and credit availability.
 
 Ongoing problems in real estate and
credit markets continue to impact our operations, particularly our ability to
generate capital and financing to execute our investment strategies.  These
ongoing problems have affected our earnings on a GAAP basis as we have increased
our provision for loan and lease losses to reflect these
conditions.  We have also determined that the market valuation for
CMBS and other ABS in our investment portfolio has been temporarily
impaired.  While we believe we have appropriately valued the assets in our
investment portfolio at December 31, 2008, we cannot assure you that further
impairment will not occur or that our assets will otherwise not be adversely
effected by market conditions.
 
 The events occurring in the credit
markets have impacted our financing and investing strategies.  The
market for securities issued by new securitizations collateralized by assets
similar to those in our investment portfolio has largely
disappeared.  Since our sponsorship in June 2007 of Resource Real
Estate Funding CDO 2007-1, or RREF CDO 2007-1, we have not sponsored any new
securitizations and we do not expect to be able to sponsor new securitizations
for the foreseeable future.  As a result, our ability to originate and
finance new investments has been significantly diminished.  Short-term
financing through warehouse lines of credit and repurchase agreements has become
less available and reliable as increasing volatility in the valuation of assets
similar to those we originate has increased the risk of margin
calls.  To reduce our exposure to margin calls or facility
terminations, we have paid down repurchase agreement borrowings that finance
commercial real estate loans and other securities that we hold.  In
addition, we have funded margin calls related to our interest rate derivatives
of $3.7 million and $605,000 during the three months and year ended December 31,
2008, respectively.




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Beginning in the second half of 2007,
we have focused on managing our exposure to liquidity risks primarily by
reducing our exposure to possible margin calls under repurchase agreements,
seeking to conserve our liquidity.  We have continued to manage our
liquidity and originate new assets primarily through capital recycling as loan
payoffs and paydowns occur and through existing capacities within our completed
securitizations.  As a result of commercial real estate loan
repayments for the year ended December 31, 2008, we were able to shift loans,
available-for-sale securities, and commercial real estate CDO notes from our
commercial real estate term facility and short term repurchase agreements into
our CDO structures, which resulted in the following transfers by
category:




·
            $130.7
      million of commercial real estate loans into our commercial real estate
      CDO structures from our commercial real estate term
    facility




·
            $17.3
      million of commercial real estate CDO notes we owned into RREF CDO
      2006-1




·
            $5.0
      million of available-for-sale securities into our CDO
      structures





The transfer of assets into our CDOs
was offset by the transfer of assets from our CDOs to our commercial real estate
term facility, as follows:




·
            $11.5
      million of commercial real estate
loans




·
            $12.0
      million of available-for-sale
securities







These transfers into and out of our CDO
structures totaling $176.5 million, resulted in proceeds of $130.3 million, of
which a net $74.6 million was used to pay down our commercial real estate term
facility, $22.6 million was used to fund purchases of assets from our CDO
structures, and the remainder of $33.1 million represented unrestricted cash to
us.





In addition to the above transfer
activity, during the year ended December 31, 2008 we sold a CMBS security that
provided proceeds of $8.0 million.  The combined transfer to/from our
CDOs and commercial real estate term facility and sale of the CMBS security
resulted in a total of $41.1 million net unrestricted cash to us during the year
ended December 31, 2008.





As of December 31, 2008, we had $17.1
million of outstanding repurchase agreements with pledged collateral of $3.9
million of CRE CDO notes and $35.8 million of CRE loans, which was reduced from
$116.4 million of outstanding repurchase agreements with pledged collateral of
$20.5 million CRE CDO notes, available-for-sale securities of $13.6 million and
CRE loans of $156.8 million at December 31, 2007.





We expect to continue to generate net
investment income from our current investment portfolio and generate dividends
for our shareholders. We continue to seek additional sources of financing,
including expanded bank financing, and use of co-investment, participations and
joint venture strategies that will enable us to originate investments and
generate fee income while preserving capital.





We consolidate variable interest
entities, or VIEs, if we determine we are the primary beneficiary, in accordance
with Financial Accounting
Standards Board, or FASB, Interpretation 46, “Consolidation of Variable Interest
Entities,” as revised, or FIN 46-R.  During the year ended
December 31, 2007, we sold ten percent of our equity investment in one of our
CDOs, Ischus CDO II, to an independent third party at market
value.  The sale was deemed to be a reconsideration event under FIN
46-R and we determined we were no longer the primary beneficiary based on a
discounted cash flow analysis of expected losses and expected residual
returns.  Therefore, we deconsolidated Ischus CDO II and recognized
income in our investment in Ischus CDO II using the cost recovery
method.  At the date of deconsolidation, the value of our investment
in Ischus CDO II was $722,000.  From the date of deconsolidation
through December 31, 2007, we received $465,000 of distributions leaving a
balance of $257,000 at December 31, 2007.  For the three months ended
March 31, 2008, $1.3 million of cash receipts were collected and we recognized
$997,000 of interest income on this investment which we record on our income
statement as interest income – other.  No additional cash has been
collected since March 31, 2008.





As of December 31, 2008, we had
invested 72% of our portfolio in commercial real estate-related assets 25% in
commercial bank loans and 3% in direct financing leases and notes.  As
of December 31, 2007, we had invested 75% of our portfolio in commercial real
estate-related assets, 24% in commercial bank loans and 1% in direct financing
leases and notes.





Results
of Operations





Our net loss for the year ended
December 31, 2008 was $3.1 million, or ($0.12) per weighted average common share
as compared to net income of $8.9 million, or $0.36 per weighted average common
share (basic and diluted) for the year ended December 31, 2007 and compared to
net income of $15.6 million, or $0.89 per weighted average common share (basic
and diluted), for the year ended December 31, 2006.





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 37
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Interest
Income





The following tables set forth
information relating to our interest income recognized for the periods presented
(in thousands, except percentages):




As
      of and for the Years EndedDecember
      31,2008
                        
                        
                        2007
                        
                        
                        2006Interest
      income:Interest income from
      loans:Bank loans
                        
                        $
                        55,106
                        
                        
                        $
                        70,183
                        
                        
                        $
                        42,526Commercial real estate
      loans
                        
                        
                        63,936
                        
                        
                        
                        67,895
                        
                        
                        
                        28,062Total interest income from
      loans
                        
                        
                        119,042
                        
                        
                        
                        138,078
                        
                        
                        
                        70,588Interest income from securities
      available-for-sale:Agency RMBS
                        
                        
                        −
                        
                        
                        
                        −
                        
                        
                        
                        28,825Non-agency RMBS
                        
                        
                        −
                        
                        
                        
                        21,837
                        
                        
                        
                        24,102CMBS
                        
                        
                        −
                        
                        
                        
                        1,395
                        
                        
                        
                        1,590CMBS-private
      placement
                        
                        
                        4,425
                        
                        
                        
                        4,082
                        
                        
                        
                        87Other
                        
                        
                        19
                        
                        
                        
                        1,496
                        
                        
                        
                        1,414Private equity
                        
                        
                        −
                        
                        
                        
                        −
                        
                        
                        
                        30Total interest income from
      securities available-for-sale
                        
                        
                        4,444
                        
                        
                        
                        28,810
                        
                        
                        
                        56,048Leasing
                        
                        
                        8,180
                        
                        
                        
                        7,553
                        
                        
                        
                        5,259Interest income –
      other:Interest rate swap
      agreements
                        
                        
                        −
                        
                        
                        
                        −
                        
                        
                        
                        3,755Interest income – other (1)
                        
                        
                        997
                        
                        
                        
                        −
                        
                        
                        
                        −Temporary investment in
      over-night repurchase agreements
                        
                        
                        1,678
                        
                        
                        
                        2,554
                        
                        
                        
                        1,424Total interest income –
      other
                        
                        
                        2,675
                        
                        
                        
                        2,554
                        
                        
                        
                        5,180Total
      interest income
                        
                        $
                        134,341
                        
                        
                        $
                        176,995
                        
                        
                        $
                        137,075


(1)
            Represents
      cash received on our 90% equity investment in Ischus CDO II in excess of
      our investment.  Income on this investment is recognized using
      the cost recovery method.






Weighted
      Average
              
              
              Weighted
      Average
              
              
              Weighted
      AverageRate
              
              
              Balance
              
              
              Rate
              
              
              Balance
              
              
              Rate
              
              
              BalanceYear
      Ended
                  December
      31,
              
              
              Period
      Ended
                  December
      31,
              
              
              Period
      Ended
                  December
      31,2008
      (1)
              
              
              2008
              
              
              2007
      (1)
              
              
              2007
              
              
              2006
      (1)
              
              
              2006Interest
      income:Interest income from
      loans:Bank loans
              
              
              5.63%
              
              
              $
              947,753
              
              
              
              7.42%
              
              
              $
              911,514
              
              
              
              7.41%
              
              
              $
              565,414Commercial real estate
      loans
              
              
              7.48%
              
              
              $
              840,874
              
              
              
              8.58%
              
              
              $
              781,954
              
              
              
              8.55%
              
              
              $
              325,301Interest income from securitiesavailable-for-sale:Agency RMBS
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              4.60%
              
              
              $
              621,299Non-agency RMBS
              
              
              N/A
              
              
              
              N/A
              
              
              
              7.09%
              
              
              $
              303,960
              
              
              
              6.76%
              
              
              $
              344,969CMBS
              
              
              N/A
              
              
              
              N/A
              
              
              
              5.67%
              
              
              $
              24,549
              
              
              
              5.65%
              
              
              $
              27,274CMBS-private
      placement
              
              
              5.76%
              
              
              $
              76,216
              
              
              
              6.45%
              
              
              $
              61,952
              
              
              
              5.46%
              
              
              $
              1,564Other
              
              
              0.32%
              
              
              $
              6,000
              
              
              
              6.96%
              
              
              $
              21,094
              
              
              
              6.69%
              
              
              $
              21,232Private equity
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              16.42%
              
              
              $
              170Leasing
              
              
              8.68%
              
              
              $
              94,864
              
              
              
              8.71%
              
              
              $
              85,092
              
              
              
              8.57%
              
              
              $
              62,612Interest
    income-other:Interest rate swap
      agreements
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              0.78%
              
              
              $
              511,639Temporary investment
      in
                over-night repurchaseagreements
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A





(1)
            Certain
      one-time items reflected in interest income have been excluded in
      calculating the weighted average rate, since they are not indicative of
      expected future results.






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 38
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Year
Ended December 31, 2008 as compared to Year Ended December 31, 2007





Interest income decreased $42.7 million
(24%) to $134.3 million for the year ended December 31, 2008, from $177.0
million for the year ended December 31, 2007.  We attribute this
decrease to the following:





Interest
Income from Loans





Interest income from loans decreased
$19.0 million (14%) to $119.0 million for the year ended December 31, 2008 from
$138.1 million for the year ended December 31, 2007.




Bank loans generated $55.1 million of
interest income for the year ended December 31, 2008 as compared to $70.2
million for the year ended December 31, 2007, a decrease of $15.1 million
(21%).  This decrease resulted primarily from a decrease in the
weighted average rate earned by our bank loans to 5.63% for the year ended
December 31, 2008 from 7.42% for the year ended December 31,
2007.  This was principally a result of the decrease in LIBOR which is
a reference index for the rates payable on these loans.  The effects
of the decrease in the weighted average rate were partially offset by an
increase of $36.2 million in the weighted average balance of assets to $947.8
million for the year ended December 31, 2008 from $911.5 million for the year
ended December 31, 2007 as a result of the acquisition of investments for our
third bank loan CDO, Apidos Cinco CDO which closed in May 2007.  The
year ended December 31, 2008 includes a full year of income on the increased
asset base.




Commercial real estate loans produced
$63.9 million of interest income for the year ended December 31, 2008 as
compared to $67.9 million for the year ended December 31, 2007, a decrease of
$4.0 million (6%).  This decrease resulted primarily from a decrease
in the interest rate on these loans to 7.48% for the year ended December 31,
2008 from 8.58% for the year ended December 31, 2007, primarily due to the
decrease in LIBOR which is a reference index for the rates payable on some of
these loans. The effects of the decrease in the weighted average rate were
partially offset by an increase of $58.9 million in the weighted average balance
of loans to $840.9 million from $782.0 million as a result of the accumulation
of investments by our second commercial real estate CDO, Resource Real Estate
Funding 2007-1, or RREF CDO 2007-1, which closed on June 26, 2007 and had $463.0
million of assets at December 31, 2007.  The year ended December 31,
2008 includes a full year of income on the increased asset base.




Interest
Income from Securities Available-for-Sale
 
 Interest income from securities
available-for-sale decreased $24.4 million (85%) to $4.4 million for the year
ended December 31, 2008 from $28.8 million for the year ended December 31,
2007.  The decrease in interest income from securities
available-for-sale resulted principally from the following:
 
 Interest
income from our asset-backed securities-residential mortgage-backed securities,
or ABS-RMBS, CMBS and other ABS portfolio generated $21.8 million, $1.4 million
and $1.5 million, respectively for the year ended December 31,
2007.  No interest income from ABS-RMBS and CMBS was generated during
the year ended December 31, 2008.  The other ABS portfolio generated
$19,000 for the year ended December 31, 2008.  These decreases are
primarily a result of the deconsolidation of Ischus CDO II  on
November 13, 2007.
 
 This
decrease was partially offset by interest income on our CMBS-private placement
portfolio which increased $343,000 (8%) to $4.4 million for the year ended
December 31, 2008 from $4.1 million for the year ended December 31,
2007.  The increase is primarily attributed to in increase of $14.3
million in the weighted average balance of these assets to $76.2 million for the
year ended December 31, 2008 as compared to $62.0 million for the year ended
December 31, 2007 as a result of the accumulation of assets by RREF CDO 2007-1,
which closed on June 26, 2007 and had $463.0 million of assets at December 31,
2007.  The year ended December 31, 2008 includes a whole year of
income for these assets.  The effects of the increase in the weighted
average balance were partially offset by an decrease in the interest rate on
these securities to 5.76% for the year ended December 31, 2008 from 6.45% for
the year ended December 31, 2007, primarily due to the decrease in LIBOR which
is a reference index for the rates payable on some of these
securities.


Interest
Income - Leasing





Our equipment leasing portfolio
generated $8.2 million of interest income for the year ended December 31, 2008
as compared to $7.6 million for the year ended December 31, 2007, an increase of
$627,000 (8%).  This increase resulted from the increase of $9.8
million in the weighted average balance of leases to $94.9 million at December
31, 2008 from $85.1 million for the year ended December 31, 2007, primarily from
the addition of leases to our portfolio in 2008.





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Interest
Income - Other





Interest income-other increased
$120,000 (5%) to $2.7 million for the year ended December 31, 2008, as compared
to $2.6 million for the year ended December 31, 2007 as a result of an increase
in interest income from our cost recovery method investment in Ischus CDO
II.  See “− Overview,” above.  We use the cost recovery
method to recognize the income on this investment and recognized $997,000 during
the three months ended March 31, 2008.  No such additional income was
recognized during 2007.  This increase during the year ended December
31, 2008 was partially offset by a decrease in temporary investment income due
to lower rates earned on our over-night repurchase agreements.





Year
Ended December 31, 2007 as compared to Year Ended December 31, 2006





Interest income increased $39.9 million
(29%) to $177.0 million for the year ended December 31, 2007, from $137.1
million for the year ended December 31, 2006.  We attribute this
increase to the following:





Interest
Income from Loans





Interest income from loans increased
$67.5 million (96%) to $138.1 million for the year ended December 31, 2007 from
$70.6 million for the year ended December 31, 2006.





Bank loans generated $70.2 million of
interest income for the year ended December 31, 2007 as compared to $42.5
million for the year ended December 31, 2006, an increase of $27.7 million
(65%).  This increase resulted primarily from the
following:




·
            an
      increase of $346.1 million in the weighted average balance of loans
      primarily from the accumulation of investments by Apidos Cinco CDO, which
      closed on May 30, 2007 and had $331.2 million of assets at December 31,
      2007.  In addition, 2007 reflects a full year of income for
      Apidos CDO III which closed on May 9, 2006 while the prior year reflects
      only a partial year of income.  Apidos CDO III had $270.9
      million in assets at December 31,
2007.





Commercial real estate loans produced
$67.9 million of interest income for the year ended December 31, 2007 as
compared to $28.1 million for the year ended December 31, 2006, an increase of
$39.8 million (142%).  This increase resulted from the
following:




·
            an
      increase of $456.7 million in the weighted average balance of loans
      primarily from the accumulation of investments by RREF CDO 2007-1, which
      closed on June 26, 2007 and had $463.0 million of assets at December 31,
      2007.  In addition, 2007 reflects a full year of income for our
      first commercial real estate CDO, Resource Real Estate Funding 2006-1, or
      RREF CDO 2006-1, which closed on August 10, 2006 while the prior year
      reflects only a partial year of income.  RREF CDO 2006-1 had
      $291.7 million in assets at December 31, 2007;
  and




·
            a
      $505,000 acceleration of loan origination fees as a result of loan sales
      that are included as part of interest income for the year ended December
      31, 2007.  There was no such acceleration of fees for the year
      ended December 31, 2006.





This increase was offset by a decrease
in the weighted average interest rate on these loans to 8.06% for the year ended
December 31, 2007 from 8.26% for the year ended December 31, 2006, primarily due
to the interest rates on $421.9 million of whole loans we added during the year
ended December 31, 2007.





Interest
Income from Securities Available-for-Sale





The increase in interest income from
loans was partially offset by a decrease in interest income from securities
available-for-sale.  Interest income from securities
available-for-sale decreased $27.2 million (49%) to $28.8 million for the year
ended December 31, 2007 from $56.0 million for the year ended December 31,
2006.  The decrease in interest income from securities
available-for-sale resulted principally from the following:




·
            the
      sale of $125.4 million of our agency ABS-RMBS portfolio in January 2006
      and the sale of the remaining $753.1 million of these securities in
      September 2006.  This portfolio had generated $28.8 million of
      interest income for the year ended December 31, 2006.  As a
      result of the sale, we generated no agency ABS-RMBS interest income during
      the year ended December 31, 2007;




·
            our
      non-agency ABS-RMBS contributed $21.8 million of interest income for the
      year ended December 31, 2007, as compared to $24.1 million for the year
      ended December 31, 2006, a decrease of $2.3 million (9%) primarily due to
      the deconsolidation of Ischus CDO II on November 13, 2007;
    and




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 40
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·
            our
      CMBS contributed $1.4 million of interest income for the year ended
      December 31, 2007, as compared to $1.6 million for the year ended December
      31, 2006, a decrease of $196,000 (12%) for the year ended December 31,
      2006 primarily due to the deconsolidation of Ischus CDO II on November 13,
      2007.




The decrease was partially offset by
the following:




·
            our
      CMBS-private placement portfolio contributed $4.1 million of interest
      income for the year ended December 31, 2007, as compared to $87,000 for
      the year ended December 31, 2006, an increase of $4.1 million (4,592%) due
      to the accumulation of securities in this portfolio beginning in December
      2006.





Interest
Income - Leasing





Our equipment leasing portfolio
generated $7.6 million of interest income for the year ended December 31, 2007
as compared to $5.3 million for the year ended December 31, 2006, an increase of
$2.3 million (44%).  This increase resulted from the
following:




·
            the
      increase of $22.4 million in the weighted average balance of leases
      primarily from the addition of leases we funded following the closing of
      our secured term credit facility in March 2006;
  and




·
            an
      increase in the weighted average interest rate on these leases to 8.71%
      for the year ended December 31, 2007 from 8.57% for the year ended
      December 31, 2006.





Interest
Income - Other





The overall increase in interest income
was impacted by a decrease in interest income - other.  Interest
income - other decreased $2.6 million (51%) to $2.6 million for the year ended
December 31, 2007, as compared to $5.2 million for the year ended December 31,
2006.  This was due to interest rate swap agreements which generated
$3.8 million of interest income for the year ended December 31,
2006.  Our swaps generated interest expense for the year ended
December 31, 2007 due to reductions in market interest rates which caused the
fixed rate we paid to exceed the floating rate we received under these
agreements during the year.





The decrease of interest income – other
was offset by an increase in our temporary investment income which increased
$1.2 million (79%) to $2.6 million for the year ended December 31, 2007 from
$1.4 million for the year ended December 31, 2006.  This increase is
primarily due to an increase of $1.1 million in sweep income from our two
commercial real estate CDOs, RREF CDO 2006-1 and RREF CDO 2007-1.  The
year ended December 31, 2007 contains a full year of income for RREF 2006-1
which closed in August 2006 and six months of income for RREF CDO 2007-1 which
closed at the end of June 2007.  The year ended December 31, 2006
contains four months of income for RREF CDO 2006-1 and no income for RREF CDO
2007-1.





Interest
Expense





Year
Ended December 31, 2008 as compared to Year Ended December 31, 2007





The following tables set forth
information relating to our interest expense incurred for the periods presented
(in thousands, except percentages):




As
      of and for the Years EndedDecember
      31,2008
                
                
                2007
                
                
                2006Interest
      expense:Bank loans
                
                $
                35,165
                
                
                $
                52,466
                
                
                $
                30,903Commercial real estate
      loans
                
                
                27,924
                
                
                
                37,184
                
                
                
                14,436Agency RMBS
                
                
                −
                
                
                
                −
                
                
                
                28,607Non-agency / CMBS /
      ABS
                
                
                −
                
                
                
                19,794
                
                
                
                21,666CMBS-private
    placement
                
                
                163
                
                
                
                1,223
                
                
                
                83Leasing
                
                
                4,357
                
                
                
                5,595
                
                
                
                3,659General
                
                
                12,010
                
                
                
                5,302
                
                
                
                2,497Total
      interest expense
                
                $
                79,619
                
                
                $
                121,564
                
                
                $
                101,851




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 41
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Weighted
      Average
                
                
                Weighted
      Average
                
                
                Weighted
      AverageRate
                
                
                Balance
                
                
                Rate
                
                
                Balance
                
                
                Rate
                
                
                BalanceYear
      Ended
                    December
      31,
                
                
                Year
      Ended
                    December
      31,
                
                
                Period
      Ended
                    December
      31,2008
      (1)
                
                
                2008
                
                
                2007
      (1)
                
                
                2007
                
                
                2006
      (1)
                
                
                2006Interest
      expense:Bank loans
                
                
                3.82%
                
                
                $
                906,000
                
                
                
                5.96%
                
                
                $
                868,345
                
                
                
                5.61%
                
                
                $
                535,894Commercial real estate
      loans
                
                
                3.91%
                
                
                $
                696,492
                
                
                
                6.29%
                
                
                $
                582,173
                
                
                
                6.42%
                
                
                $
                224,844Agency RMBS
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                5.01%
                
                
                $
                560,269Non-agency / CMBS /
      ABS
                
                
                N/A
                
                
                
                N/A
                
                
                
                5.93%
                
                
                $
                326,458
                
                
                
                5.69%
                
                
                $
                376,000CMBS-private
      placement
                
                
                4.34%
                
                
                $
                3,597
                
                
                
                5.84%
                
                
                $
                20,571
                
                
                
                5.40%
                
                
                $
                1,519Leasing
                
                
                4.67%
                
                
                $
                89,778
                
                
                
                6.68%
                
                
                $
                83,405
                
                
                
                6.51%
                
                
                $
                57,214General
                
                
                3.00%
                
                
                $
                383,860
                
                
                
                9.91%
                
                
                $
                51,981
                
                
                
                9.52%
                
                
                $
                24,916


(1)
            Certain
      one-time items reflected in interest expense have been excluded in
      calculating the weighted average rate, since they are not indicative of
      expected future results.





Interest expense decreased $41.9
million (35%) to $79.6 million for the year ended December 31, 2008, from $121.6
million for the year ended December 31, 2007.  We attribute this
decrease to the following:





Interest expense on bank loans was
$35.2 million for the year ended December 31, 2008, as compared to $52.5 million
for the year ended December 31, 2007, a decrease of $17.3 million
(33%).  This decrease resulted primarily from a decrease in the
weighted average rate on this debt to 3.82% for the year ended December 31, 2008
from 5.96% for the year ended December 31, 2007 as a result of the decrease in
LIBOR which is a reference index for the rates payable on these
notes.  The effects of the decrease in the weighted average rate were
partially offset by an increase of $37.7 million in the weighted average balance
of debt to $906.0 million for the year ended December 31, 2008 from $868.3
million for the year ended December 31, 2007 as a result of the closing of
Apidos Cinco CDO.  The year ended December 31, 2008 reflects a full
year of expense on this portfolio.





Interest expense on commercial real
estate loans was $27.9 million for the year ended December 31, 2008, as compared
to $37.2 million for the year ended December 31, 2007, a decrease of $9.3
million (25%).  This decrease resulted primarily from a decrease in
the weighted average rate on our financings to 3.91% for the year ended December
31, 2008 from 6.29% for the year ended December 31, 2007 primarily due to the
decrease in LIBOR which is a reference index for the rates payable on a majority
of these borrowings.  The effects of the decrease in the weighted
average rate were partially offset by an increase of $114.3 million in the
weighted average balance of debt to $696.5 million for the year ended December
31, 2008 from $582.2 million for the year ended December 31, 2007 primarily from
the accumulation of investments of our second CRE CDO, RREF CDO 2007-1 which
closed on June 26, 2007 and issued $348.9 million of debt at that
time.  The year ended December 31, 2008 reflects a full year of
expense on this debt.





Non-agency,
CMBS and other ABS, which we refer to collectively as ABS, were pooled and
financed by Ischus CDO II.  Interest expense related to these
obligations was $19.8 million for the year ended December 31,
2007.  There was no such interest expense for the year ended December
31, 2008 due to the deconsolidation of Ischus CDO II on November 13, 2007,
discussed in “ − Overview,” above.





Interest expense on CMBS-private
placement was $163,000 for the year ended December 31, 2008, as compared to $1.2
million for the year ended December 31, 2007, a decrease of $1.1 (87%) million
due the following:




·
            A
      decrease in the weighted average balance of debt of $17.0 million to $3.6
      million for the year ended December 31, 2008 from $20.6 for the year ended
      December 31, 2007 primarily from the reduction in advance rates on our
      pledged CMBS-private placement collateral, which resulted in $15.8 million
      in pay-downs on the related repurchase agreement
  debt.




·
            A
      decrease in the weighted average rate on our financings to 4.34% for the
      year ended December 31, 2008 from 5.84% for the year ended December 31,
      2007 primarily due to the decrease in LIBOR, which is a reference index
      for the rates payable on a majority of these
  borrowings.





Interest
expense on our equipment leasing portfolio was $4.4 million for the year ended
December 31, 2008, as compared to $5.6 million for the year ended December 31,
2007, a decrease of $1.2 million (22%).  The decrease for the year
ended December 31, 2008 resulted primarily from a decrease in the weighted
average rate on this debt to 4.67% for the year ended December 31, 2008 from
6.68% for the year ended December 31, 2007.  The decrease in rate was
the result of the decrease in the commercial paper index, which is a reference
index for the rate payable on the facility we used to finance this
portfolio.





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 42
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The decrease in interest expense was
partially offset by an increase in general interest expense.  General
interest expense was $12.0 million for the year ended December 31, 2008, as
compared to $5.3 million for the year ended December 31, 2007, an increase of
$6.7 million (127%).  This increase resulted primarily from an
increase of $7.8 million on our interest rate derivatives that fix the rate we
pay under these agreements.  During the year ended December 31, 2008,
the floating rate we paid exceeded the fixed rate we received due to the
decrease in LIBOR. The increase in derivative expense was partially offset by a
decrease in interest expense related to our unsecured junior subordinated
debentures held by unconsolidated trusts that issued trust preferred securities
as a result of a decrease in the LIBOR rate which is a reference index for the
rates payable by these debentures.





Year
Ended December 31, 2007 as compared to Year Ended December 31, 2006





Interest expense increased $19.7
million (19%) to $121.6 million for the year ended December 31, 2007, from
$101.9 million for the year ended December 31, 2006.  We attribute
this increase to the following:





Interest expense on bank loans was
$52.5 million for the year ended December 31, 2007, as compared to $30.9 million
for the year ended December 31, 2006, an increase of $21.6 million
(70%).  This increase resulted primarily from the
following:




·
            The
      increase of $332.5 million in the weighted average balance of debt
      primarily related to the accumulation of investments by, and the closing
      of Apidos Cinco CDO, which closed on May 30, 2007 and issued $322.0
      million of debt.  In addition, the current year reflects a full
      year of interest expense for Apidos CDO III which issued $262.5 million of
      debt and closed on May 9, 2006.  The prior year reflected only
      eight months of such interest
expense.




·
            The
      weighted average rate on the debt related to bank loans increased to 5.82%
      for the year ended December 31, 2007, from 5.46% for the year ended
      December 31, 2006 due primarily to the increase in
  LIBOR.




·
            We
      amortized $1.2 million of deferred debt issuance costs related to our CDO
      financings for the year ended December 31, 2007, compared to $785,000 for
      the year ended December 31, 2006. This increase resulted primarily from
      the addition of Apidos Cinco CDO and a full year of deferred debt issuance
      cost amortization for Apidos CDO
III.





Interest expense on commercial real
estate loans was $37.2 million for the year ended December 31, 2007, as compared
to $14.4 million for the year ended December 31, 2006, an increase of $22.8
million (158%).  This increase resulted primarily from the
following:




·
            An
      increase of $357.3 million in the weighted average balance of debt
      primarily from the accumulation of investments of RREF CDO 2007-1 which
      closed on June 26, 2007 and issued $348.9 million of debt at that
      time.  In addition, the current year reflects a full year of
      interest expense for RREF CDO 2006-1 which closed on August 10, 2006 and
      issued $265.5 million in debt, while the prior year reflects only five
      months of such interest expense.




·
            We
      amortized $1.4 million of deferred debt issuance costs related to our CDOs
      and repurchase facility financings for the year ended December 31, 2007,
      compared to $376,000 for the year ended December 31, 2006 due to primarily
      a full year of expense from RREF CDO 2006-1, six months of expense from
      RREF CDO 2007-1 and the closing costs of our three year term facility that
      closed in April 2007.





This increase was offset by a decrease
in the weighted average rate on our financings from 6.25% for the year ended
December 31, 2006 to 6.05% at December 31, 2007 primarily due to the issuance of
long-term debt by RREF CDO 2006-1 in August 2006 and RREF CDO 2007-1 in June
2007 and the related reduction in repurchase agreement debt for the year ended
December 31, 2007 as compared to the year ended December 31, 2006.





Interest expense on CMBS-private
placement was $1.2 million for the year ended December 31, 2007, as compared to
$83,000 for the year ended December 31, 2006, an increase of $1.1 million
(1,373%) due to the accumulation of securities in this portfolio beginning in
December 2006.  There were no such assets prior to December
2006.





Interest
expense on our equipment leasing portfolio was $5.6 million for the year ended
December 31, 2007, as compared to $3.7 million for the year ended December 31,
2006, an increase of $1.9 million (53%).  The increase for the year
ended December 31, 2007 resulted from an increase in the amount of direct
financing leases and notes we acquired and the related financing after March 31,
2006 and through September 30, 2007.  The assets were acquired with
cash until the facility closed on March 31, 2006 when we entered into a secured
term facility.  The increase for the year ended December 31, 2007 was
also the result of an increase in the weighted average rate from 6.51% for the
year ended December 31, 2006, to 6.68% for the year ended December 31, 2007 due
to an increase in the commercial paper rate.





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 43
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General interest expense was $5.3
million for the year ended December 31, 2007, as compared to $2.5 million for
the year ended December 31, 2006, an increase of $2.8 million
(112%).  This increase resulted from an increase of $2.8 million in
interest expense on our unsecured junior subordinated debentures held by
unconsolidated trusts that issued trust preferred securities which were not
issued until May 2006 and September 2006, respectively.





These increases in interest expense
were offset by the following:




·
            Agency
      ABS-RMBS generated $28.6 million in interest expense for the year ended
      December 31, 2006.  No such expense was incurred for the year
      ended December 31, 2007 since we sold our agency ABS-RMBS portfolio in
      January and September 2006 and repaid the related
  debt.




·
            ABS-RMBS,
      CMBS and other asset-backed securities were pooled and financed by Ischus
      CDO II.  Interest expense related to these obligations was $19.8
      million for the year ended December 31, 2007, as compared to $21.7 million
      for the year ended December 31, 2006, a decrease of $1.9 million
      (9%).  This decrease resulted primarily from the deconsolidation
      of Ischus CDO II on November 13,
2007.





Non-Investment
Expenses





The following table sets forth
information relating to our non-investment expenses incurred for the periods
presented (in thousands):





Years
      EndedDecember
      31,2008
                
                
                2007
                
                
                2006Non-investment
      expenses:Management fees-related
      party
                
                $
                6,301
                
                
                $
                6,554
                
                
                $
                4,838Equity compensation-related
      party
                
                
                540
                
                
                
                1,565
                
                
                
                2,432Professional
      services
                
                
                3,349
                
                
                
                2,911
                
                
                
                1,881Insurance
                
                
                641
                
                
                
                466
                
                
                
                498General and
      administrative
                
                
                1,848
                
                
                
                1,581
                
                
                
                1,428Income tax
    expense
                
                
                (241
                )
                
                
                338
                
                
                
                67Total
      non-investment expenses
                
                $
                12,438
                
                
                $
                13,415
                
                
                $
                11,144





Year
Ended December 31, 2008 as compared to the Year Ended December 31,
2007





Management
fees – related party decreased $253,000 (4%) to $6.3 million for the year ended
December 31, 2008 as compared to $6.6 million for the year ended December 31,
2007.  These amounts represent compensation in the form of base
management fees and incentive management fees pursuant to our management
agreement.  The base management fees decreased by $537,000 (11%) to
$4.5 million for the year ended December 31, 2008 as compared to $5.1 million
for the year ended December 31, 2007.  This decrease was due to
decreased equity, a component in the formula by which base management fees are
calculated, as a result of asset impairments and the eventual deconsolidation of
Ischus CDO II and as a result of provisions for loan and lease losses during
2008.  Incentive management fees increased by $284,000 (19%) to $1.8
million for the year ended December 31, 2008 from $1.5 million for the year
ended December 31, 2007.  The incentive fee is calculated for each
quarter and the calculation in any quarter is not affected by the results of any
other quarter.  The increase for the year ended December 31, 2008 is
primarily due to the fact that an incentive was paid for three quarters during
the year ended December 31, 2008 and only for two quarters during the year ended
December 31, 2007.  No incentive management fee was paid for the
quarters ended June 30, 2008, September 30, 2007 and December 31, 2007 because
adjusted net income thresholds, as defined in the management agreement were not
met.





Equity compensation – related party
decreased $1.0 million (66%) to $540,000 for the year ended December 31, 2008 as
compared to $1.6 million for the year ended December 31, 2007.  These
expenses relate to the amortization of annual grants of restricted common stock
to our non-employee independent directors, and annual and discretionary grants
of restricted stock to several employees of Resource America who provide
investment management services to us through our Manager.  The
decrease in expense was primarily the result of an adjustment related to our
quarterly remeasurement of unvested stock and options granted to the Manager to
reflect changes in the fair value of our common stock as well as the vesting of
the remaining grant of stock and options to the Manager on March 8,
2005.  These decreases were partially offset by the issuance of new
grants.





Professional services increased
$438,000 (15%) to $3.3 million for the year ended December 31, 2008 as compared
to $2.9 million for the year ended December 31, 2007 due to the
following:




·
            Increase
      of $151,000 in lease servicing expense for the year ended December 31,
      2008 due to the increase in managed assets in the year ended December 31,
      2008.




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 44
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·
            Increase
      of $394,000 in legal fees due to compliance work
  performed.




These increases were offset by a
decrease of $64,000 in audit and tax fees for the year ended December 31, 2008
due to the timing of when the services were performed and billed.





Income tax expense decreased $579,000
(171%) to a benefit of $241,000 for the year ended December 31, 2008 as compared
to expense of $338,000 for the year ended December 31, 2007 due to a decrease in
taxable income related to Resource TRS, our domestic taxable REIT
subsidiary.





Year
Ended December 31, 2007 as compared to the Year Ended December 31,
2006





Management
fees-related party increased $1.8 million (35%) to $6.6 million for the year
ended December 31, 2007 as compared to $4.8 million for the year ended December
31, 2006.  These amounts represent compensation in the form of base
management fees and incentive management fees pursuant to our management
agreement.  The base management fees increased by $1.4 million (37%)
to $5.1 million for the year ended December 31, 2007 as compared to $3.7 million
for the year ended December 31, 2006.  This increase was due to
increased equity as a result of our public offerings in February and December
2006 and the January 2007 exercise of the over-allotment option that was part of
the December 2006 follow-on offering.  Equity is a principal component
of the management fee calculation.  See Item 1, “Business-Management
Agreement.”  Incentive management fees increased by $355,000 (32%) to
$1.5 million for the year ended December 31, 2007 from $1.1 million for the year
ended December 31, 2006.  The incentive fee is calculated for each
quarter and the calculation in any quarter is not affected by the results of any
other quarter.  During the first two quarters of 2006 and 2007,
adjusted net income increased $8.9 million causing a $1.1 million increase in
incentive management fees.  No incentive management fee was paid for
the quarters ended December 31, 2007, September 30, 2007 or September 30, 2006
because adjusted net income thresholds, as defined in the management agreement
(see Note 12) were not met.





Equity compensation-related party
decreased $867,000 (36%) to $1.6 million for the year ended December 31, 2007 as
compared to $2.4 million for the year ended December 31, 2006.  These
expenses relate to the amortization of the March 8, 2005 grant of
restricted common stock to the Manager, the March 8, 2005, 2006 and 2007
grants of restricted common stock to our non-employee independent directors, the
March 8, 2005 grant of options to the Manager to purchase common stock, the
January 5, 2007 grant of restricted stock to several employees of Resource
America who provide investment management services to us through our Manager, a
June 27, 2007 grant of performance shares to two employees of Resource America
and several grants of restricted common stock to various employees of our
Manager in October and December 2007.  The decrease in expense was
primarily the result of the vesting of two thirds of the stock and options
related to the March 8, 2005 grants of restricted stock and options to the
Manager on March 8, 2006 and March 8, 2007 as well as an adjustment related to
our quarterly remeasurement of unvested stock and options granted to the Manager
to reflect changes in the fair value of our common stock.  This was
offset by expense related to the January 5, 2007, June 27, 2007 and the October
and December 2007 grants.





Professional services increased $1.0
million (55%) to $2.9 million for the year ended December 31, 2007 as compared
to $1.9 million for the year ended December 31, 2006 due to the
following:




·
            Increase
      of $391,000 in audit and tax fees for the year ended December 31, 2007 due
      to the timing of when the services were performed and
    billed.




·
            Increase
      of $151,000 in lease servicing expense for the year ended December 31,
      2007 due to the increase in managed assets in the year ended December 31,
      2007.




·
            Increase
      of $135,000 in fees associated with our Sarbanes-Oxley compliance for the
      year ended December 31, 2007.




·
            Increase
      of $170,000 in trustee fees with respect to our CDOs and increases of
      $71,000 in agreed-upon procedures fees to independent audit firms for the
      year ended December 31, 2007 due to two CDO vehicles closing subsequent to
      December 31, 2006.  There were no such fees for the year ended
      December 31, 2006.




·
            Increase
      of $117,000 in legal fees due to our having been subject to a full year of
      reporting obligations under the Securities Exchange Act of
      1934.





General and administrative expenses
increased $153,000 (11%) to $1.6 million for the year ended December 31,
2007 as compared to $1.4 million for the year ended December 31,
2006.  These expenses include expense reimbursements to our Manager,
rating agency expenses and all other operating costs incurred.  The
increase is due to the following:




·
            Increase
      of $203,000 in rating agency and other fees with respect to our CDOs for
      the year ended December 31, 2007 due to two CDO vehicles closing
      subsequent to December 31, 2006.  There were no such fees for
      the year ended December 31, 2006.






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 45
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·
            Increase
      of $172,000 in director’s fees for the year ended December 31, 2007 due to
      the new fees paid to members of the investment committee who approve all
      investments in commercial real estate
mortgages.




·
            Increase
      of $66,000 in bad debt expense for the year ended December 31, 2007
      related to several assets in our bank loan portfolio.  There was
      no such expense for the year ended December 31,
  2006.




·
            Increase
      of $126,000 in other general and administrative expenses including bank
      fees related to cost of servicing our commercial real estate portfolio,
      printing fees for our first proxy filing, dues and subscriptions, and
      travel due to our growing portfolio for the year ended December 31,
      2007.





These were offset by a decrease in
reimbursed expenses to our Manager of $447,000 for the year ended December 31,
2007 due to a determination by our Manager not to seek reimbursement of a
portion of general office expenses for which reimbursement is permitted under
our management agreement.





Income tax expense increased $271,000
(404%) to $338,000 for the year ended December 31, 2007 as compared to $67,000
for the year ended December 31, 2006 due to an increase in taxable income
related to Resource TRS, our domestic taxable REIT
subsidiary.  Resource TRS had no taxable income for the period from
January 1, 2006 through December 15, 2006.





Other
(Expenses) Revenues





The following table sets forth
information relating to our other (expenses) revenues incurred for the periods
presented (in thousands):





Years
      Ended
                  December
      31,2008
              
              
              2007
              
              
              2006Other
      (expenses) revenuesNet realized (loss) gain on
      investments
              
              $
              (1,637
              )
              
              $
              (15,098
              )
              
              $
              (8,627
              )Gain on deconsolidation of
      VIE
              
              
              −
              
              
              
              14,259
              
              
              
              −Provision for loan and lease
      losses
              
              
              (46,160
              )
              
              
              (6,211
              )
              
              
              −Gain on the extinguishment of
      debt
              
              
              1,750
              
              
              
              −
              
              
              
              −Gain on the settlement of
      loan
              
              
              574
              
              
              
              −
              
              
              
              −Asset
    impairments
              
              
              −
              
              
              
              (26,277
              )
              
              
              −Other income
              
              
              115
              
              
              
              201
              
              
              
              153Total
      (expenses) revenues
              
              $
              (45,358
              )
              
              $
              (33,126
              )
              
              $
              (8,474
              )





Year
Ended December 31, 2008 as compared to Year Ended December 31, 2007




Net realized losses on investments
decreased $13.5 million (89%) to a loss of $1.6 million for the year ended
December 31, 2008 from a loss of $15.1 million for the year ended December 31,
2007.  Realized losses during the year ended December 31, 2008
consisted primarily of a loss of $2.0 million on the sale of one of our CMBS –
private placement positions during the year.  This loss was partially
offset by gains of $252,000 and $112,000 on the sale of assets in our leasing
and bank loan portfolio, respectively.  Realized losses during the
year ended December 31, 2007 consisted primarily of a $15.6 million realized
gross loss on deconsolidation of Ischus CDO II.
 
 Gain on deconsolidation of VIE of $14.3
million during the year ended December 31, 2007 is due to the deconsolidation of
Ischus CDO II in November 2007.  Ischus CDO II had previously been a
consolidated entity.  See “− Overview.”
 
 Our provision for loan and lease losses
increased $39.9 million (643%) to $46.2 for the year ended December 31, 2008 as
compared to $6.2 million for the year ended December 31, 2007.  The
provision for the year ended December 31, 2008 consisted of a $30.4 million
provision for loan loss on our bank loan portfolio, a $14.8 million provision on
our commercial real estate portfolio and a $900,000 provision on our direct
financing leases and notes.  The provision for the year ended December
31, 2007 consisted of a $2.8 million provision for loan loss on our bank loan
portfolio, a $3.2 million provision on our commercial real estate portfolio and
a $293,000 provision for lease loss on our direct financing leases and
notes.  The principal reason for the increase in the provision for
loan and lease losses was our recognition of reserves on seven defaulted
bank loans, one defaulted CRE loan and one CRE loan sold at a
discount.  We also increased our general reserves due to deteriorating
credit market conditions.




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Gain on the extinguishment of debt
during the year ended December 31, 2008 is due to the buyback of $5.0 million of
debt issued by RREF CDO 2007-1 in February 2008.  The notes, issued at
par, were bought back as an investment by us at a price of 65% of par resulting
in a gain of $1.8 million.  The related deferred debt issuance costs
were immaterial.  There was no such transaction during the year ended
December 31, 2007.





Gain on
the settlement of loan during the year ended December 31, 2008 is due to the
reimbursement of a loss related to the termination of a hedge after the paydown
of a commercial real estate loan.  Per the terms of the agreement, we
were to be reimbursed for any such termination costs.  There was no
such transaction during the year ended December 31,
2007.





Asset impairments of $26.3 million
during the year ended December 31, 2007 consisted entirely of
other-than-temporary impairment on assets in our ABS-RMBS portfolio held by
Ischus CDO II.  During the second and third quarters of 2007 we
experienced illiquidity in the sub-prime market and deteriorating delinquency
characteristics of the mortgages underlying Ischus CDO II’s investments. 
These trends together with significant rating agency actions supported the need
to further reevaluate the level of asset impairments in Ischus CDO II’s ABS-RMBS
portfolio.  The asset impairments recorded reflect these declining market
conditions.  There was no such impairment for the year ended December
31, 2008.  These impairments were partially recaptured as part of our
gain on the deconsolidation of Ischus CDO II.





Year
Ended December 31, 2007 as compared to Year Ended December 31, 2006





Net realized losses on investments
increased $6.5 million (75%) to a loss of $15.1 million for the year ended
December 31, 2007 from a loss of $8.6 million for the year ended December 31,
2006.  Realized losses during the year ended December 31, 2007
consisted primarily of a $15.6 million realized gross loss on deconsolidation of
Ischus CDO II.  Realized losses during the year ended December 31,
2006 primarily consisted of $12.2 million of gross losses related to the sale of
our agency ABS-RMBS portfolio, offset by a $2.6 million gain on termination of
our amortizing swap agreement in connection with the sale of our agency ABS-RMBS
portfolio in September 2006.





Gain on deconsolidation of VIE of $14.3
million is due to the deconsolidation of Ischus CDO II in November
2007.





Our provision for loan and lease losses
was $6.2 million for the year ended December 31, 2007.  It consisted
of a $2.8 million provision for loan loss on our bank loan portfolio, a $3.2
million provision on our commercial real estate portfolio and a $293,000
provision for lease loss on our direct financing leases and
notes.  There were no such provisions for the year ended December 31,
2006.  The increase in the provision for loan and lease losses was due
to payment defaults on two bank loans and three leases and declining credit
market conditions in the second half of 2007.





Asset impairments of $26.3 million
consisted entirely of other-than-temporary impairment on assets in our ABS-RMBS
portfolio held by Ischus CDO II.  During the second and third quarters
of 2007 we experienced illiquidity in the sub-prime market and deteriorating
delinquency characteristics of the mortgages underlying Ischus CDO II’s
investments.  These trends together with significant rating agency actions
supported the need to further reevaluate the level of asset impairments in
Ischus CDO II’s ABS-RMBS portfolio.  The asset impairments recorded reflect
these declining market conditions.  There was no such impairment for
the year ended December 31, 2006.  These impairments were partially
recaptured as part of our gain on the deconsolidation of Ischus CDO
II.





Other income increased $47,000 (31%) to
$201,000 for the year ended December 31, 2007 from $154,000 for the year ended
December 31, 2006, primarily due to an increase of $83,000 in dividend income
related to the common shares held in two unconsolidated trusts that issued trust
preferred securities for our benefit.  See “ – Financial Condition –
Trust Preferred Securities,” below.  The trust had a full year of
operations in 2007 compared to a partial year in 2006.  These
increases were offset by a decrease in consulting fee income of approximately
$35,000.





Income
Taxes





We do not pay federal income tax on
income we distribute to our stockholders, subject to our compliance with REIT
qualification requirements.  However, Resource TRS, our domestic TRS,
is taxed as a regular subchapter C corporation under the provisions of the
Internal Revenue Code.  For the years ended December 31, 2008 and
2007, Resource TRS recorded a $241,000 benefit for income taxes and $338,000
provision for income taxes, respectively.





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Financial
Condition





Summary





Our total assets at December 31, 2008
were $1.9 billion as compared to $2.1 billion at December 31,
2007.  The decrease in total assets was principally due to loan
repayments in our investment portfolio.  The decrease in total assets
from these loan repayments also resulted in a reduction of our borrowings as we
repaid related debt.  To a lesser extent, the decrease in our total
assets was due to the change in the fair market value of our available-for-sale
securities and provisions for loan losses with respect to both our loans held
for investment and direct financing leases and notes.





Investment
Portfolio





The following tables summarize the
amortized cost and net carrying amount of our investment portfolio as of
December 31, 2008 and 2007, classified by interest rate type.  The
following table includes both (i) the amortized cost of our investment portfolio
and the related dollar price, which is computed by dividing amortized cost by
par amount, and (ii) the net carrying amount of our investment portfolio and the
related dollar price, which is computed by dividing the net carrying amount by
par amount (in thousands, except percentages):


Amortized
      cost
                
                
                Dollar
      price
                
                
                Net
      carrying amount
                
                
                Dollar
      price
                
                
                Net
      carrying amount less amortized cost
                
                
                Dollar
      priceDecember
      31, 2008Floating rateCMBS-private
      placement
                
                $
                32,061
                
                
                
                99.99%
                
                
                $
                15,042
                
                
                
                46.91%
                
                
                $
                (17,019
                )
                
                
                -53.08%Other
      ABS
                
                
                5,665
                
                
                
                94.42%
                
                
                
                45
                
                
                
                0.75%
                
                
                
                (5,620
                )
                
                
                -93.67%B
      notes (1)
                
                
                33,535
                
                
                
                100.00%
                
                
                
                33,434
                
                
                
                99.70%
                
                
                
                (101
                )
                
                
                -0.30%Mezzanine
      loans (1)
                
                
                129,459
                
                
                
                100.01%
                
                
                
                129,071
                
                
                
                99.71%
                
                
                
                (388
                )
                
                
                -0.30%Whole
      loans (1)
                
                
                431,985
                
                
                
                99.71%
                
                
                
                430,690
                
                
                
                99.41%
                
                
                
                (1,295
                )
                
                
                -0.30%Bank
      loans (2)
                
                
                937,507
                
                
                
                99.11%
                
                
                
                582,416
                (4)
                
                
                61.57%
                
                
                
                (355,091
                )
                
                
                -37.94%Total floating
    rate
                
                $
                1,570,212
                
                
                
                99.36%
                
                
                $
                1,190,698
                
                
                
                75.35%
                
                
                $
                (379,514
                )
                
                
                -24.01%Fixed rateCMBS
      – private placement
                
                $
                38,397
                
                
                
                91.26%
                
                
                $
                14,173
                
                
                
                33.69%
                
                
                $
                (24,224
                )
                
                
                -57.57%B
      notes (1)
                
                
                55,534
                
                
                
                100.11%
                
                
                
                55,367
                
                
                
                99.81%
                
                
                
                (167
                )
                
                
                -0.30%Mezzanine
      loans (1)
                
                
                81,274
                
                
                
                94.72%
                
                
                
                68,378
                
                
                
                79.69%
                
                
                
                (12,896
                )
                
                
                -15.03%Whole
      loans (1)
                
                
                87,352
                
                
                
                99.52%
                
                
                
                87,090
                
                
                
                99.23%
                
                
                
                (262
                )
                
                
                -0.29%Equipment
      leases and notes (3)
                
                
                104,465
                
                
                
                99.38%
                
                
                
                104,015
                
                
                
                98.95%
                
                
                
                (450
                )
                
                
                -0.43%Total fixed
rate
                
                $
                367,022
                
                
                
                97.55%
                
                
                $
                329,023
                
                
                
                87.45%
                
                
                $
                (37,999
                )
                
                
                -10.10%Grand total
                
                $
                1,937,234
                
                
                
                99.02%
                
                
                $
                1,519,721
                
                
                
                77.68%
                
                
                $
                (417,513
                )
                
                
                -21.34%


(1)
            Net
      carrying amount includes an allowance for loan losses of $15.1 million at
      December 31, 2008, allocated as follows: B notes ($0.3 million), mezzanine
      loans ($13.3 million) and whole loans ($1.5
  million).




(2)
            Net
      carrying amount includes a $28.8 million provision for loan losses at
      December 31, 2008.




(3)
            Net
      carrying amount includes a $450,000 provision for lease losses at December
      31, 2008.




(4)
            Bank
      loan portfolio is carried at amortized cost less allowance for loan loss
      and was $908.7 million at December 31, 2008.  Amount disclosed
      represents fair value at December 31,
2008.





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 48
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Amortized
      cost
                  
                  
                  Dollar
      price
                  
                  
                  Net
      carrying amount
                  
                  
                  Dollar
      price
                  
                  
                  Net
      carrying amount less amortized cost
                  
                  
                  Dollar
      priceDecember
      31, 2007Floating rateCMBS-private
      placement
                  
                  $
                  54,132
                  
                  
                  
                  93.40%
                  
                  
                  $
                  41,524
                  
                  
                  
                  71.65%
                  
                  
                  $
                  (12,608
                  )
                  
                  
                  -21.75%Other
      ABS
                  
                  
                  5,665
                  
                  
                  
                  94.42%
                  
                  
                  
                  900
                  
                  
                  
                  15.00%
                  
                  
                  
                  (4,765
                  )
                  
                  
                  -79.42%B
      notes (1)
                  
                  
                  33,570
                  
                  
                  
                  100.10%
                  
                  
                  
                  33,486
                  
                  
                  
                  99.85%
                  
                  
                  
                  (84
                  )
                  
                  
                  -0.25%Mezzanine
      loans (1)
                  
                  
                  141,894
                  
                  
                  
                  100.09%
                  
                  
                  
                  141,539
                  
                  
                  
                  99.83%
                  
                  
                  
                  (355
                  )
                  
                  
                  -0.26%Whole
      loans (1)
                  
                  
                  430,776
                  
                  
                  
                  99.35%
                  
                  
                  
                  429,699
                  
                  
                  
                  99.10%
                  
                  
                  
                  (1,077
                  )
                  
                  
                  -0.25%Bank
      loans (2)
                  
                  
                  931,101
                  
                  
                  
                  100.00%
                  
                  
                  
                  874,736
                  (4)
                  
                  
                  93.95%
                  
                  
                  
                  (56,365
                  )
                  
                  
                  -6.05%Total floating
    rate
                  
                  $
                  1,597,138
                  
                  
                  
                  99.58%
                  
                  
                  $
                  1,521,884
                  
                  
                  
                  94.88%
                  
                  
                  $
                  (75,254
                  )
                  
                  
                  -4.69%Fixed rateCMBS
      – private placement
                  
                  $
                  28,241
                  
                  
                  
                  98.95%
                  
                  
                  $
                  23,040
                  
                  
                  
                  80.73%
                  
                  
                  $
                  (5,201
                  )
                  
                  
                  -18.22%B
      notes (1)
                  
                  
                  56,007
                  
                  
                  
                  100.17%
                  
                  
                  
                  55,867
                  
                  
                  
                  99.92%
                  
                  
                  
                  (140
                  )
                  
                  
                  -0.25%Mezzanine
      loans (1)
                  
                  
                  81,268
                  
                  
                  
                  94.69%
                  
                  
                  
                  80,016
                  
                  
                  
                  93.23%
                  
                  
                  
                  (1,252
                  )
                  
                  
                  -1.46%Whole
      loans (1)
                  
                  
                  97,942
                  
                  
                  
                  99.24%
                  
                  
                  
                  97,697
                  
                  
                  
                  98.99%
                  
                  
                  
                  (245
                  )
                  
                  
                  -0.25%Equipment
      leases and notes (3)
                  
                  
                  95,323
                  
                  
                  
                  100.00%
                  
                  
                  
                  95,030
                  
                  
                  
                  99.69%
                  
                  
                  
                  (293
                  )
                  
                  
                  -0.31%Total fixed
rate
                  
                  $
                  358,781
                  
                  
                  
                  98.49%
                  
                  
                  $
                  351,650
                  
                  
                  
                  96.53%
                  
                  
                  $
                  (7,131
                  )
                  
                  
                  -1.96%Grand total
                  
                  $
                  1,955,919
                  
                  
                  
                  99.37%
                  
                  
                  $
                  1,873,534
                  
                  
                  
                  95.19%
                  
                  
                  $
                  (82,385
                  )
                  
                  
                  -4.18%


(1)
            Net
      carrying amount of B notes, mezzanine loans and whole loans includes a
      provision for loan losses of $3.2 million at December 31,
      2007.




(2)
            Net
      carrying amount includes a $2.7 million provision for loan losses at
      December 31, 2007.




(3)
            Net
      carrying amount includes a $293,000 provision for lease losses at December
      31, 2007.




(4)
            Bank
      loan portfolio is carried at amortized cost less allowance for loan loss
      and was $928.3 million at December 31, 2007.  Amount disclosed
      represents fair value at December 31,
2007.





Commercial
Mortgage-Backed Securities-Private Placement





At December 31, 2008 and 2007, we held
$29.2 million and $64.6 million, respectively, net of unrealized losses of $41.2
million and $17.8 million at December 31, 2008 and 2007, respectively, of
CMBS-private placement at fair value which is based on taking a weighted average
of the following three measures:




i.
                    an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      historical analysis of underlying loan
  performance;




ii.
              quotes
      on similar-vintage, higher rated, more actively traded CMBS securities
      adjusted for the lower subordination level of our securities;
      and




iii.
              dealer
      quotes on our securities for which there is not an active
      market.





In the aggregate, we purchased our
CMBS-private placement portfolio at a discount.  At December 31, 2008
and 2007, the remaining discount to be accreted into income over the remaining
lives of the securities was $3.7 million and $4.1 million,
respectively.  These securities are classified as available-for-sale
and, as a result, are carried at their fair value.





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 49
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The following table summarizes our
CMBS-private placement as of December 31, 2008 and 2007 (in thousands, except
percentages).  Dollar price is computed by dividing amortized cost by
par amount.





December
      31, 2008
                
                
                December
      31, 2007Amortized
      Cost
                
                
                Dollar
      Price
                
                
                Amortized
      Cost
                
                
                Dollar
      PriceMoody’s
      Ratings Category:Aaa
                
                $
                −
                
                
                
                −%
                
                
                $
                10,000
                
                
                
                100.00%Baa1
      through Baa3
                
                
                63,459
                
                
                
                94.52%
                
                
                
                65,377
                
                
                
                94.07%Ba1
      through Ba3
                
                
                −
                
                
                
                −%
                
                
                
                6,996
                
                
                
                99.94%B1
      through B3
                
                
                6,999
                
                
                
                99.99%
                
                
                
                −
                
                
                
                −%Total
                
                $
                70,458
                
                
                
                95.04%
                
                
                $
                82,373
                
                
                
                95.23%S&P
      Ratings Category:AAA
                
                $
                −
                
                
                
                −%
                
                
                $
                10,000
                
                
                
                100.00%BBB+
      through BBB-
                
                
                51,378
                
                
                
                94.24%
                
                
                
                72,373
                
                
                
                94.61%BB+
      through BB-
                
                
                19,080
                
                
                
                97.26%
                
                
                
                −
                
                
                
                −%Total
                
                $
                70,458
                
                
                
                95.04%
                
                
                $
                82,373
                
                
                
                95.23%Weighted
      average rating factor
                
                
                830
                
                
                
                
                
                
                
                497





Other
Asset-Backed Securities





At December 31, 2008 and 2007, we held
$45,000 and $900,000, respectively, of other ABS at fair value, which is based
on an income approach utilizing an appropriate current risk-adjusted yield, time
value and projected estimated losses from default assumptions based on
historical analysis of underlying loan performance, net of unrealized gains of
$0 and $0, respectively, and losses of $5.6 million and $4.8 million,
respectively.  In the aggregate, we purchased our other ABS portfolio
at a discount.  As of December 31, 2008 and 2007, the remaining
discount to be accreted into income over the remaining lives of securities was
$335,000 and $335,000, respectively.  These securities are classified
as available-for-sale and, as a result, are carried at their fair
value.





The
following table summarizes our other ABS as of December 31, 2008 and 2007 (in
thousands, except percentages).  Dollar price is computed by dividing
amortized cost by par amount.





December
      31, 2008
                
                
                December
      31, 2007Amortized
      cost
                
                
                Dollar
      price
                
                
                Amortized
      cost
                
                
                Dollar
      priceMoody’s
      ratings category:B1
      through B3
                
                $
                5,665
                
                
                
                94.42%
                
                
                $
                5,665
                
                
                
                94.42%Total
                
                $
                5,665
                
                
                
                94.42%
                
                
                $
                5,665
                
                
                
                94.42%S&P
      ratings category:B+
      through B-
                
                $
                5,665
                
                
                
                94.42%
                
                
                $
                5,665
                
                
                
                94.42%Total
                
                $
                5,665
                
                
                
                94.42%
                
                
                $
                5,665
                
                
                
                94.42%Weighted
      average rating factor
                
                
                3,490
                
                
                
                
                
                
                
                610




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 50
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Real
Estate Loans





The following table is a summary of
the loans in our commercial real estate loan portfolio at the dates indicated
(in thousands):


Description
                    
                    Quantity
                    
                    
                    Amortized
      Cost
                    
                    Contracted
                      Interest
      Rates
                    
                    Maturity
      DatesDecember 31, 2008:Whole
      loans, floating rate  (1)
                    
                    
                    29
                    
                    
                    $
                    431,985
                    
                    LIBOR
      plus 1.50% to LIBOR plus 4.40%
                    
                    April
      2009 toAugust
      2011Whole
      loans, fixed rate  (1)
                    
                    
                    7
                    
                    
                    
                    87,352
                    
                    6.98%
      to 10.00%
                    
                    May
      2009 toAugust
      2012B
      notes, floating rate
                    
                    
                    4
                    
                    
                    
                    33,535
                    
                    LIBOR
      plus 2.50% to LIBOR plus 3.01%
                    
                    March
      2009 toOctober
      2009B
      notes, fixed rate
                    
                    
                    3
                    
                    
                    
                    55,534
                    
                    7.00%
      to 8.68%
                    
                    July
      2011 toJuly
      2016Mezzanine
      loans, floating rate
                    
                    
                    10
                    
                    
                    
                    129,459
                    
                    LIBOR
      plus 2.15% to LIBOR plus 3.45%
                    
                    May
      2009 toFebruary
      2010Mezzanine
      loans, fixed rate
                    
                    
                    7
                    
                    
                    
                    81,274
                    
                    5.78%
      to 11.00%
                    
                    November
      2009 toSeptember
      2016Total (2)
                    
                    
                    60
                    
                    
                    $
                    819,139December 31, 2007:Whole
      loans, floating rate
                    
                    
                    28
                    
                    
                    $
                    430,776
                    
                    LIBOR
      plus 1.50% to LIBOR plus 4.25%
                    
                    May
      2008 toJuly
      2010Whole
      loans, fixed rate
                    
                    
                    7
                    
                    
                    
                    97,942
                    
                    6.98%
      to 8.57%
                    
                    May
      2009 toAugust
      2012B
      notes, floating rate
                    
                    
                    3
                    
                    
                    
                    33,570
                    
                    LIBOR
      plus 2.50% to LIBOR plus 3.01%
                    
                    March
      2008 toOctober
      2008B
      notes, fixed rate
                    
                    
                    3
                    
                    
                    
                    56,007
                    
                    7.00%
      to 8.68%
                    
                    July
      2011 toJuly
      2016Mezzanine
      loans, floating rate
                    
                    
                    11
                    
                    
                    
                    141,894
                    
                    LIBOR
      plus 2.15% to LIBOR plus 3.45%
                    
                    February
      2008 toMay
      2009Mezzanine
      loans, fixed rate
                    
                    
                    7
                    
                    
                    
                    81,268
                    
                    5.78%
      to 11.00%
                    
                    October
      2009 toSeptember
      2016Total (2)
                    
                    
                    59
                    
                    
                    $
                    841,457


(1)
              As
      of December 31, 2008, whole loans have $26.6 million in unfunded loan
      commitments which are not included as part of this
      balance.  These are funded as the loans require additional
      funding and the related borrowers have satisfied the requirements to
      obtain this additional funding.
  (2)
              The
      total does not include a provision for loan losses of $15.1 million and
      $3.2 million recorded as of December 31, 2008 and 2007,
      respectively.
 
 We have one mezzanine loan, with a
balance of $11.6 million secured by 100% of the equity interests in two enclosed
regional malls which went into default in February 2008.  During early
2008, we began working with the borrower and special servicer toward a
resolution of the default.  However, during the quarter ended June 30,
2008, the borrower defaulted on the more senior first mortgage
position.  This event triggered the reevaluation of our provision for
loan loss and we determined that during the three months ended June 30, 2008, a
full reserve of the remaining balance of $11.6 million was
necessary.  Any future recovery from this loan will be adjusted
through our allowance for loan loss.
 
 Bank
Loans
 
 At December 31, 2008, we held a total
of $582.4 million of bank loans at fair value through Apidos CDO I, Apidos CDO
III and Apidos Cinco CDO, all of which secure the debt issued by these
entities.  This is a decrease of $292.3 million over our holdings at
December 31, 2007.  The decrease in total bank loans was principally
due to the reduction of market prices.  We own 100% of the equity
issued by Apidos CDO I, Apidos CDO III and Apidos Cinco CDO which we have
determined are VIEs of which we are the primary beneficiary.  See
“-Variable Interest Entities.”  As a result, we consolidated Apidos
CDO I, Apidos CDO III and Apidos Cinco CDO as of December 31,
2008.





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The following table summarizes our bank
loan investments as of December 31, 2008 and 2007 (in thousands, except
percentages).  Dollar price is computed by dividing amortized cost by
par amount.




December
      31, 2008
                  
                  
                  December
      31, 2007Amortized
      cost
                  
                  
                  Dollar
      price
                  
                  
                  Amortized
      cost
                  
                  
                  Dollar
      priceMoody’s
      ratings category:Aa1
      through Aa3
                  
                  $
                  1,136
                  
                  
                  
                  75.72%
                  
                  
                  $
                  −
                  
                  
                  
                  −%A1
      through A3
                  
                  
                  6,351
                  
                  
                  
                  97.71%
                  
                  
                  
                  −
                  
                  
                  
                  −%Baa1
      through Baa3
                  
                  
                  19,782
                  
                  
                  
                  97.70%
                  
                  
                  
                  5,914
                  
                  
                  
                  98.65%Ba1
      through Ba3
                  
                  
                  471,781
                  
                  
                  
                  99.19%
                  
                  
                  
                  500,417
                  
                  
                  
                  100.02%B1
      through B3
                  
                  
                  397,157
                  
                  
                  
                  99.10%
                  
                  
                  
                  386,589
                  
                  
                  
                  100.01%Caa1
      through Caa3
                  
                  
                  34,617
                  
                  
                  
                  100.09%
                  
                  
                  
                  20,380
                  
                  
                  
                  100.20%Ca
                  
                  
                  −
                  
                  
                  
                  −%
                  
                  
                  
                  1,000
                  
                  
                  
                  100.00%No
      rating provided
                  
                  
                  6,683
                  
                  
                  
                  99.00%
                  
                  
                  
                  16,801
                  
                  
                  
                  99.44%Total
                  
                  $
                  937,507
                  
                  
                  
                  99.11%
                  
                  
                  $
                  931,101
                  
                  
                  
                  100.00%S&P
      ratings category:BBB+
      through BBB-
                  
                  $
                  41,495
                  
                  
                  
                  99.44%
                  
                  
                  $
                  14,819
                  
                  
                  
                  100.15%BB+
      through BB-
                  
                  
                  473,354
                  
                  
                  
                  99.03%
                  
                  
                  
                  433,624
                  
                  
                  
                  100.00%B+
      through B-
                  
                  
                  317,601
                  
                  
                  
                  99.46%
                  
                  
                  
                  405,780
                  
                  
                  
                  100.06%CCC+
      through CCC-
                  
                  
                  27,961
                  
                  
                  
                  100.02%
                  
                  
                  
                  4,207
                  
                  
                  
                  100.00%D
                  
                  
                  1,480
                  
                  
                  
                  100.00%
                  
                  
                  
                  −
                  
                  
                  
                  −%No
      rating provided
                  
                  
                  75,616
                  
                  
                  
                  97.57%
                  
                  
                  
                  72,671
                  
                  
                  
                  99.59%Total
                  
                  $
                  937,507
                  
                  
                  
                  99.11%
                  
                  
                  $
                  931,101
                  
                  
                  
                  100.00%Weighted
      average rating factor
                  
                  
                  1,946
                  
                  
                  
                  
                  
                  
                  
                  2,000




Equipment
Leases and Notes





Investments in direct financing leases
and notes as of December 31, 2008 and 2007, were as follows (in
thousands):





December
      31,2008
              
              
              2007Direct
      financing leases, net of unearned income
              
              $
              29,423
              
              
              $
              28,880Operating
      Leases
              
              
              337
              
              
              
              –Notes
      receivable
              
              
              74,705
              
              
              
              66,150Sub total
              
              
              104,465
              
              
              
              95,030Allowance
      for possible losses
              
              
              (450
              )
              
              
              −Total
              
              $
              104,015
              
              
              $
              95,030





Interest
Receivable




At December 31, 2008, we had interest
receivable of $8.4 million, which consisted of $8.4 million of interest on our
securities, loans and equipment leases and notes and $49,000 of interest earned
on escrow and sweep accounts.  At December 31, 2007, we had interest
receivable of $12.0 million, which consisted of $11.7 million of interest on our
securities, loans and equipment leases and notes and $228,000 of interest earned
on escrow and sweep accounts.  The decrease in interest receivable
resulted primarily from a $2.6 million decrease in interest on our Apidos
portfolio as a result of the decrease in LIBOR, a reference index for the rates
payable on these assets.  There was also a decrease of $912,000 in our
commercial real estate portfolio as a result of the decrease in LIBOR, a
referenced index for the rates payable on a majority of the loans in this
portfolio.  LIBOR had less of an impact on commercial real estate due
to the fact that $401.3 million of the commercial real estate loans have LIBOR
floors with a weighted average rate of 4.71%.


Principal
Paydown Receivables





At December 31, 2008 and 2007, we had
principal paydown receivables of $950,000 and $836,000, respectively, which
consisted of principal payments due on our commercial real estate loans and bank
loans.





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 52
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Other
Assets





Other assets at December 31, 2008 of
$4.1 million consisted primarily of $2.7 million of loan origination costs
associated with our trust preferred securities issuances, commercial real estate
loan portfolio and secured term facility, $125,000 of prepaid directors’ and
officers’ liability insurance, $764,000 of prepaid expenses, $424,000 of lease
payment receivables and $60,000 of other receivables.  Other assets at
December 31, 2007 of $4.9 million consisted primarily of $3.4 million of loan
origination costs associated with our trust preferred securities issuances,
revolving credit facility, commercial real estate loan portfolio and secured
term facility, $85,000 of prepaid directors’ and officers’ liability insurance,
$412,000 of prepaid expenses, $998,000 of lease payment receivables and $37,000
of other receivables.  The decrease was related to the reduction in
loan origination costs due to continued amortization of existing facilities and
a reduction in the amount of lease payment receivables.





Hedging
Instruments


Our hedges at December 31, 2008 and
2007 were fixed-for-floating interest rate swap agreements whereby we swapped
the floating rate of interest on the liabilities we hedged for a fixed rate of
interest.  In a decreasing interest rate environment, we expect that
the fair value of our hedges will continue to decrease.  We intend to
continue to seek such hedges for our floating rate debt in the
future.  Our hedges at December 31, 2008 were as follows (in
thousands):


Benchmark
      rate
                
                Notional
      value
                
                
                Strike
      rate
                
                Effective
      date
                
                Maturity
      date
                
                Fair
      valueInterest
      rate swap
                
                1
      month LIBOR
                
                $
                12,750
                
                
                
                5.27%
                
                07/25/07
                
                08/06/12
                
                $
                (1,613
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                12,965
                
                
                
                4.63%
                
                12/04/06
                
                07/01/11
                
                
                (1,053
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                28,000
                
                
                
                5.10%
                
                05/24/07
                
                06/05/10
                
                
                (1,639
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                1,880
                
                
                
                5.68%
                
                07/13/07
                
                03/12/17
                
                
                (463
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                15,235
                
                
                
                5.34%
                
                06/08/07
                
                02/25/10
                
                
                (785
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                10,435
                
                
                
                5.32%
                
                06/08/07
                
                05/25/09
                
                
                (199
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                12,150
                
                
                
                5.44%
                
                06/08/07
                
                03/25/12
                
                
                (1,490
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                7,000
                
                
                
                5.34%
                
                06/08/07
                
                02/25/10
                
                
                (361
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                44,773
                
                
                
                4.13%
                
                01/10/08
                
                05/25/16
                
                
                (2,627
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                82,638
                
                
                
                5.58%
                
                06/08/07
                
                04/25/17
                
                
                (13,157
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                1,726
                
                
                
                5.65%
                
                06/28/07
                
                07/15/17
                
                
                (288
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                1,681
                
                
                
                5.72%
                
                07/09/07
                
                10/01/16
                
                
                (280
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                3,850
                
                
                
                5.65%
                
                07/19/07
                
                07/15/17
                
                
                (642
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                4,023
                
                
                
                5.41%
                
                08/07/07
                
                07/25/17
                
                
                (621
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                17,017
                
                
                
                5.32%
                
                03/30/06
                
                09/22/15
                
                
                (1,455
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                4,054
                
                
                
                5.31%
                
                03/30/06
                
                11/23/09
                
                
                (85
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                4,643
                
                
                
                5.41%
                
                05/26/06
                
                08/22/12
                
                
                (229
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                3,220
                
                
                
                5.43%
                
                05/26/06
                
                04/22/13
                
                
                (256
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                3,033
                
                
                
                5.72%
                
                06/28/06
                
                06/22/16
                
                
                (328
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                807
                
                
                
                5.52%
                
                07/27/06
                
                07/22/11
                
                
                (36
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                2,712
                
                
                
                5.54%
                
                07/27/06
                
                09/23/13
                
                
                (250
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                5,927
                
                
                
                5.25%
                
                08/18/06
                
                07/22/16
                
                
                (667
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                3,423
                
                
                
                5.06%
                
                09/28/06
                
                08/22/16
                
                
                (272
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                2,062
                
                
                
                4.97%
                
                12/22/06
                
                12/23/13
                
                
                (180
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                3,425
                
                
                
                5.22%
                
                01/19/07
                
                11/22/16
                
                
                (236
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                1,535
                
                
                
                5.05%
                
                04/23/07
                
                09/22/11
                
                
                (72
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                2,954
                
                
                
                5.42%
                
                07/25/07
                
                04/24/17
                
                
                (263
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                7,937
                
                
                
                4.53%
                
                11/29/07
                
                10/23/17
                
                
                (662
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                5,728
                
                
                
                4.40%
                
                12/26/07
                
                11/22/17
                
                
                (457
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                4,525
                
                
                
                3.35%
                
                01/23/08
                
                12/22/17
                
                
                (180
                )Interest
      rate swap
                
                1
      month LIBOR
                
                
                12,927
                
                
                
                3.96%
                
                09/30/08
                
                09/22/15
                
                
                (743
                )Total
                
                
                
                $
                325,035
                
                
                
                5.07%
                
                
                
                
                
                $
                (31,589
                )




As of
December 31, 2007, we had entered into hedges with a notional amount of $347.9
million and maturities ranging from November 2009 to November
2017.  At December 31, 2007, the unrealized loss on our interest
rate swap agreements was $18.0 million.


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Repurchase
Agreements




We have entered into repurchase
agreements to finance our commercial real estate loans and CMBS-private
placement portfolio.  We discuss these repurchase agreements in “−
Liquidity and Capital Resources,” below.  These agreements are secured
by the financed assets and bear interest rates that have historically moved in
close relationship to LIBOR.  At December 31, 2008 and 2007, we had
established nine and nine borrowing arrangements, respectively, with various
financial institutions and at December 31, 2008, had utilized two of these
arrangements, principally our arrangement with Natixis.  Because any
repurchase transaction must be approved by the lender, and as a result of
current market conditions, we do not anticipate using these facilities for the
foreseeable future; however, the facilities remain available for use if market
conditions improve.


Collateralized
Debt Obligations





As of December 31, 2008, we had
executed six CDO transactions as follows:




·
            In
      June 2007, we closed RREF CDO 2007-1, a $500.0 million CDO transaction
      that provided financing for commercial real estate loans.  The
      investments held by RREF CDO 2007-1 collateralized $390.0 million of
      senior notes issued by the CDO vehicle, of which RCC Real Estate, Inc., or
      RCC Real Estate, a subsidiary of ours, purchased 100% of the class H
      senior notes, class K senior notes, class L senior notes and class M
      senior notes for $68.0 million and $5.0 million of the Class J senior
      notes purchased in February 2008.  In addition, RREF 2007-1 CDO
      Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million
      equity interest representing 100% of the outstanding preference
      shares.  At December 31, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  1.15%.




·
            In
      May 2007, we closed Apidos Cinco CDO, a $350.0 million CDO transaction
      that provided financing for bank loans.  The investments held by
      Apidos Cinco CDO collateralized $322.0 million of senior notes issued by
      the CDO vehicle, of which RCC Commercial Inc., or RCC Commercial, a
      subsidiary of ours, purchased a $28.0 million equity interest representing
      100% of the outstanding preference shares.  At December 31,
      2008, the notes issued to outside investors had a weighted average
      borrowing rate of 2.64%.




·
            In
      August 2006, we closed RREF CDO 2006-1, a $345.0 million CDO transaction
      that provided financing for commercial real estate loans.  The
      investments held by RREF CDO 2006-1 collateralized $308.7 million of
      senior notes issued by the CDO vehicle, of which RCC Real Estate purchased
      100% of the class J senior notes and class K senior notes for $43.1
      million.  At December 31, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  1.38%.




·
            In
      May 2006, we closed Apidos CDO III, a $285.5 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO III collateralized $262.5 million of senior notes issued by the
      CDO vehicle, of which RCC Commercial purchased $23.0 million equity
      interest representing 100% of the outstanding preference
      shares.  At December 31, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  2.55%.




·
            In
      August 2005, we closed Apidos CDO I, a $350.0 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO I collateralize $321.5 million of senior notes issued by the
      CDO vehicle, of which RCC Commercial purchased $28.5 million equity
      interest representing 100% of the outstanding preference
      shares.  At December 31, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  4.03%.




·
            In
      July 2005, we closed Ischus CDO II, a $403.0 million CDO transaction that
      provided financing for MBS and other asset-backed.  The
      investments held by Ischus CDO II collateralize $376.0 million of senior
      notes issued by the CDO vehicle, of which RCC Commercial purchased $28.5
      million equity interest representing 100% of the outstanding preference
      shares.  At November 13, 2007, we sold 10% of our equity
      interest and were no longer deemed to be the primary
      beneficiary.  We no longer had any interest in Ischus CDO II at
      December 31, 2008.





Trust
Preferred Securities





In May and September 2006, we formed
Resource Capital Trust I and RCC Trust II, respectively, for the sole purpose of
issuing and selling trust preferred securities.  In accordance with
FIN 46-R, Resource Capital Trust I and RCC Trust II are not consolidated into
our consolidated financial statements because we are not deemed to be the
primary beneficiary of either trust.  We own 100% of the common shares
of each trust, each of which issued $25.0 million of preferred shares to
unaffiliated investors.  Our rights as the holder of the common shares
of each trust are subordinate to the rights of the holders of preferred shares
only in the event of a default; otherwise, our economic and voting rights are
pari passu with the preferred shareholders.  We record each of our
investments in the trusts’ common shares of $774,000 as an investment in
unconsolidated trusts and record dividend income upon declaration by each
trust.




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In connection with the issuance and
sale of the trust preferred securities, we issued $25.8 million principal amount
of junior subordinated debentures to each of Resource Capital Trust I and RCC
Trust II.  The junior subordinated debentures debt issuance costs are
deferred in other assets in the consolidated balance sheets.  We
record interest expense on the junior subordinated debentures and amortization
of debt issuance costs in our consolidated statements of
operations.  At December 31, 2008, the junior subordinated debentures
had a weighted average borrowing rate of 6.42%.





Stockholders’
Equity





Stockholders’ equity at December 31,
2008 was $186.3 million and gave effect to $33.8 million of unrealized losses on
cash flow hedges and $46.9 million of unrealized losses on our
available-for-sale portfolio, shown as a component of accumulated other
comprehensive loss.  Stockholders’ equity at December 31, 2007 was
$271.6 million and gave effect to $15.7 million of unrealized losses on cash
flow hedges and $22.6 million of unrealized losses on our available-for-sale
portfolio, shown as a component of accumulated other comprehensive
loss.  The decrease in stockholders’ equity during the year ended
December 31, 2008 and 2007 was principally due to the decrease in the market
value of our available-for-sale securities and on our cash flow
hedges.





As a result of our “available-for-sale”
accounting treatment, unrealized fluctuations in market values of certain assets
do not impact our income determined in accordance with GAAP, or our taxable
income, but rather are reflected on our consolidated balance sheets by changing
the carrying value of the asset and stockholders’ equity under “Accumulated
Other Comprehensive Loss.”  By accounting for our assets in this
manner, we hope to provide useful information to stockholders and creditors and
to preserve flexibility to sell assets in the future without having to change
accounting methods.





REIT
Taxable Income





We calculate estimated REIT taxable
income, which is a non-GAAP financial measure, according to the requirements of
the Internal Revenue Code.  The following table reconciles net income
to estimated REIT taxable income for the periods presented (in
thousands):




Years
      EndedDecember
      31,2008
                
                
                2007
                
                
                2006Net
      income
                
                $
                (3,074
                )
                
                $
                8,890
                
                
                $
                15,606Adjustments:Share-based compensation to
      related parties
                
                
                (1,620
                )
                
                
                (500
                )
                
                
                368Incentive management fee expense
      to related party
                  paid in shares
                
                
                −
                
                
                
                −
                
                
                
                371Capital carryover
      (utilization)/losses from the sale of
                  securities
                
                
                2,000
                
                
                
                (49
                )
                
                
                11,624Net unrealized loss on the
      deconsolidation of
                  ABS-RMBS
portfolio
                
                
                −
                
                
                
                1,317
                
                
                
                −Asset impairments related to
      ABS-RMBS portfolio
                
                
                −
                
                
                
                26,277
                
                
                
                −Provision for loan and lease
      losses
                
                
                14,817
                
                
                
                3,153
                
                
                
                −Net book to tax adjustment for the
      inclusion of our
                  taxable foreign REIT
      subsidiaries
                
                
                27,115
                
                
                
                3,432
                
                
                
                121Other net book to tax
      adjustments
                
                
                16
                
                
                
                (110
                )
                
                
                (152
                )Estimated
      REIT taxable income
                
                $
                39,254
                
                
                $
                42,410
                
                
                $
                27,938





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We believe that a presentation of
estimated REIT taxable income provides useful information to investors regarding
our financial condition and results of operations as we use this measurement to
determine the amount of dividends that we are required to declare to our
stockholders in order to maintain our status as a REIT for federal income tax
purposes.  Since we, as a REIT, expect to make distributions based on
taxable earnings, we expect that our distributions may at times be more or less
than our reported GAAP earnings.  Total taxable income is the
aggregate amount of taxable income generated by us and by our domestic and
foreign taxable REIT subsidiaries.  Estimated REIT taxable income
excludes the undistributed taxable income of our domestic TRS, if any such
income exists, which is not included in REIT taxable income until distributed to
us.  There is no requirement that our domestic TRS distribute its
earning to us.  Estimated REIT taxable income, however, includes the
taxable income of our foreign TRSs because we will generally be required to
recognize and report their taxable income on a current basis.  Because
not all companies use identical calculations, this presentation of estimated
REIT taxable income may not be comparable to other similarly-titled measures of
other companies.





In order to maintain our qualification
as a REIT and to avoid corporate-level income tax on the income we distribute to
our stockholders, we intend to make regular quarterly distributions of all or
substantially all of our net taxable income to holders of our common
stock.  This requirement can impact our liquidity and capital
resources.





Liquidity
and Capital Resources




As of December 31, 2008, our principal
sources of current liquidity were funds available in existing CDO financings of
$35.9 million, $4.0 million from secured term financings, and $33.1 million of
net proceeds from the transfer of commercial real estate loans,
available-for-sale securities and commercial real estate CDO notes from our
commercial real estate term facility and short term repurchase agreements into
our CDO structures.  For the year ended December 31, 2007, our
principal sources of funds were CDO financings of $673.7 million, $7.1 million
from secured term financings, $10.1 million of net proceeds from the exercise in
January 2007 of the over-allotment option related to our December 31, 2006
follow-on offering and $5.6 million of proceeds from the exercise of
warrants.
 
 Our on-going liquidity needs consist
principally of funds to make investments, make distributions to our stockholders
and pay our operating expenses, including our management fees.  Our ability
to meet our on-going liquidity needs will be subject to our ability to generate
cash from operations and, with respect to our investments, our ability to
maintain and/or obtain additional debt financing and equity capital together
with the funds referred to above.  We have financed a substantial
portion of our portfolio investments through CDOs that essentially match the
maturity and repricing dates of these financing vehicles with the maturities and
repricing dates of our investments. We derive substantial operating cash from
our equity investments in our CDOs. which if they fail to meet certain tests,
will cease.  Through December 31, 2008, we have not experienced
difficulty in maintaining our existing CDO financing and have passed all of the
critical tests required by these financings. However, there can be no assurance
that we will continue to meet all such critical tests in the future.  If we
are unable to renew, replace or expand our sources of existing financing on
substantially similar terms, we may be unable to implement our investment
strategies successfully and may be required to liquidate portfolio investments.
 If required, a sale of portfolio investments could be at prices lower than
the carrying value of such assets, which would result in losses and reduced
income.


At February 28, 2009, there were three
primary sources for our liquidity:




·
            cash
      and cash equivalents of $10.2 million and restricted cash of $10.6 million
      comprised of $7.1 million in margin call accounts and $3.5 million related
      to our leasing portfolio;




·
            capital
      available for reinvestment in our five CDOs of $49.5 million, of which
      $8.4 million is designated to finance future funding commitments on
      commercial real estate loans; and




·
            financing
      available under existing borrowing facilities of $9.3 million from our
      three year non-recourse secured financing facility.  We also
      have $83.0 million of unused capacity under our repurchase facilities,
      which are, however, subject to approval of individual repurchase
      transactions by the repurchase
counterparties.





Our leverage ratio may vary as a result
of the various funding strategies we use.  As of December 31, 2008 and
2007, our leverage ratio was 9.1 times and 6.5 times,
respectively.  The increase in leverage ratio was primarily due to the
funding of one of the drawable notes in RREF CDO 2007-1 during 2008 and the
decrease in fair market value we recorded for some of our
investments.





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Repurchase
Agreements





In April
2007, our indirect wholly-owned subsidiary, RCC Real Estate SPE 3, LLC, entered
into a master repurchase agreement with Natixis Real Estate Capital, Inc. to be
used as a warehouse facility to finance the purchase of commercial real estate
loans and commercial mortgage-backed securities.  The maximum amount
of our borrowing capacity under the repurchase agreement was $150.0
million.  The financing provided by the agreement matures April 18,
2010 subject to a one-year extension at the option of RCC Real Estate SPE 3 and
subject further to the right of RCC Real Estate SPE 3 to repurchase the assets
held in the facility earlier.  We paid a facility fee of 0.75% of the
maximum facility amount, or $1.2 million, at closing.  In addition,
once the borrowings exceed a weighted average undrawn balance of $75.0 million
for the prior 90 day period, we must pay a non-usage fee on the unused portion
equal to the product of (i) 0.15% per annum multiplied by, (ii) the weighted
average undrawn balance during the prior 90 day period.  The
repurchase agreement is with recourse only to the assets financed, subject to
standardized exceptions relating to breaches of representations, fraud and
similar matters.  We have guaranteed RCC Real Estate SPE 3, LLC’s
performance of our obligations under the repurchase agreement.





On September 25, 2008, RCC Real Estate
SPE 3 entered into an amendment to the master repurchase agreement dated as of
April 12, 2007 with Natixis.  The amendment reduced (i) the amount of
the facility from $150,000,000 to $100,000,000 and (ii) the weighted average
undrawn balance (as defined in the agreement) threshold exempting payment of the
non-usage fee from $75,000,000 to $56,250,000.  Natixis charged us a
modification fee of 0.25% of the amended facility amount of
$100,000,000.  In connection with the new agreement, we expensed
$211,000 of previously capitalized costs and capitalized the new fee of
$250,000.  In addition, once the borrowings exceed a weighted average
undrawn balance of $75.0 million for the prior 90 day period, we must pay a
non-usage fee on the unused portion equal to the product of (i) 0.15% per annum
multiplied by (ii) the weighted average undrawn balance during the prior 90 day
period.





On
September 25, 2008, we also entered into a second amendment to our Guaranty,
dated April 12, 2007, with Natixis, pursuant to which our minimum net worth
covenant was reduced to $200,000,000 from $250,000,000.





On
November 25, 2008, RCC Real Estate SPE 3 entered into a second amendment to the
Master Repurchase Agreement with Natixis.  Pursuant to the second
amendment:




·
            We
      repaid $41.5 million of amounts outstanding under the
      facility.




·
            The
      maximum facility amount was maintained at $100.0 million, reducing on
      October 18, 2009 to the amounts then outstanding on the
      facility.




·
            Further
      repurchase agreement transactions under the facility were subject to
      Natixis’ sole discretion.




·
            The
      repurchase prices for assets remaining subject to the facility on November
      25, 2008, referred to as the Existing Assets, were set an aggregate of
      $17.0 million.  Premiums over new repurchase prices are required
      for early repurchase by RCC Real Estate SPE 3 of the Existing Assets;
      however, the premiums will reduce the repurchase price of the remaining
      Existing Assets.




·
            RCC
      Real Estate SPE 3’s obligation to pay non-usage fees was
      terminated.




·
            The
      provision permitting RCC Real Estate SPE 3 to defer its repurchase
      obligations for 12 months after the stated April 18, 2010 repurchase date
      was terminated.




·
            The
      second amendment also modified the method under which the amount of margin
      maintenance RCC Real Estate SPE 3 is required to provide is calculated and
      terminated the revolving cash withdrawal feature of the
      facility.




On March
13, 2009, RCC Real Estate SPE 3 entered into a third amendment to the master
repurchase agreement and the guaranty.  The amendment (i) reduces the
amount of the net worth we are required to maintain under our guaranty to
$165,000,000 from $200,000,000 for the period from December 31, 2008 through May
12, 2009, (ii) requires a paydown of $1.0 million of amounts outstanding under
the facility by March 17, 2009 and (iii) requires that reasonable best efforts
be used by (a) us to reduce amounts outstanding under the facility further and
(b) us and Natixis to reduce the amount of the net worth
requirement.
 At
December 31, 2008, RCC Real Estate SPE 3 had borrowed $17.1
million.  At December 31, 2008, borrowings under the repurchase
agreement were secured by commercial real estate loans with an estimated fair
value of $35.8 million and had a weighted average interest rate of one-month
LIBOR plus 2.30%, which was 3.50% at December 31, 2008.  At December
31, 2007, RCC Real Estate SPE 3 had borrowed $96.7 million.  At
December 31, 2007, borrowings under the repurchase agreement were secured by
commercial real estate loans with an estimated fair value of $154.2 million and
had a weighted average interest rate of one-month LIBOR plus 1.39%, which was
6.42% at December 31, 2007.





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 57
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 We also have entered into master
repurchase agreements with Credit Suisse Securities (USA) LLC, Barclays Capital
Inc., J.P. Morgan Securities Inc., Countrywide Securities Corporation, Deutsche
Bank Securities Inc., Morgan Stanley & Co. Incorporated, Goldman
Sachs & Co., Bear, Stearns International Limited and UBS Securities
LLC.  As of December 31, 2008, we had no amounts outstanding under the
agreements with J.P. Morgan Securities, Inc., Countrywide Securities
Corporation, Deutsche Bank Securities, Inc., Morgan Stanley & Co.
Incorporated, Goldman Sachs & Co., Bear Stearns International Limited and
UBS Securities LLC.  At December 31, 2007, we had $3.2 million
outstanding with J.P. Morgan and $1.9 million outstanding with Bear, Stearns
International Limited.
 
 As of
December 31, 2008, we had $90,000 outstanding under our agreement with Credit
Suisse Securities (USA) LLC to finance our commercial real estate CDO Notes
which was secured by commercial real estate CDO notes with a carrying value of
$3.9 million.   As of December 31, 2007, we had $14.6 million
outstanding under our agreement with Credit Suisse Securities (USA) LLC to
finance our commercial real estate CDO notes and available-for-sale securities
which were secured by commercial real estate CDO notes and available-for-sale
securities with a carrying value of $20.5 million and $9.6 million,
respectively.  These are one-month contracts.
 
 Credit
Facilities
 
 We had a
$10.0 million facility with TD Bank, N.A. that bore interest at one of two rates
elected at our option; (i) the lender’s prime rate plus a margin ranging from
0.50% to 1.50% based upon our leverage ratio; or (ii) LIBOR plus a margin
ranging from 1.50% to 2.50% based upon our leverage ratio.  The
facility expired December 31, 2008.





In March 2006, Resource Capital
Funding, LLC, a special purpose entity whose sole member is Resource TRS, Inc.,
our wholly-owned subsidiary, entered into a Receivables Loan and Security
Agreement as the borrower among LEAF Financial Corporation as the servicer,
Black Forest Funding Corporation as the lender, Bayerische Hypo-Und Vereinsbank
AG, New York Branch as the agent, U.S. Bank National Association, as the
custodian and the agent’s bank, and Lyon Financial Services, Inc. (d/b/a U.S.
Bank Portfolio Services), as the backup servicer.  This agreement is a
$100.0 million secured term credit facility used to finance the purchase of
equipment leases and notes.  At December 31, 2008 and 2007, there were
$95.7 million and $91.7 million, respectively, outstanding under the
facility.  See “ – Financial Condition – Credit
Facility.”





The facility bears interest at one of
two rates, determined by asset class.




·
            Pool
      A—one-month LIBOR plus 1.10%; or




·
            Pool
      B—one-month LIBOR plus 0.80%.




The weighted average interest rate was
4.14% and 6.55% at December 31, 2008 and 2007, respectively.
 
 Upon a default, the program will
terminate and Resource Capital Funding must cease purchasing receivables from
Resource TRS and the lender may declare all loans made and any yield or fees due
thereon to be immediately due and payable.


We received a waiver for the period
ended December 31, 2007 from Bayerische Hypo- und Vereinsbank AG with respect to
our non-compliance with the tangible net worth covenant.  Under the
covenant, Resource America, the parent of our Manager, is required to maintain a
consolidated net worth (stockholder’s equity) of at least $175.0 million plus
90% of the net proceeds of any capital transactions, minus all amounts (not to
exceed $50,000,000) paid by Resource America to repurchase any outstanding
shares of common or preferred stock of Resource America, measured by each
quarter end, as further described in the agreement.




On June 23, 2008, the facility was
amended to base the net worth test on LEAF Financial Corporation, or LEAF, and
to change the measure of net worth to not less than the sum of (i) $17,000,000,
plus (ii) 50% of the aggregate net income of LEAF for each fiscal quarter
beginning with the fiscal quarter ended September 30, 2008.  See Note
13 of the notes to our consolidated financial statements in Item 8 of this
report regarding our relationship with LEAF.  As of December 31, 2008,
LEAF was in compliance with all covenants.


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Contractual
Obligations and Commitments





The table below summarizes our
contractual obligations as of December 31, 2008.  The table below
excludes contractual commitments related to our derivatives, which we discuss in
Item 7A − “Quantitative and Qualitative Disclosures about Market Risk,” and the
management agreement that we have with our Manager, which we discuss in Item 1 −
“Business” and Item 13 − “Certain Relationships and Related Transactions”because those contracts
do not have fixed and determinable payments.




Contractual
      Commitments
                      (dollars
      in thousands)Payments
      due by periodTotal
                    
                    
                    Less
      than
                        1
      year
                    
                    
                    1 –
      3 years
                    
                    
                    3 –
      5 years
                    
                    
                    More
      than
                        5
      yearsRepurchase
      agreements(1)
                    
                    $
                    17,112
                    
                    
                    $
                    17,112
                    
                    
                    $
                    −
                    
                    
                    $
                    −
                    
                    
                    $
                    −CDOs
                    
                    
                    1,535,389
                    
                    
                    
                    −
                    
                    
                    
                    −
                    
                    
                    
                    −
                    
                    
                    
                    1,535,389
                    (2)Secured
      term facility
                    
                    
                    95,714
                    
                    
                    
                    −
                    
                    
                    
                    95,714
                    (3)
                    
                    
                    −
                    
                    
                    
                    −Junior
      subordinated debentures held by
                      unconsolidated trusts that
      issued trust
                      preferred
    securities
                    
                    
                    51,548
                    
                    
                    
                    −
                    
                    
                    
                    −
                    
                    
                    
                    −
                    
                    
                    
                    51,548
                    (4)Base
      management fees(5)
                    
                    
                    4,370
                    
                    
                    
                    4,370
                    
                    
                    
                    −
                    
                    
                    
                    −
                    
                    
                    
                    −Total
                    
                    $
                    1,704,133
                    
                    
                    $
                    21,482
                    
                    
                    $
                    95,714
                    
                    
                    $
                    −
                    
                    
                    $
                    1,586,937





(1)
            Includes
      accrued interest of $22,000.




(2)
            Contractual
      commitment does not include $17.5 million, $19.0 million, $17.5 million,
      $19.6 million and $36.9 million of interest expense payable through the
      non-call dates of July 2010, May 2011, June 2011, August 2011 and June
      2012, respectively, on Apidos CDO I, Apidos Cinco CDO, Apidos CDO III,
      RREF 2006-1 and RREF 2007-1.  The non-call date represents the
      earliest period under which the CDO assets can be sold, resulting in
      repayment of the CDO notes.




(3)
            Contractual
      commitment does not include $5.0 million of interest expense payable
      through the facility maturity date of March 2010 on our secured term
      facility with Bayerische Hypo- und Vereinsbank
  AG.




(4)
            Contractual
      commitment does not include $7.4 million and $9.0 million of interest
      expense payable through the non-call dates of June 2011 and October 2011,
      respectively, on our trust preferred
securities.




(5)
            Calculated
      only for the next 12 months based on our current equity, as defined in our
      management agreement.




At December 31, 2008, we had 31
interest rate swap contracts with a notional value of $325.0
million.  These contracts are fixed-for-floating interest rate swap
agreements under which we contracted to pay a fixed rate of interest for the
term of the hedge and will receive a floating rate of interest.  See
“– Financial Condition – Hedging Instruments.”  As of December 31,
2008, the average fixed pay rate of our interest rate hedges was 5.07% and our
receive rate was one-month LIBOR, or 0.71%.




Off-Balance
Sheet Arrangements
 
 As of December 31, 2008, we did not
maintain any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities or variable interest entities, established for the
purpose of facilitating off-balance sheet arrangements or contractually narrow
or limited purposes.  Further, as of December 31, 2008, we had not
guaranteed any obligations of unconsolidated entities or entered into any
commitment or letter of intent to provide additional funding to any such
entities.
 We have certain unfunded commitments
related to our commercial real estate loan portfolio that we may be required to
fund in the future.  Our unfunded commitments generally fall into two
categories: (1) pre-approved capital improvement projects; and (2) new
or additional construction costs subject, in each case, to the borrower meeting
specified criteria.  Upon completion of the improvements or
construction, we would receive additional loan interest income on the advanced
amount.  As of December 31, 2008, we had 14 loans with unfunded
commitments totaling $26.6 million, of which $8.7 million will be
funded by restricted cash in RREF CDO 2007-1.


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Critical
Accounting Policies and Estimates





Our consolidated financial statements
are prepared by management in accordance with GAAP.  The preparation
of financial statements in conformity with GAAP requires that we make estimates
and assumptions that may affect the value of our assets or liabilities and our
financial results.  We believe that certain of our policies are
critical because they require us to make difficult, subjective and complex
judgments about matters that are inherently uncertain.  The critical
policies summarized below relate to classifications of investment securities,
revenue recognition, accounting for derivative financial instruments and hedging
activities, and stock-based compensation.  We have reviewed these
accounting policies with our board of directors and believe that all of the
decisions and assessments upon which our financial statements are based were
reasonable at the time made based upon information available to us at the
time.  We rely on the Manager’s experience and analysis of historical
and current market data in order to arrive at what we believe to be reasonable
estimates.





Classifications
of Investment Securities




Statement of Financial Accounting
Standards, or SFAS, 115, “Accounting for Certain Investments in Debt and Equity
Securities,” requires us to classify our investment portfolio as either trading
investments, available-for-sale investments or held-to-maturity
investments.  Although we generally plan to hold most of our
investments to maturity, we may, from time to time, sell any of our investments
due to changes in market conditions or in accordance with our investment
strategy.  Accordingly, SFAS 115 requires us to classify all of our
investment securities as available-for-sale.  We report all
investments classified as available-for-sale at fair value, with unrealized
gains and losses reported as a component of accumulated other comprehensive
income (loss) in stockholders’ equity.  As of December 31, 2008 and
2007, we had aggregate unrealized losses on our available-for-sale securities of
$46.9 million and $22.6 million, respectively, which if not recovered, may
result in the recognition of future losses..  Fair value is determined
by taking a weighted average of the following three measures:
  i.
              an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      historical analysis of underlying loan
  performance;
  ii.
                    quotes
      on similar-vintage, higher rated, more actively traded CMBS securities
      adjusted for the lower subordination level of our securities;
      and
  iii.
              dealer
      quotes on our securities for which there is not an active
      market.


We evaluate our available-for-sale
investments for other-than-temporary impairment charges on available-for-sale
securities under SFAS 115 in accordance with Emerging Issues Task Force, or
EITF, 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments.”  SFAS 115 and EITF 03-1 require an investor
to determine when an investment is considered impaired (i.e., decline in fair
value below its amortized cost), evaluate whether the impairment is other than
temporary (i.e., the investment value will not be recovered over its remaining
life), and, if the impairment is other than temporary, recognize an impairment
loss equal to the difference between the investment’s cost and its fair
value.  The guidance also includes accounting considerations
subsequent to the recognition of other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments.  EITF 03-1 also includes disclosure
requirements for investments in an unrealized loss position for which
other-than-temporary impairments have not been recognized.




We record investment securities
transactions on the trade date.  We record purchases of newly issued
securities when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement
date.  We determine realized gains and losses on investment securities
on the specific identification method.
  Accounting
for Derivative Financial Instruments and Hedging Activities
 
 Our policies permit us to enter into
derivative contracts, including interest rate swaps and interest rate caps as a
means of mitigating our interest rate risk on forecasted interest expense
associated with the benchmark rate on forecasted rollover/reissuance of
repurchase agreements or the interest rate repricing of repurchase agreements,
or other similar hedged items, for a specified future time
period.


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As of December 31, 2008, we had engaged
in 31 interest rate swaps with a notional value of $325.0 million and a fair
value of ($31.6) million to seek to mitigate our interest rate risk for
specified future time periods as defined in the terms of the hedge
contracts.  The contracts we have entered into have been designated as
cash flow hedges and are evaluated at inception and on an ongoing basis in order
to determine whether they qualify for hedge accounting under SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended and
interpreted.  The hedge instrument must be highly effective in
achieving offsetting changes in the hedged item attributable to the risk being
hedged in order to qualify for hedge accounting.  A hedge instrument
is highly effective if changes in the fair value of the derivative provide an
offset to at least 80% and not more than 125% of the changes in fair value or
cash flows of the hedged item attributable to the risk being
hedged.  The futures and interest rate swap contracts are carried on
our consolidated
balance sheets at fair value.  Any ineffectiveness which arises during
the hedging relationship must be recognized in interest expense during the
period in which it arises.  Before the end of the specified hedge time
period, the effective portion of all contract gain and losses (whether realized
or unrealized) is recorded in other comprehensive income or
loss.  Realized gains and losses on futures contracts are reclassified
into earnings as an adjustment to interest expense during the specified hedge
time period.  Realized gains and losses on the interest rate hedges
are reclassified into earnings as an adjustment to interest expense during the
period after the swap repricing date through the remaining maturity of the
swap.  For taxable income purposes, realized gains and losses on
futures and interest rate cap and swap contracts are reclassified into earnings
over the term of the hedged transactions as designated for tax.




We are not required to account for
derivative contracts using hedge accounting as described above.  If we
decided not to designate the derivative contracts as hedges and to monitor their
effectiveness as hedges, or if we entered into other types of financial
instruments that did not meet the criteria to be designated as hedges, changes
in the fair values of these instruments would be recorded in the statement of
operations, potentially resulting in increased volatility in our
earnings.





Income
Taxes





We expect to operate in a manner that
will allow us to qualify and be taxed as a REIT and to comply with the
provisions of the Internal Revenue Code with respect thereto.  A REIT
is generally not subject to federal income tax on that portion of its REIT
taxable income which is distributed to its stockholders, provided, that at least
90% of REIT taxable income is distributed and certain other requirements are
met.  If we fail to meet these requirements and do not qualify for
certain statutory relief provisions, we would be subject to federal income
tax.  We have a wholly-owned domestic subsidiary, Resource TRS, that
we and Resource TRS have elected to be treated as a taxable REIT
subsidiary.  For financial reporting purposes, current and deferred
taxes are provided for on the portion of earnings recognized by us with respect
to our interest in Resource TRS, because it is taxed as a regular subchapter C
corporation under the Internal Revenue Code.  During the years ended
December 31, 2008 and 2007, we recorded a $241,000 benefit and a $338,000
provision, respectively, for income taxes related to earnings of Resource
TRS.





Apidos CDO I, Apidos CDO III, Apidos
Cinco CDO and Ischus CDO II, our foreign TRSs, are organized as exempted
companies incorporated with limited liability under the laws of the Cayman
Islands, and are generally exempt from federal and state income tax at the
corporate level because their activities in the United States are limited to
trading in stock and securities for their own account. Therefore, despite their
status as TRSs, they generally will not be subject to corporate tax on their
earnings and no provision from income taxes is required; however because they
are “controlled foreign corporations,” we will generally be required to include
their current taxable income in our calculation of REIT taxable
income.




Allowance
for Loan and Lease Losses





We maintain an allowance for loan and
lease losses.  Loans and leases held for investment are first
individually evaluated for impairment, and then evaluated as a homogeneous pool
as loans with substantially similar characteristics for
impairment.  The reviews are performed at least
quarterly.





We consider an individual loan to be
impaired when, based on current information and events, management believes it
is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement.  When a loan is impaired, the
allowance for loan losses is increased by the amount of the excess of the
amortized cost basis of the loan over its fair value.  Fair value may
be determined based the present value of estimated cash flows; on market price,
if available; or the fair value of the collateral less estimated disposition
costs.  When a loan, or a portion thereof, is considered uncollectible
and pursuit of the collection is not warranted, then we will record a charge-off
or write-down of the loan against the allowance for credit
losses.  The balance of impaired loans and leases was $23.9 million
and $17.4 million at December 31, 2008 and 2007, respectively.  The
total balance of impaired loans and leases with a valuation allowance at
December 31, 2008 and 2007 was $23.9 million and $17.0 million,
respectively.  All of the loans deemed impaired at December 31, 2008
and 2007 have an associated valuation allowance.  The total balance of
impaired leases without a specific valuation allowance was $0 and $359,000 at
December 31, 2008 and 2007, respectively.  The specific valuation
allowance related to these impaired loans and leases was $19.6 million and $2.3
million at December 31, 2008 and 2007, respectively.  The average
balance of impaired loans and leases was $24.9 million and $4.3 million during
2008 and 2007, respectively.  We did not recognize any income on
impaired loans and leases during 2008 and 2007 once each individual loan or
lease became impaired.





An impaired loan or lease may remain on
accrual status during the period in which we are pursuing repayment of the loan
or lease; however, the loan or lease would be placed on non-accrual status at
such time as either (i) management believes that scheduled debt service payments
will not be met within the coming 12 months; (ii) the loan or lease becomes 90
days delinquent; (iii) management determines the borrower is incapable of, or
has ceased efforts toward, curing the cause of the impairment; or (iv) the net
realizable value of the loan’s underlying collateral approximates our carrying
value of such loan.  While on non-accrual status, we recognize
interest income only when an actual payment is received.


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The following table shows the changes
in the allowance for loan loss (in thousands):





Allowance
      for loan loss at December 31, 2006
                    
                    $
                    −Reserve charged to
      expense
                    
                    
                    5,918Loans
    charged-off
                    
                    
                    −Recoveries
                    
                    
                    −Allowance
      for loan loss at December 31, 2007
                    
                    
                    5,918Reserve charged to
      expense
                    
                    
                    45,259Loans
    charged-off
                    
                    
                    (7,310
                    )Recoveries
                    
                    
                    −Allowance
      for loan loss at December 31, 2008
                    
                    $
                    43,867





The following table shows the changes
in the allowance for lease loss (in thousands):





Allowance
      for lease loss at December 31, 2006
                    
                    $
                    −Reserve charged to
      expense
                    
                    
                    293Lease
    charged-off
                    
                    
                    (293
                    )Recoveries
                    
                    
                    −Allowance
      for lease loss at December 31, 2007
                    
                    
                    −Reserve charged to
      expense
                    
                    
                    901Lease
    charged-off
                    
                    
                    (451
                    )Recoveries
                    
                    
                    −Allowance
      for lease loss at December 31, 2008
                    
                    $
                    450




Variable
Interest Entities





In December 2003, the FASB issued FIN
46-R.  FIN 46-R addresses the application of Accounting Research
Bulletin 51, ‘‘Consolidated Financial Statements,’’ to a variable interest
entity, or VIE, and requires that the assets, liabilities and results of
operations of a VIE be consolidated into the financial statements of the
enterprise that has a controlling financial interest in it. The interpretation
provides a framework for determining whether an entity should be evaluated for
consolidation based on voting interests or significant financial support
provided to the entity which we refer to as variable interests.  We
consider all counterparties to a transaction to determine whether a counterparty
is a VIE and,
if so, whether our involvement with the entity results in a variable interest in
the entity.  We perform analyses to determine whether we are the
primary beneficiary.  As of December 31, 2008, we determined that
Resource Real Estate Funding CDO 2007-1, Resource Real Estate Funding CDO
2006-1, Apidos CDO I, Apidos CDO III and Apidos Cinco CDO were VIEs and that we
were the primary beneficiary of Resource Real Estate Funding CDO 2007-1,
Resource Real Estate Funding CDO 2006-1, Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO.




Recent
Accounting Pronouncements




In
January 2009, the FASB issued Staff Position, or FSP, Emerging Issues Task
Force, or EITF, 99-20-1,“Amendments to the Impairment
Guidance of EITF Issue No. 99-20.”  FSP 99-20-1amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
That Continue to Be Held by a Transferor in Securitized Financial Assets,” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. FSP 99-20-1is effective, on a
prospective basis, for interim and annual reporting periods ending after
December 15, 2008.  Adoption did not have a material impact on our
consolidated financial statements.  
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In October 2008, the FASB issued FSP
157-3, “Determining the Fair Value of a Financial Asset in a Market that is Not
Active.”  FSP 157-3 clarifies the application of SFAS 157 “Fair Value
Measurements,” or SFAS 157 in an inactive market.  The provisions of
FSP 157-3 were effective immediately.  The adoption of FSP FAS 157-3
has been reflected in our determination of fair value in our consolidated
financial statements.
 
 In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement 133
and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161.”  FSP FAS 133-1 and FIN 45-4 is intended
to improve disclosures about credit derivatives by requiring more information
about the potential adverse effects of changes in credit risk on financial
position, financial performance, and cash flows of the sellers of credit
derivatives.  FSP FAS 133-1 and FIN 45-4 is effective for reporting
periods ending after November 15, 2008.  Adoption did not have a
material effect on our consolidated financial statements.
 
 In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.”  FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
“Earnings per Share.”  Under the guidance in FSP EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method.  FSP EITF 03-6-1 is effective for us in fiscal
2009.  After the effective date of FSP EITF 03-6-1, all prior-period
earnings per share data presented must be adjusted
retrospectively.  We are currently evaluating the potential impact of
adopting FSP EITF 03-6-1.
  In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.”  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework or hierarchy for selecting accounting
principles to be used in preparing financial statements in conformity with U.S.
GAAP.  We do not expect that SFAS 162 will have an impact on our
consolidated financial statements.


In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of SFAS 133.”  This new standard
requires enhanced disclosures for derivative instruments, including those used
in hedging activities.  It is effective for fiscal years and interim
periods beginning after November 15, 2008 and will be applicable to us in the
first quarter of fiscal 2009.  We are evaluating the potential impact
that the adoption of SFAS 161 may have on our financial statements.





In
February 2008, the FASB issued FSP 140-3, “Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions,” which provides guidance on
accounting for a transfer of a financial asset and repurchase
financing.  FSP 140-3 is effective for fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years.  We
do not expect that FSP FAS 140-3 will have a material effect on our consolidated
financial statements.





In December 2007, the FASB issued SFAS
160, “Noncontrolling Interests in Consolidated Financial
Statements.”  SFAS 160 amends Accounting Research Bulletin 51 to
establish accounting and reporting standards for the noncontrolling (minority)
interest in a subsidiary and for the deconsolidation of a
subsidiary.  It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  We are
currently evaluating the potential impact, if any, that SFAS 160 will have on
our consolidated financial statements.  SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
which replaces SFAS No. 141.  SFAS 141R, among other things,
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired
(including intangibles), the liabilities assumed and any noncontrolling interest
in the acquired entity. Additionally, SFAS 141R requires that all transaction
costs be expensed as incurred.  The Company is currently evaluating
the effect, if any, that SFAS 141R will have on its financial
statements.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008.





Inflation





Virtually all of our assets and
liabilities are interest rate sensitive in nature.  As a result,
interest rates and other factors influence our performance far more so than does
inflation.  Changes in interest rates do not necessarily correlate
with inflation rates or changes in inflation rates.  Our financial
statements are prepared in accordance with GAAP and our distributions are
determined by our board of directors based primarily by our net income as
calculated for tax purposes; in each case, our activities and balance sheet are
measured with reference to historical cost and/or fair market value without
considering inflation.





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ITEM
7A.                     QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As of
December 31, 2008 and 2007, the primary component of our market risk was
interest rate risk, as described below. While we do not seek to avoid risk
completely, we do seek to assume risk that can be quantified from historical
experience, to actively manage that risk, to earn sufficient compensation to
justify assuming that risk and to maintain capital levels consistent with the
risk we undertake or to which we are exposed.





Effect
on Fair Value





A component of interest rate risk is
the effect changes in interest rates will have on the market value of our
assets.  We face the risk that the market value of our assets will
increase or decrease at different rates than that of our liabilities, including
our hedging instruments.





We primarily assess our interest rate
risk by estimating the duration of our assets and the duration of our
liabilities.  Duration essentially measures the market price
volatility of financial instruments as interest rates change.  We
generally calculate duration using various financial models and empirical
data.  Different models and methodologies can produce different
duration numbers for the same securities.




The following sensitivity analysis
tables show, at December 31, 2008, the estimated impact on the fair value of our
interest rate-sensitive investments and liabilities of changes in interest
rates, assuming rates instantaneously fall 100 basis points and rise 100 basis
points (dollars in thousands):




December
      31, 2008Interest
      rates fall 100
                    basis
      points
                
                
                Unchanged
                
                
                Interest
      rates rise 100
                    basis
      pointsCMBS
      – private placement (1)Fair value
                
                $
                14,880
                
                
                $
                14,173
                
                
                $
                13,513Change in fair
    value
                
                $
                707
                
                
                $
                −
                
                
                $
                (660
                )Change as a percent of fair
      value
                
                
                4.99
                %
                
                
                −
                
                
                
                4.66
                %Repurchase
      and warehouse agreements (2)Fair value
                
                $
                112,804
                
                
                $
                112,804
                
                
                $
                112,804Change in fair
    value
                
                $
                −
                
                
                $
                −
                
                
                $
                −Change as a percent of fair
      value
                
                
                −
                
                
                
                −
                
                
                
                −Hedging
      instrumentsFair value
                
                $
                (53,727
                )
                
                $
                (31,589
                )
                
                $
                (26,600
                )Change in fair
    value
                
                $
                (22,138
                )
                
                $
                −
                
                
                $
                4,989Change as a percent of fair
      value
                
                
                N/M
                
                
                
                −
                
                
                
                N/M


For purposes of the table, we have
excluded our investments with variable interest rates that are indexed to
LIBOR.  Because the variable rates on these instruments are short-term
in nature, we are not subject to material exposure to movements in fair value as
a result of changes in interest rates.





It is important to note that the impact
of changing interest rates on fair value can change significantly when interest
rates change beyond 100 basis points from current levels.  Therefore,
the volatility in the fair value of our assets could increase significantly when
interest rates change beyond 100 basis points from current levels.  In
addition, other factors impact the fair value of our interest rate-sensitive
investments and hedging instruments, such as the shape of the yield curve,
market expectations as to future interest rate changes and other market
conditions.  Accordingly, in the event of changes in actual interest
rates, the change in the fair value of our assets would likely differ from that
shown above and such difference might be material and adverse to our
stockholders.





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Risk
Management





To the extent consistent with
maintaining our status as a REIT, we seek to manage our interest rate risk
exposure to protect our portfolio of fixed-rate commercial real estate mortgages
and CMBS and related debt against the effects of major interest rate
changes.  We generally seek to manage our interest rate risk
by:




·
            monitoring
      and adjusting, if necessary, the reset index and interest rate related to
      our mortgage-backed securities and our
  borrowings;




·
            attempting
      to structure our borrowing agreements for our CMBS to have a range of
      different maturities, terms, amortizations and interest rate adjustment
      periods; and




·
            using
      derivatives, financial futures, swaps, options, caps, floors and forward
      sales, to adjust the interest rate sensitivity of our fixed-rate
      commercial real estate mortgages and CMBS and our
    borrowing.





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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA








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Report of
Independent Registered Public Accounting Firm










Board of
Directors and Stockholders
 Resource
Capital Corp.
 We have
audited the accompanying consolidated balance sheets of Resource Capital Corp.
and subsidiaries (a Maryland Corporation) (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. Our audits of the basic financial statements included
the financial statement schedules listed in the index appearing under 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 these 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 audits 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Resource Capital Corp. and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.  Also, in our opinion, the
related 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 Resource Capital Corp. and
subsidiaries’ internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 16, 2009 expressed an
unqualified opinion.
 
 
 /s/ Grant
Thornton LLP
 
 
 
 Philadelphia,
Pennsylvania
 March 16,
2009


(Back to Index)
 67
 (Back to Index)


RESOURCE CAPITAL CORP.ANDSUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share and per share data)







December
      31,2008
              
              
              2007ASSETSCash and cash
      equivalents
              
              $
              14,583
              
              
              $
              6,029Restricted cash
              
              
              60,394
              
              
              
              119,482Investment securities
      available-for-sale, pledged as collateral, at fair value
              
              
              22,466
              
              
              
              65,464Investment securities
      available-for-sale, at fair value
              
              
              6,794
              
              
              
              −Loans, pledged as collateral and
      net of allowances of $43.9 million and
                $5.9 million
              
              
              1,712,779
              
              
              
              1,766,639Direct financing leases and
      notes, pledged as collateral and net of allowance of
                $450,000 and $0 and net of
      unearned income
              
              
              104,015
              
              
              
              95,030Investments in unconsolidated
      entities
              
              
              1,548
              
              
              
              1,805Interest
    receivable
              
              
              8,440
              
              
              
              11,965Principal paydown
      receivables
              
              
              950
              
              
              
              836Other assets
              
              
              4,062
              
              
              
              4,898Total assets
              
              $
              1,936,031
              
              
              $
              2,072,148LIABILITIESBorrowings
              
              $
              1,699,763
              
              
              $
              1,760,969Distribution
    payable
              
              
              9,942
              
              
              
              10,366Accrued interest
      expense
              
              
              4,712
              
              
              
              7,209Derivatives, at fair
      value
              
              
              31,589
              
              
              
              18,040Accounts payable and other
      liabilities
              
              
              3,720
              
              
              
              3,958Total
    liabilities
              
              
              1,749,726
              
              
              
              1,800,542STOCKHOLDERS’
      EQUITYPreferred stock, par value
      $0.001:  100,000,000 shares authorized;
                no shares issued and
      outstanding
              
              
              −
              
              
              
              −Common stock, par value
      $0.001:  500,000,000 shares authorized;
                25,344,867 and 25,103,532
      shares issued and outstanding
                (including 452,310 and 581,493
      unvested restricted shares)
              
              
              26
              
              
              
              25Additional paid-in
      capital
              
              
              356,103
              
              
              
              355,205Accumulated other comprehensive
      loss
              
              
              (80,707
              )
              
              
              (38,323
              )Distributions in excess of
      earnings
              
              
              (89,117
              )
              
              
              (45,301
              )Total stockholders’
      equity
              
              
              186,305
              
              
              
              271,606TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              1,936,031
              
              
              $
              2,072,148




The accompanying notes are an integral
part of these financial statements


(Back to Index)
 68
 (Back to Index)


RESOURCE CAPITAL CORP.ANDSUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


December
      31,2008
                  
                  
                  2007
                  
                  
                  2006REVENUESInterest
Income:Loans
                  
                  $
                  119,042
                  
                  
                  $
                  138,078
                  
                  
                  $
                  70,588Securities
                  
                  
                  4,444
                  
                  
                  
                  28,810
                  
                  
                  
                  56,048Leases
                  
                  
                  8,180
                  
                  
                  
                  7,553
                  
                  
                  
                  5,259Interest income –
      other
                  
                  
                  2,675
                  
                  
                  
                  2,554
                  
                  
                  
                  5,180Total interest
    income
                  
                  
                  134,341
                  
                  
                  
                  176,995
                  
                  
                  
                  137,075Interest expense
                  
                  
                  79,619
                  
                  
                  
                  121,564
                  
                  
                  
                  101,851Net interest
    income
                  
                  
                  54,722
                  
                  
                  
                  55,431
                  
                  
                  
                  35,224OPERATING
      EXPENSESManagement fees − related
      party
                  
                  
                  6,301
                  
                  
                  
                  6,554
                  
                  
                  
                  4,838Equity compensation – related
      party
                  
                  
                  540
                  
                  
                  
                  1,565
                  
                  
                  
                  2,432Professional
      services
                  
                  
                  3,349
                  
                  
                  
                  2,911
                  
                  
                  
                  1,881Insurance
    expense
                  
                  
                  641
                  
                  
                  
                  466
                  
                  
                  
                  498General and
      administrative
                  
                  
                  1,848
                  
                  
                  
                  1,581
                  
                  
                  
                  1,428Income tax (benefit)
      expense
                  
                  
                  (241
                  )
                  
                  
                  338
                  
                  
                  
                  67Total operating
      expenses
                  
                  
                  12,438
                  
                  
                  
                  13,415
                  
                  
                  
                  11,144NET
      OPERATING INCOME
                  
                  
                  42,284
                  
                  
                  
                  42,016
                  
                  
                  
                  24,080OTHER
      (EXPENSES) REVENUESNet realized losses on sales of
      investments
                  
                  
                  (1,637
                  )
                  
                  
                  (15,098
                  )
                  
                  
                  (8,627
                  )Gain on deconsolidation of
      VIE
                  
                  
                  −
                  
                  
                  
                  14,259
                  
                  
                  
                  −Provision for loan and lease
      losses
                  
                  
                  (46,160
                  )
                  
                  
                  (6,211
                  )
                  
                  
                  −Asset
    impairments
                  
                  
                  −
                  
                  
                  
                  (26,277
                  )
                  
                  
                  −Gain on the extinguishment of
      debt
                  
                  
                  1,750
                  
                  
                  
                  −
                  
                  
                  
                  −Gain on the settlement of
      loan
                  
                  
                  574
                  
                  
                  
                  −
                  
                  
                  
                  −Other income
                  
                  
                  115
                  
                  
                  
                  201
                  
                  
                  
                  153Total expenses
                  
                  
                  (45,358
                  )
                  
                  
                  (33,126
                  )
                  
                  
                  (8,474
                  )NET
      (LOSS) INCOME
                  
                  $
                  (3,074
                  )
                  
                  $
                  8,890
                  
                  
                  $
                  15,606NET
      (LOSS) INCOME PER SHARE – BASIC
                  
                  $
                  (0.12
                  )
                  
                  $
                  0.36
                  
                  
                  $
                  0.89NET
      (LOSS) INCOME PER SHARE – DILUTED
                  
                  $
                  (0.12
                  )
                  
                  $
                  0.36
                  
                  
                  $
                  0.87WEIGHTED
      AVERAGE NUMBER OF SHARES
                    OUTSTANDING –
      BASIC
                  
                  
                  24,757,386
                  
                  
                  
                  24,610,468
                  
                  
                  
                  17,538,273WEIGHTED
      AVERAGE NUMBER OF SHARES
                    OUTSTANDING –
      DILUTED
                  
                  
                  24,757,386
                  
                  
                  
                  24,860,184
                  
                  
                  
                  17,881,355DIVIDENDS
      DECLARED PER SHARE
                  
                  $
                  1.60
                  
                  
                  $
                  1.62
                  
                  
                  $
                  1.49
  The
accompanying notes are an integral part of these financial
statements
  (Back to Index)
 69
 (Back to Index)




RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
 Years
Ended December 31, 2008, 2007 and 2006
 (in
thousands, except share and per share data)
  Shares
                
                
                Amount
                
                
                Additional
      Paid-In Capital
                
                
                Deferred
                    Equity
                    Compensation
                
                
                Accumulated
                    Other
      Comprehensive Loss
                
                
                Retained
      Earnings
                
                
                Distributions
      in Excess of Earnings
                
                
                Treasury
      Shares
                
                
                Total
      Stockholders’ Equity
                
                
                Comprehensive
      LossBalance,
      December 31, 2005
                
                15,682,334
                
                
                $
                16
                
                
                $
                220,161
                
                
                $
                (2,684
                )
                
                $
                (19,581
                )
                
                $
                −
                
                
                $
                (2,579
                )
                
                $
                −
                
                
                $
                195,333Net
      proceeds from common
                  stock
      offerings
                
                8,120,800
                
                
                
                8
                
                
                
                123,213
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                123,221
                
                
                
                −Offering
      costs
                
                −
                
                
                
                −
                
                
                
                (2,988
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (2,988
                )
                
                
                −Stock
      based compensation
                
                18,300
                
                
                
                −
                
                
                
                254
                
                
                
                (60
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                194
                
                
                
                −Stock
      based compensation,
                  fair valueadjustment
                
                −
                
                
                
                −
                
                
                
                760
                
                
                
                (760
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −Amortization
      of stock
                  based
      compensation
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                2,432
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                2,432
                
                
                
                −Net
      income
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                15,606
                
                
                
                −
                
                
                
                −
                
                
                
                15,606
                
                
                $
                15,606Available-for-sale
      securities,
                  fair
      valueadjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                16,325
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                16,325
                
                
                
                16,325Designated
      derivatives,
                  fair  value adjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (6,023
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (6,023
                )
                
                
                (6,023
                )Distributions
      on common stock
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (15,606
                )
                
                
                (10,943
                )
                
                
                −
                
                
                
                (26,549
                )Comprehensive
      income
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                $
                25,908Balance,
      December 31, 2006
                
                23,821,434
                
                
                
                24
                
                
                
                341,400
                
                
                
                (1,072
                )
                
                
                (9,279
                )
                
                
                −
                
                
                
                (13,522
                )
                
                
                −
                
                
                
                317,551Net
      proceeds from common
                  stock offerings
                
                650,000
                
                
                
                1
                
                
                
                10,134
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                10,135
                
                
                
                −Offering
      costs
                
                −
                
                
                
                −
                
                
                
                (406
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (406
                )
                
                
                −Reclassification
      of deferred
                  equity compensation
                
                −
                
                
                
                −
                
                
                
                (1,072
                )
                
                
                1,072
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −Stock
      based compensation
                
                526,448
                
                
                
                −
                
                
                
                723
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                723
                
                
                
                −Stock
      based compensation,
                  fair value adjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −Exercise
      of common stock
                  warrants
                
                375,547
                
                
                
                −
                
                
                
                5,632
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                5,632
                
                
                
                −Amortization
      of stock
                  based compensation
                
                −
                
                
                
                −
                
                
                
                1,565
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                1,565
                
                
                
                −Retirement
      of treasury shares
                
                (263,000
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (2,771
                )
                
                
                (2,771
                )Forfeiture
      of unvested stock
                
                (6,897
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −Net
      income
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                8,890
                
                
                
                −
                
                
                
                −
                
                
                
                8,890
                
                
                
                8,890Available-for-sale
      securities,
                  fair valueadjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (16,544
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (16,544
                )
                
                
                (16,544
                )Designated
      derivatives, fair
                  value adjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (12,500
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (12,500
                )
                
                
                (12,500
                )Distributions
      on common stock
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (8,890
                )
                
                
                (31,779
                )
                
                
                −
                
                
                
                (40,669
                )Comprehensive
      loss
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                $
                (20,154
                )Balance,
      December 31, 2007
                
                25,103,532
                
                
                
                25
                
                
                
                357,976
                
                
                
                −
                
                
                
                (38,323
                )
                
                
                −
                
                
                
                (45,301
                )
                
                
                (2,771
                )
                
                
                271,606Net
      proceeds from dividend
                  reinvestment andstock
                  purchase plan
                
                10,831
                
                
                
                −
                
                
                
                40
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                40
                
                
                
                −Offering
      costs
                
                −
                
                
                
                −
                
                
                
                (22
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (22
                )
                
                
                −Retirement
      of treasury shares
                
                −
                
                
                
                −
                
                
                
                (2,771
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                2,771
                
                
                
                −
                
                
                
                −Stock
      based compensation
                
                234,871
                
                
                
                1
                
                
                
                340
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                341
                
                
                
                −Amortization
      of stock
                  based compensation
                
                −
                
                
                
                −
                
                
                
                540
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                540
                
                
                
                −Forfeiture
      of unvested stock
                
                (4,367
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −Net
      income
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (3,074
                )
                
                
                −
                
                
                
                −
                
                
                
                (3,074
                )
                
                
                (3,074
                )Available-for-sale
      securities,
                  fair valueadjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (24,288
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (24,288
                )
                
                
                (24,288
                )Designated
      derivatives, fair
                  value adjustment
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (18,096
                )
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                (18,096
                )
                
                
                (18,096
                )Distributions
      on common stock
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                3,074
                
                
                
                (43,816
                )
                
                
                −
                
                
                
                (40,742
                )Comprehensive
      loss
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                $
                (45,458
                )Balance,
      December 31, 2008
                
                25,344,867
                
                
                $
                26
                
                
                $
                356,103
                
                
                $
                −
                
                
                $
                (80,707
                )
                
                $
                −
                
                
                $
                (89,117
                )
                
                $
                −
                
                
                $
                186,305
 The
accompanying notes are an integral part of these financial
statements
  (Back to Index)
 70
 (Back to Index)


RESOURCE CAPITAL CORP.ANDSUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)




Years
      EndedDecember
      31,2008
                  
                  
                  2007
                  
                  
                  2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
                  
                  $
                  (3,074
                  )
                  
                  $
                  8,890
                  
                  
                  $
                  15,606Adjustments to reconcile net
      income to net cash provided by
                    operating
      activities:Provision for loan and lease
      losses
                  
                  
                  46,160
                  
                  
                  
                  6,211
                  
                  
                  
                  −Depreciation and
      amortization
                  
                  
                  1,019
                  
                  
                  
                  793
                  
                  
                  
                  399Amortization/accretion on net
      discounts on investments
                  
                  
                  (1,478
                  )
                  
                  
                  (1,034
                  )
                  
                  
                  (709
                  )Amortization of discount on
      notes
                  
                  
                  173
                  
                  
                  
                  83
                  
                  
                  
                  4Amortization of debt issuance
      costs
                  
                  
                  3,129
                  
                  
                  
                  2,681
                  
                  
                  
                  1,608Amortization of stock-based
      compensation
                  
                  
                  540
                  
                  
                  
                  1,565
                  
                  
                  
                  2,432Non-cash incentive compensation
      to the Manager
                  
                  
                  440
                  
                  
                  
                  774
                  
                  
                  
                  280Net realized (losses) gains on
      derivative instruments
                  
                  
                  205
                  
                  
                  
                  (174
                  )
                  
                  
                  (3,449
                  )Net realized losses on
      investments
                  
                  
                  1,637
                  
                  
                  
                  15,098
                  
                  
                  
                  11,201Gain on the extinguishment of
      debt
                  
                  
                  (1,750
                  )
                  
                  
                  −
                  
                  
                  
                  −Gain on deconsolidation of
      VIEs
                  
                  
                  −
                  
                  
                  
                  (14,259
                  )
                  
                  
                  −Gain on the settlement of
      loan
                  
                  
                  (574
                  )
                  
                  
                  −
                  
                  
                  
                  −Asset
    impairments
                  
                  
                  −
                  
                  
                  
                  26,277
                  
                  
                  
                  −Changes in operating assets and
      liabilities:(Decrease) increase in
      restricted cash
                  
                  
                  4,113
                  
                  
                  
                  (16,775
                  )
                  
                  
                  (15,894
                  )(Decrease) increase in
      interest receivable,
                    net of purchased
      interest
                  
                  
                  3,526
                  
                  
                  
                  (4,881
                  )
                  
                  
                  332(Decrease) increase in
      accounts receivable
                  
                  
                  574
                  
                  
                  
                  (511
                  )
                  
                  
                  (303
                  )Increase (decrease) in
      principal paydowns receivable
                  
                  
                  (115
                  )
                  
                  
                  (333
                  )
                  
                  
                  5,301Increase (decrease) in
      management and incentive fee payable
                  
                  
                  221
                  
                  
                  
                  (647
                  )
                  
                  
                  417Increase in security
      deposits
                  
                  
                  353
                  
                  
                  
                  134
                  
                  
                  
                  725(Decrease) increase in
      accounts payable and accrued liabilities
                  
                  
                  (962
                  )
                  
                  
                  55
                  
                  
                  
                  1,698(Decrease) increase in accrued
      interest expense
                  
                  
                  (2,729
                  )
                  
                  
                  993
                  
                  
                  
                  (4,774
                  )(Decrease) increase in other
      assets
                  
                  
                  (458
                  )
                  
                  
                  (1,562
                  )
                  
                  
                  (2,002
                  )Net cash provided by operating
      activities
                  
                  
                  50,950
                  
                  
                  
                  23,378
                  
                  
                  
                  12,872CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted cash
                  
                  
                  54,976
                  
                  
                  
                  (71,930
                  )
                  
                  
                  7,279Purchase of securities
      available-for-sale
                  
                  
                  −
                  
                  
                  
                  (87,378
                  )
                  
                  
                  (40,147
                  )Principal payments on securities
      available-for-sale
                  
                  
                  2,359
                  
                  
                  
                  11,333
                  
                  
                  
                  129,900Proceeds from sale of securities
      available-for-sale
                  
                  
                  8,000
                  
                  
                  
                  29,867
                  
                  
                  
                  884,772Distribution from unconsolidated
      entities
                  
                  
                  257
                  
                  
                  
                  517
                  
                  
                  
                  −Purchase of loans
                  
                  
                  (186,759
                  )
                  
                  
                  (1,296,938
                  )
                  
                  
                  (1,067,068
                  )Principal payments received on
      loans
                  
                  
                  161,653
                  
                  
                  
                  572,046
                  
                  
                  
                  205,546Proceeds from sale of
      loans
                  
                  
                  34,853
                  
                  
                  
                  183,455
                  
                  
                  
                  128,498Purchase of direct financing
      leases and notes
                  
                  
                  (42,490
                  )
                  
                  
                  (38,735
                  )
                  
                  
                  (106,742
                  )Principal payments received on
      direct financing leases and notes
                  
                  
                  27,823
                  
                  
                  
                  26,366
                  
                  
                  
                  24,634Proceeds from sale of direct
      financing leases and notes
                  
                  
                  5,034
                  
                  
                  
                  6,378
                  
                  
                  
                  17,261Purchase of property and
      equipment
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  (6
                  )Net cash provided by (used in)
      investing activities
                  
                  
                  65,706
                  
                  
                  
                  (665,019
                  )
                  
                  
                  183,927




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 71
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RESOURCE CAPITAL CORP.ANDSUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS − (Continued)


(in
thousands)





Years
      EndedDecember
      31,2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuances of
      common stock (net of offering costs
                  of $0, $406 and
      $2,988)
                
                
                −
                
                
                
                15,362
                
                
                
                120,232Net proceeds from dividend
      reinvestment and stock purchase plan
                  (net of offering costs of $22, $0
      and $0
                
                
                18
                
                
                
                −
                
                
                
                −Repurchase of common
      stock
                
                
                −
                
                
                
                (2,771
                )
                
                
                −Proceeds from
      borrowings:Repurchase
    agreements
                
                
                239
                
                
                
                464,137
                
                
                
                7,170,093Collateralized debt
      obligations
                
                
                35,912
                
                
                
                674,653
                
                
                
                527,980Unsecured revolving credit
      facility
                
                
                −
                
                
                
                10,000
                
                
                
                25,500Secured term
    facility
                
                
                26,342
                
                
                
                30,077
                
                
                
                112,887Payments on
      borrowings:Repurchase
    agreements
                
                
                (99,319
                )
                
                
                (468,102
                )
                
                
                (8,116,131
                )Collateralized debt
      obligations
                
                
                −
                
                
                
                (993
                )
                
                
                −Unsecured revolving credit
      facility
                
                
                −
                
                
                
                (10,000
                )
                
                
                (40,500
                )Secured term
    facility
                
                
                (22,367
                )
                
                
                (23,011
                )
                
                
                (28,214
                )Use of unrestricted cash for
      early extinguishment of debt
                
                
                (3,250
                )
                
                
                −
                
                
                
                −Issuance of Trust Preferred
      Securities
                
                
                −
                
                
                
                −
                
                
                
                50,000Settlement of derivative
      instruments
                
                
                (4,178
                )
                
                
                2,581
                
                
                
                3,335Payment of debt issuance
      costs
                
                
                (333
                )
                
                
                (11,651
                )
                
                
                (9,825
                )Distributions paid on common
      stock
                
                
                (41,166
                )
                
                
                (37,966
                )
                
                
                (24,531
                )Net cash (used in) provided by
      financing activities
                
                
                (108,102
                )
                
                
                642,316
                
                
                
                (209,174
                )NET
      INCREASE (DECREASE) IN CASH AND CASH
                  EQUIVALENTS
                
                
                8,554
                
                
                
                675
                
                
                
                (12,375
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF
                  PERIOD
                
                
                6,029
                
                
                
                5,354
                
                
                
                17,729CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                14,583
                
                
                $
                6,029
                
                
                $
                5,354NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Distributions on common stock
      declared but not paid
                
                $
                9,942
                
                
                $
                10,366
                
                
                $
                7,663Issuance of restricted
      stock
                
                $
                1,435
                
                
                $
                6,650
                
                
                $
                −Purchase of loans on warehouse
      line
                
                $
                −
                
                
                $
                (311,069
                )
                
                $
                (222,577
                )Proceeds from warehouse
      line
                
                $
                −
                
                
                $
                311,069
                
                
                $
                222,577SUPPLEMENTAL
      DISCLOSURE:Interest expense paid in
      cash
                
                $
                94,879
                
                
                $
                136,683
                
                
                $
                137,748Income taxes paid in
      cash
                
                $
                627
                
                
                $
                90
                
                
                $
                −




The
accompanying notes are an integral part of these financial
statements




(Back to Index)
 72
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
1 − ORGANIZATION AND BASIS OF QUARTERLY PRESENTATION





Resource Capital Corp. and
subsidiaries’ (the ‘‘Company’’) principal business activity is to purchase and
manage a diversified portfolio of commercial real estate-related assets and
commercial finance assets.  The Company’s investment activities are
managed by Resource Capital Manager, Inc. (‘‘Manager’’) pursuant to a management
agreement (‘‘Management Agreement’’).  The Manager is a wholly-owned
indirect subsidiary of Resource America, Inc. (“Resource America”) (NASDAQ:
REXI).  The following variable interest entities ("VIE") are consolidated
in the Company's financial statements:




·
            RCC
      Real Estate, Inc. (“RCC Real Estate”) holds real estate investments,
      including commercial real estate loans and commercial real estate-related
      securities.  RCC Real Estate owns 100% of the equity of the
      following entities:




-
            Resource
      Real Estate Funding CDO 2006-1 (“RREF CDO 2006-1”), a Cayman Islands
      limited liability company and qualified real estate investment trust
      (“REIT”) subsidiary (“QRS”).  RREF CDO 2006-1 was established to
      complete a collateralized debt obligation (“CDO”) issuance secured by a
      portfolio of commercial real estate loans and commercial mortgage-backed
      securities.




-
            Resource
      Real Estate Funding CDO 2007-1 (“RREF CDO 2007-1”), a Cayman Islands
      limited liability company and QRS.  RREF CDO 2007-1 was
      established to complete a CDO issuance secured by a portfolio of
      commercial real estate loans and commercial
      mortgage-backed securities.




·
            RCC
      Commercial, Inc. (“RCC Commercial”) holds bank loan investments and
      commercial real estate-related securities.  RCC Commercial owns
      100% of the equity of the following
entities:




-
            Apidos
      CDO I, Ltd. (“Apidos CDO I”), a Cayman Islands limited liability company
      and taxable REIT subsidiary (“TRS”).  Apidos CDO I was
      established to complete a CDO secured by a portfolio of bank
      loans.




-
            Apidos
      CDO III, Ltd. (“Apidos CDO III”), a Cayman Islands limited liability
      company and TRS.  Apidos CDO III was established to complete a
      CDO secured by a portfolio of bank
loans.




-
            Apidos
      Cinco CDO, Ltd. (“Apidos Cinco CDO”), a Cayman Islands limited liability
      company and TRS.  Apidos Cinco CDO was established to complete a
      CDO secured by a portfolio of bank
loans.




·
            Resource
      TRS, Inc. (“Resource TRS”), the Company’s directly-owned TRS, holds all
      the Company’s direct financing leases and
notes.





NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation





The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”).  The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned.





When the
Company obtains an explicit or implicit interest in an entity, the Company
evaluates the entity to determine if the entity is a VIE, and, if so, whether or
not the Company is deemed to be the primary beneficiary of the VIE, in
accordance with Financial Accounting Standards Board (“FASB”) Interpretation 46,
“Consolidation of Variable Interest Entities,” as revised (“FIN 46-R”). 
Generally, the Company consolidates VIEs for which the Company is deemed to be
the primary beneficiary or for non-VIEs which the Company controls. The primary
beneficiary of a VIE is the variable interest holder that absorbs the majority
of the variability in the expected losses or the residual returns of the
VIE.  When determining the primary beneficiary of a VIE, the Company
considers its aggregate explicit and implicit variable interests as a single
variable interest.  If the Company’s single variable interest absorbs the
majority of the variability in the expected losses or the residual returns of
the VIE, the Company is considered the primary beneficiary of the VIE.  The
Company reconsiders its determination of whether an entity is a VIE and whether
the Company is the primary beneficiary of such VIE if certain events
occur.





The Company has a 100% interest valued
at $1.5 million in the common shares (three percent of the total equity) in two
trusts, Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”). 
Accordingly, the Company does not have the right to the majority of RCTs’
expected residual returns.  Therefore, the Company is not deemed to be
the primary beneficiary of either trust and they are not consolidated in the
Company’s consolidated financial statements.  The Company records its
investments in RCT I and RCT II’s common securities of $774,000 each as
investments in unconsolidated trusts using the cost method and records dividend
income upon declaration by RCT I and RCT II.  For the years ended
December 31, 2008 and 2007, the Company recognized $4.0 million and $4.8
million, respectively, of interest expense with respect to the subordinated
debentures it issued to RCT I and RCT II which included $134,000 and $117,000,
respectively, of amortization of deferred debt issuance costs.




(Back to Index)
 73
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Principles
of Consolidation − (Continued)





All inter-company transactions and
balances have been eliminated.





Use
of Estimates





The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.  Estimates affecting the accompanying consolidated
financial statements include the net realizable and fair values of the Company’s
investments and derivatives, the estimated life used to calculate amortization
and accretion of premiums and discounts, respectively, on investments and
provisions for loan and lease losses.





Cash
and Cash Equivalents




Cash and cash equivalents include
cash on hand and all highly liquid investments with original maturities of three
months or less at the time of purchase.  At December 31, 2008 and
2007, this includes $8.0 million and $5.8 million, respectively, in overnight
deposits in the form of reverse repurchase agreements that are held at financial
institutions, $1.6 million and $221,000, respectively, held in a prime brokerage
account and $5.0 million and $0, respectively, held in a money market
account.


Investment
Securities Available-for-Sale





The Company accounts for its
investments in securities under Statement of Financial Accounting Standards
(“SFAS”) 115, ‘‘Accounting for Certain Investments in Debt and Equity
Securities,” (“SFAS 115”) which requires the Company to classify its investment
portfolio as either trading investments, available-for-sale or
held-to-maturity.  Although the Company generally plans to hold most
of its investments to maturity, it may, from time to time, sell any of its
investments due to changes in market conditions or in accordance with its
investment strategy.  Accordingly, the Company classifies all of its
investment securities as available-for-sale and reports them at fair value,
which is based on taking a weighted average of the following three
measures:




i.
              an
      income approach utilizing an appropriate current risk-adjusted yield, time
      value and projected estimated losses from default assumptions based on
      analysis of underlying loan performance;
and




ii.
              quotes
      on similar-vintage, higher rate, more actively traded CMBS securities
      adjusted for the lower subordination level of the Company’s securities;
      and




iii.
              dealer
      quotes on the Company’s securities for which there is not an active
      market.





Unrealized gains and losses are
reported as a component of accumulated other comprehensive loss in stockholders’
equity.




The Company evaluates its investments
for other-than-temporary impairment in accordance with SFAS 115, Staff Position
(“FSP”) EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20” (“FSP 99-20-1”) and EITF 99-20, "Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets” (“FSP
99-20”) which requires an investor to determine when an investment is considered
impaired (i.e., when its fair value has declined below its amortized cost),
evaluate whether that impairment is other than temporary (i.e., the investment
value will not be recovered over its remaining life), and, if the impairment is
other than temporary, recognizes an impairment loss equal to the difference
between the investment’s cost and its fair value.


Investment securities transactions are
recorded on the trade date.  Purchases of newly issued securities are
recorded when all significant uncertainties regarding the characteristics of the
securities are removed, generally shortly before settlement
date.  Realized gains and losses on investment securities are
determined on the specific identification method.




(Back to Index)
 74
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RESOURCE CAPITAL CORP. AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Interest
Income Recognition





Interest income on the Company’s
mortgage-backed and other asset-backed securities is accrued using the effective
yield method based on the actual coupon rate and the outstanding principal
amount of the underlying mortgages or other assets.  Premiums and
discounts are amortized or accreted into interest income over the lives of the
securities also using the effective yield method, adjusted for the effects of
estimated prepayments based on SFAS 91, ‘‘Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases,’’ (“SFAS 91”).  For an investment purchased at par, the
effective yield is the contractual interest rate on the
investment.  If the investment is purchased at a discount or at a
premium, the effective yield is computed based on the contractual interest rate
increased for the accretion of a purchase discount or decreased for the
amortization of a purchase premium.  The effective yield method
requires the Company to make estimates of future prepayment rates for its
investments that can be contractually prepaid before their contractual maturity
date so that the purchase discount can be accreted, or the purchase premium can
be amortized, over the estimated remaining life of the
investment.  The prepayment estimates that the Company uses directly
impact the estimated remaining lives of its investments.  Actual
prepayment estimates are reviewed as of each quarter end or more frequently if
the Company becomes aware of any material information that would lead it to
believe that an adjustment is necessary.  If prepayment estimates are
incorrect, the amortization or accretion of premiums and discounts may have to
be adjusted, which would have an impact on future income.





Loans





The Company acquires whole loans
through direct origination, through the acquisition of participations in
commercial real estate loans and corporate leveraged loans in the secondary
market and through syndications of newly originated loans.  Loans are
held for investment; therefore, the Company initially records them at their
acquisition price, and subsequently, accounts for them based on their
outstanding principal plus or minus unamortized premiums or
discounts.  In certain instances, where the credit fundamentals
underlying a particular loan have changed in such a manner that the Company’s
expected return on investment may decrease, the Company may sell a loan held for
investment due to adverse changes in credit fundamentals.  Once the
determination has been made by the Company that it no longer will hold the loan
for investment, the Company identifies these loans as “Loans held for sale” and
will account for them at the lower of amortized cost or fair value.





Loan
Interest Income Recognition





Interest income on loans includes
interest at stated rates adjusted for amortization or accretion of premiums and
discounts.  Premiums and discounts are amortized or accreted into
income using the effective yield method.  If a loan with a premium or
discount is prepaid, the Company immediately recognizes the unamortized portion
as a decrease or increase to interest income.  In addition, the
Company defers loan origination fees and loan origination costs and recognizes
them over the life of the related loan against interest using the effective
yield method.





Allowance
for Loan and Lease Losses




The Company maintains an allowance for
loan and lease losses.  Loans and leases held for investment are first
individually evaluated for impairment so specific reserves can be applied, and
then evaluated for impairment as a homogeneous pool of loans with substantially
similar characteristics so that a general reserve can be established, if
needed.  The reviews are performed at least quarterly.
 
 The Company considers a loan to be
impaired when, based on current information and events, management believes it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement.  When a loan is
impaired, the allowance for loan losses is increased by the amount of the excess
of the amortized cost basis of the loan over its fair value.  Fair
value may be determined based on the present value of estimated cash flows; on
market price, if available; or on the fair value of the collateral less
estimated disposition costs.  When a loan, or a portion thereof, is
considered uncollectible and pursuit of collection is not warranted, then the
Company will record a charge-off or write-down of the loan against the allowance
for loan and lease losses.


(Back to Index)
 75
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Allowance
for Loan and Lease Losses − (Continued)





The balance of impaired loans and
leases was $23.9 million and $17.4 million at December 31, 2008 and 2007,
respectively.  The total balance of impaired loans and leases with a
valuation allowance at December 31, 2008 and 2007 was $23.9 million and $17.0
million, respectively.  All of the loans deemed impaired at December
31, 2008 and 2007 have an associated valuation allowance.  The total
balance of impaired leases without a specific valuation allowance was $0 and
$359,000 at December 31, 2008 and 2007, respectively.  The specific
valuation allowance related to these impaired loans and leases was $19.6 million
and $2.3 million at December 31, 2008 and 2007, respectively.  The
average balance of impaired loans and leases was $24.9 million and $4.3 million
during 2008 and 2007, respectively.  The Company did not recognize any
income on impaired loans and leases during 2008 and 2007 once each individual
loan or lease became impaired.





An impaired loan or lease may remain on
accrual status during the period in which the Company is pursuing repayment of
the loan or lease; however, the loan or lease would be placed on non-accrual
status at such time as (i) management believes that scheduled debt service
payments will not be met within the coming 12 months; (ii) the loan or lease
becomes 90 days delinquent; (iii) management determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment;
or (iv) the net realizable value of the loan’s underlying collateral
approximates the Company’s carrying value of such loan.  While on
non-accrual status, the Company recognizes interest income only when an actual
payment is received.





Comprehensive
Loss





Comprehensive loss for the Company
includes net income and the change in net unrealized gains/ (losses) on
available-for-sale securities and derivative instruments used to hedge exposure
to interest rate fluctuations and protect against declines in the market-value
of assets resulting from general trends in debt markets.





Income
Taxes





The Company operates in such a manner
as to qualify as a REIT under the provisions of the Internal Revenue Code of
1986, as amended (the "Code"); therefore, applicable REIT taxable income is
included in the taxable income of its shareholders, to the extent distributed by
the Company.  To maintain REIT status for federal income tax purposes, the
Company is generally required to distribute at least 90% of its REIT taxable
income to its shareholders as well as comply with certain other qualification
requirements as defined under the Code.  As a REIT, the Company is not
subject to federal corporate income tax to the extent that it distributes 100%
of its REIT taxable income each year.





Taxable income from non-REIT activities
managed through Resource TRS are subject to federal, state and local income
taxes.  Resource TRS income taxes are accounted for under the asset
and liability method as required under SFAS 109 "Accounting for Income
Taxes."  Under the asset and liability method, deferred income taxes
are recognized for the temporary differences between the financial reporting
basis and tax basis of Resource TRS' assets and liabilities.


Apidos CDO I, Apidos CDO III, Apidos
Cinco CDO and Ischus CDO II, Ltd., (“Ischus CDO II”) a Cayman Islands TRS, (now
de-consolidated), the Company’s foreign TRSs, are organized as exempted
companies incorporated with limited liability under the laws of the Cayman
Islands, and are generally exempt from federal and state income tax at the
corporate level because their activities in the United States are limited to
trading in stock and securities for their own account.  Therefore,
despite their status as TRSs, they generally will not be subject to corporate
tax on their earnings and no provision for income taxes is required; however,
because they are “controlled foreign corporations,” the Company will generally
be required to include Apidos CDO I’s, Apidos CDO III’s, Apidos Cinco CDO’s and
Ischus CDO II’s current taxable income in its calculation of REIT taxable
income.
 
 Stock
Based Compensation
 
 The
Company follows SFAS 123(R), “Share Based Payment,” (“SFAS
123(R)”).  Issuances of restricted stock and options are accounted for
using the fair value based methodology prescribed by SFAS 123(R) whereby the
fair value of the award is measured on the grant date and expensed monthly to
equity compensation expense-related party on the consolidated statements of
operations with a corresponding entry to additional paid-in
capital.  For issuances to the Company’s Manager and to non-employees,
the unvested stock and options are adjusted quarterly to reflect changes in fair
value as performance under the agreement is completed.  For issuances
to the Company’s five non-employee directors, the amount is not remeasured under
the fair value-based method.  The compensation for each of these
issuances is amortized over the service period and included in equity
compensation expense.


(Back to Index)
 76
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)





Net
Income Per Share





In accordance with the provisions of
SFAS 128, ‘‘Earnings per Share,’’ (“SFAS 128”) the Company calculates basic
income per share by dividing net income for the period by weighted-average
shares of its common stock, including vested restricted stock, outstanding for
that period.  Diluted income per share takes into account the effect
of dilutive instruments, such as stock options and unvested restricted stock,
but uses the average share price for the period in determining the number of
incremental shares that are to be added to the weighted-average number of shares
outstanding (see Note 11).





Derivative
Instruments





The Company’s policies permit it to
enter into derivative contracts, including interest rate swaps and interest rate
caps to add stability to its interest expense and to manage its exposure to
interest rate movements or other identified risks.  The Company has
designated these transactions as cash flow hedges.  The contracts or
hedge instruments are evaluated at inception and at subsequent balance sheet
dates to determine if they qualify for hedge accounting under SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS
133”).  SFAS 133 requires the Company recognize all derivatives on the
balance sheet at fair value.  The Company records changes in the
estimated fair value of the derivative in other comprehensive income to the
extent that it is effective.  Any ineffective portion of a
derivative’s change in fair value is immediately recognized in
earnings.




Recent
Accounting Pronouncements
 
 In
January 2009, the FASB issued FSP 99-20-1.  FSP 99-20-1 amends the
impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP 99-20-1 is effective, on a prospective basis, for interim and
annual reporting periods ending after December 15, 2008.  Adoption of
FSP 99-20-1 did not have a material impact on the Company’s consolidated
financial statements.
 
 In October 2008, the FASB issued FSP
157-3, “Determining the Fair Value of a Financial Asset in a Market that is Not
Active” (“FSP 157-3”).  FSP 157-3 clarifies the application of SFAS
157 “Fair Value Measurements,” (“SFAS 157”) in an inactive
market.  The provisions of FSP 157-3 were effective
immediately.  The adoption of FSP FAS 157-3 has been reflected in the
determination of fair value in the Company’s consolidated financial
statements.
 
 In September 2008, the FASB issued FSP
FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement
No. 161” (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 are
intended to improve disclosures about credit derivatives by requiring more
information about the potential adverse effects of changes in credit risk on
financial position, financial performance, and cash flows of the sellers of
credit derivatives.  FSP FAS 133-1 and FIN 45-4 is effective for
reporting periods ending after November 15, 2008.   Adoption
did not have a material impact on the Company’s consolidated financial
statements.
 
 In June 2008, the FASB issued FSP EITF
03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, “Earnings per Share.”  Under the
guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method.  FSP EITF 03-6-1 is
effective for the Company in fiscal 2009.  After the effective date of
FSP EITF 03-6-1, all prior-period earnings per share data presented must be
adjusted retrospectively.  The Company is currently evaluating the
potential impact of adopting FSP EITF 03-6-1.
 
 In May 2008, the FASB issued SFAS 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”).  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework or hierarchy for selecting accounting
principles to be used in preparing financial statements in conformity with U.S.
GAAP.  It is effective for fiscal years and interim period beginning
on or after December 15, 2008 and will be applicable to the Company in the first
quarter of fiscal 2009.  The Company does not expect that SFAS 162
will have an impact on its consolidated financial statements.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
2 − SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
 
 Recent
Accounting Pronouncements − (Continued)
 
 In March 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS 133” (“SFAS 161”).  This new standard requires
enhanced disclosures for derivative instruments, including those used in hedging
activities.  It is effective for fiscal years and interim periods
beginning after November 15, 2008 and will be applicable to the Company in the
first quarter of fiscal 2009.  The Company is assessing the potential
impact that the adoption of SFAS 161 may have on its financial
statements.
 
 In
February 2008, the FASB issued FSP 140-3, “Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions” (“FSP FAS 140-3”) which provides
guidance on accounting for a transfer of a financial asset and repurchase
financing.  FSP FAS 140-3 is effective for fiscal years beginning
after November 15, 2008 and interim periods within those fiscal
years.  The Company does not expect that FSP FAS 140-3 will have a
material effect on its consolidated financial statements.
 
 In December 2007, the FASB issued SFAS
160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS
160”).  SFAS 160 amends Accounting Research Bulletin 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in
a subsidiary and for the deconsolidation of a subsidiary.  It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements.  SFAS 160 is effective for fiscal
years beginning after December 15, 2009.  The Company does not expect
that SFAS 160 will have a material effect on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
which replaces SFAS No. 141 (“SFAS 141R”). SFAS 141R, among other things,
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired
(including intangibles), the liabilities assumed and any noncontrolling interest
in the acquired entity. Additionally, SFAS 141R requires that all transaction
costs be expensed as incurred.  SFAS 141R is effective for fiscal
years beginning after December 15, 2008.  The Company does not expect
that SFAS 141R will have a material effect on its financial
statements.
 
 Reclassifications
 
 Certain reclassifications have been
made to the 2007 and 2006 consolidated financial statements to conform to the
2008 presentation.
 
 NOTE
3 − RESTRICTED CASH
 
 Restricted cash as of December 31,
2008 consists of $48.3 million held in five consolidated CDO trusts, $7.7
million in cash collateralizing outstanding margin calls and a $1.1 million
credit facility reserve used to fund future investments that will be acquired by
the Company’s three closed bank loan CDO trusts.  The remaining $3.3
million consists of interest reserves and security deposits held in connection
with the Company’s equipment lease and note portfolio.
 
 NOTE
4 – DECONSOLIDATION OF VARIABLE INTEREST ENTITY
 
 The Company consolidates VIEs if the
Company determines it is the primary beneficiary, in accordance with FIN
46-R.  During the year ended December 31, 2007, the Company sold a
portion of its preferred shares in Ischus CDO II to an independent third
party.  The sale was deemed to be a reconsideration event under FIN
46-R and the Company determined it was no longer the primary
beneficiary.  Therefore, as of the date of the sale, the Company
deconsolidated Ischus CDO II and wrote down its investment in this CDO by $15.6
million which is recorded in net realized (losses) gains on sales of investments
on the Company’s consolidated statements of operations.  Additionally, the
losses the Company recorded on the sales of the net assets were in excess of its
cost basis and, as a result, the Company recorded a gain on the deconsolidation
of Ischus CDO II of $14.3 million.
 
 The value of the preferred shares at
deconsolidation was $722,000.  The Company will recognize income on
these preferred shares using the cost recovery method.  At December
31, 2007, the remaining value of the Company’s preferred shares in Ischus CDO II
was $257,000 after collecting $465,000 of cash distributions from the date of
deconsolidation through December 31, 2007 and applying it as a reduction of the
Company’s investment.  No income was recognized on this investment
from the period of deconsolidation through December 31,
2007.   During the year ended December 31, 2008, $1.3 million of
cash was collected from this investment and $997,000 of income was recognized
(after reducing the Company’s investment from $257,000 to zero) which is
included in Interest Income – other on the Company’s consolidated statement of
operations.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008




NOTE
4 – DECONSOLIDATION OF VARIABLE INTEREST ENTITY - (Continued)





The following table summarizes the
Company’s calculation of its loss on its investment in Ischus CDO II at December
31, 2007 (in thousands):





Write-down
      of Investment in Ischus CDO IIOriginal
    investment
                    
                    $
                    27,000Cumulative cash
      distributions
                    
                    
                    (10,697
                    )Net basis
                    
                    
                    16,303Investment valuation at time of
      sale
                    
                    
                    (722
                    )Realized loss on
      investment
                    
                    $
                    15,581





The following tables summarize the
balance sheet and statement of operations of Ischus CDO II as of the date of
deconsolidation during 2007 and its income statements for historical
periods.  The statement of operations for Ischus CDO II is included in
the Company’s consolidated statement of income during 2007 whereas the assets of
the consolidated balance sheet below have been removed from the Company’s
consolidated balance sheet as of December 31, 2007.  The
following table also describes the non-cash changes in the Company’s assets and
liabilities during 2007 caused by the deconsolidation of Ischus CDO II (in
thousands):





November
      13, 2007ASSETSAvailable-for-sale securities,
      pledged
                
                $
                214,769Restricted cash
                
                
                1,954Interest
    receivable
                
                
                1,747Other assets
                
                
                191Total assets
                
                $
                218,661LIABILITIES
      AND STOCKHOLDERS’ EQUITYBorrowings
                
                $
                370,688Accrued interest and other
      payables
                
                
                414Other comprehensive
      loss
                
                
                (154,486
                )RCC investment at date of
      deconsolidation
                
                
                16,304232,920Gain on deconsolidation of
      VIE
                
                
                (14,259
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                218,661


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  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
4 – DECONSOLIDATION OF VARIABLE INTEREST ENTITIES − (Continued)
 
 Period
      from
                        January
      1, 2007 through
                        November
      13,
                      
                      
                      Year
      ended
                        December
      31,
                      
                      
                      Period
      from
                        March
      8, 2005
                        (Date
      Operations Commenced) to December 31,2007
                      
                      
                      2006
                      
                      
                      2005REVENUESSecurities
                      
                      $
                      24,463
                      
                      
                      $
                      27,189
                      
                      
                      $
                      9,252Interest income –
      other
                      
                      
                      134
                      
                      
                      
                      86
                      
                      
                      
                      100Total interest
      income
                      
                      
                      24,597
                      
                      
                      
                      27,275
                      
                      
                      
                      9,352Interest expense
                      
                      
                      19,688
                      
                      
                      
                      21,666
                      
                      
                      
                      7,161Net interest
      income
                      
                      
                      4,909
                      
                      
                      
                      5,609
                      
                      
                      
                      2,191OPERATING
      EXPENSESProfessional
      services
                      
                      
                      138
                      
                      
                      
                      228
                      
                      
                      
                      97General and
      administrative
                      
                      
                      83
                      
                      
                      
                      99
                      
                      
                      
                      45Total operating
      expenses
                      
                      
                      221
                      
                      
                      
                      327
                      
                      
                      
                      142NET
      OPERATING INCOME
                      
                      
                      4,688
                      
                      
                      
                      5,282
                      
                      
                      
                      2,049OTHER
      (EXPENSES) REVENUESNet realized gain (loss) on
      investments
                      
                      
                      47
                      
                      
                      
                      (47
                      )
                      
                      
                      −Asset
    impairments
                      
                      
                      (26,277
                      )
                      
                      
                      −
                      
                      
                      
                      −Total expenses
                      
                      
                      (26,230
                      )
                      
                      
                      (47
                      )
                      
                      
                      −NET
      (LOSS) INCOME
                      
                      $
                      (21,542
                      )
                      
                      $
                      5,235
                      
                      
                      $
                      2,049
 
 NOTE
5 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE
 
 The following table summarizes the
Company's mortgage-backed securities and other asset-backed securities,
including those pledged as collateral and classified as available-for-sale,
which are carried at fair value (in thousands):


Amortized
      Cost (1)
                
                
                Unrealized
      Gains
                
                
                Unrealized
      Losses
                
                
                FairValue
      (1)December 31, 2008:Commercial
      mortgage-backed private placement
                
                $
                70,458
                
                
                $
                −
                
                
                $
                (41,243
                )
                
                $
                29,215Other
      asset-backed
                
                
                5,665
                
                
                
                −
                
                
                
                (5,620
                )
                
                
                45Total
                
                $
                76,123
                
                
                $
                −
                
                
                $
                (46,863
                )
                
                $
                29,260December 31, 2007:Commercial
      mortgage-backed private placement
                
                $
                82,373
                
                
                $
                −
                
                
                $
                (17,809
                )
                
                $
                64,564Other
      asset-backed
                
                
                5,665
                
                
                
                −
                
                
                
                (4,765
                )
                
                
                900Total
                
                $
                88,038
                
                
                $
                −
                
                
                $
                (22,574
                )
                
                $
                65,464
 (1)
              As
      of December 31, 2008, $22.5 million of securities were pledged as
      collateral security under related financings.  At December 31,
      2007, all securities were pledged as collateral security under related
      financings.
 
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  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
5 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE − (Continued)
 
 The following table summarizes the
estimated maturities of the Company’s mortgage-backed securities and other
asset-backed securities according to their estimated weighted average life
classifications (in thousands, except percentages):
 
 Weighted
      Average Life
                      
                      Fair
      Value
                      
                      
                      Amortized
      Cost
                      
                      
                      Weighted
      Average CouponDecember
      31, 2008:Less than one
      year
                      
                      $
                      5,088
                      
                      
                      $
                      10,465
                      
                      
                      
                      3.17%Greater than one year and less
      than five years
                      
                      
                      9,954
                      
                      
                      
                      21,596
                      
                      
                      
                      3.75%Greater than five
      years
                      
                      
                      14,218
                      
                      
                      
                      44,062
                      
                      
                      
                      5.05%Total
                      
                      $
                      29,260
                      
                      
                      $
                      76,123
                      
                      
                      
                      4.36%December
      31, 2007:Less than one
      year
                      
                      $
                      11,908
                      
                      
                      $
                      12,824
                      
                      
                      
                      6.15%Greater than one year and less
      than five years
                      
                      
                      19,042
                      
                      
                      
                      21,589
                      
                      
                      
                      6.16%Greater than five
      years
                      
                      
                      34,514
                      
                      
                      
                      53,625
                      
                      
                      
                      5.85%Total
                      
                      $
                      65,464
                      
                      
                      $
                      88,038
                      
                      
                      
                      5.96%
 
 The contractual maturities of the
investment securities available-for-sale range from October 2009 to July
2017.





The following table shows the fair
value and gross unrealized losses, aggregated by investment category and length
of time, of those individual investment securities that have been in a
continuous unrealized loss position (in thousands):




Less
      than 12 Months
                  
                  
                  More
      than 12 Months
                  
                  
                  TotalFair
      Value
                  
                  
                  Gross
      Unrealized Losses
                  
                  
                  Fair
      Value
                  
                  
                  Gross
      Unrealized Losses
                  
                  
                  Fair
      Value
                  
                  
                  Gross
      Unrealized LossesDecember
      31, 2008:Commercial
      mortgage-
                    backed private
      placement
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  29,215
                  
                  
                  $
                  (41,243
                  )
                  
                  $
                  29,215
                  
                  
                  $
                  (41,243
                  )Other
      asset-backed
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  45
                  
                  
                  
                  (5,620
                  )
                  
                  
                  45
                  
                  
                  
                  (5,620
                  )Total
      temporarily
                    impaired
      securities
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  29,260
                  
                  
                  $
                  (46,863
                  )
                  
                  $
                  29,260
                  
                  
                  $
                  (46,863
                  )December
      31, 2007:Commercial
      mortgage-
                    backed private
      placement
                  
                  $
                  64,564
                  
                  
                  $
                  (17,809
                  )
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  64,564
                  
                  
                  $
                  (17,809
                  )Other
      asset-backed
                  
                  
                  900
                  
                  
                  
                  (4,765
                  )
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  900
                  
                  
                  
                  (4,765
                  )Total
      temporarily
                    impaired
      securities
                  
                  $
                  65,464
                  
                  
                  $
                  (22,574
                  )
                  
                  $
                  −
                  
                  
                  $
                  −
                  
                  
                  $
                  65,464
                  
                  
                  $
                  (22,574
                  )


The
temporary impairment of the investment securities available-for-sale results
from the fair value of the securities falling below their amortized cost basis
and is primarily attributed to changes in interest rates and market
conditions.  The Company intends and has the ability to hold the
securities until the fair value of the securities held is recovered, which may
be maturity.  As of December 31, 2007, the Company recognized $26.3
million of other-than-temporary impairment on its securities.  As a
result of the impairment charge in 2007, the cost of these securities was
written down to fair value.  The assets that related to these
impairment charges were part of Ischus CDO II.  In November 2007,
Ischus CDO II was deconsolidated and this impairment charge was offset through
the gain recorded on deconsolidation of $14.3 million (see Note
4).  The company held 15 and 16 investment securities
available-for-sale that were in an unrealized loss position as of December 31,
2008 and 2007, respectively.  The Company does not believe that any
other of its securities classified as available-for-sale were
other-than-temporarily impaired as of December 31, 2008.





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.


RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
5 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE − (Continued)
  The
determination of other-than-temporary impairment is a subjective process, and
different judgments and assumptions could affect the timing of loss
realization.  The Company reviews its portfolios monthly and the
determination of other-than-temporary impairment is made at least
quarterly.  The Company considers the following factors when
determining if there is an other-than-temporary impairment on a
security:


·
              the
      length of time the market value has been less than amortized
      cost;
  ·
              the
      Company’s intent and ability to hold the security for a period of time
      sufficient to allow for any anticipated recovery in market
      value;
  ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
and
  ·
              underlying
      credit fundamentals of the collateral backing the
    securities.
 
 While
the available-for-sale investments have continued to decline in fair value,
their change continues to be temporary.  In particular, with respect
to CMBS, all assets are current with respect to interest and principal
payments.  In addition, the Company performs an on-going review of
third-party reports and updated financial data on the underlying property to
analyze current and projected loan performance.  The Company’s review
concluded that there exist no credit characteristics that would indicate
other-than-temporary impairments as of December 31,
2008.




NOTE
6 – LOANS HELD FOR INVESTMENT





The following is a summary of the
Company’s loans (in thousands):


Loan
      Description
                
                Principal
                
                
                Unamortized
                  (Discount)
                    Premium
                
                
                Carrying
                    Value
      (1)December 31, 2008:Bank loans, includes $9.0
      million in loans held for sale
                
                $
                945,966
                
                
                $
                (8,459
                )
                
                $
                937,507Commercial real estate
      loans:Whole loans
                
                
                521,015
                
                
                
                (1,678
                )
                
                
                519,337B notes
                
                
                89,005
                
                
                
                64
                
                
                
                89,069Mezzanine
loans
                
                
                215,255
                
                
                
                (4,522
                )
                
                
                210,733Total commercial real estate
      loans
                
                
                825,275
                
                
                
                (6,136
                )
                
                
                819,139Subtotal loans before
      allowances
                
                
                1,771,241
                
                
                
                (14,595
                )
                
                
                1,756,646Allowance for loan
      loss
                
                
                (43,867
                )
                
                
                −
                
                
                
                (43,867
                )Total
                
                $
                1,727,374
                
                
                $
                (14,595
                )
                
                $
                1,712,779December 31, 2007:Bank loans
                
                $
                931,107
                
                
                $
                (6
                )
                
                $
                931,101Commercial real estate
      loans:Whole loans
                
                
                532,277
                
                
                
                (3,559
                )
                
                
                528,718B notes
                
                
                89,448
                
                
                
                129
                
                
                
                89,577Mezzanine
loans
                
                
                227,597
                
                
                
                (4,435
                )
                
                
                223,162Total commercial real estate
      loans
                
                
                849,322
                
                
                
                (7,865
                )
                
                
                841,457Subtotal loans before
      allowances
                
                
                1,780,429
                
                
                
                (7,871
                )
                
                
                1,772,558Allowance for loan
      loss
                
                
                (5,919
                )
                
                
                −
                
                
                
                (5,919
                )Total
                
                $
                1,774,510
                
                
                $
                (7,871
                )
                
                $
                1,766,639


(1)
            Substantially
      all loans are pledged as collateral under various borrowings at December
      31, 2008 and December 31, 2007.





As of December 31, 2008 and 2007,
approximately 39.2% and 11.4% and 38.7% and 12.2%, respectively, of the
Company’s commercial real estate loan portfolio was concentrated in commercial
real estate loans located in California and New York,
respectively.  As of December 31, 2008 and 2007, approximately 11.1%
and 11.5%, respectively, of the Company’s bank loan portfolio was concentrated
in the collective industry grouping of healthcare, education and
childcare.
 
 At December 31, 2008, the Company’s
bank loan portfolio consisted of $908.7 million (net of allowance of $28.8
million) of floating rate loans, which bear interest ranging between the London
Interbank Offered Rate (“LIBOR”) plus 0.97% and LIBOR plus 10.0% with maturity
dates ranging from March 2009 to August 2022.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
6 – LOANS HELD FOR INVESTMENT − (Continued)




At December 31, 2007, the Company’s
bank loan portfolio consisted of $928.3 million (net of allowance of $2.8
million) of floating rate loans, which bore interest ranging between LIBOR plus
1.38% and LIBOR plus 7.50% with maturity dates ranging from July 2008 to August
2022.
 
 The
following table shows the changes in the allowance for loan loss (in
thousands):
 
 Allowance
      for loan loss at December 31, 2006
                      
                      $
                      −Reserve charged to
      expense
                      
                      
                      5,918Loans
    charged-off
                      
                      
                      −Recoveries
                      
                      
                      −Allowance
      for loan loss at December 31, 2007
                      
                      
                      5,918Reserve charged to
      expense
                      
                      
                      45,259Loans
    charged-off
                      
                      
                      (7,310
                      )Recoveries
                      
                      
                      −Allowance
      for loan loss at December 31, 2008
                      
                      $
                      43,867


The following is a summary of the
loans in the Company’s commercial real estate loan portfolio at the dates
indicated (in thousands):


Description
                      
                      Quantity
                      
                      
                      Amortized
      Cost
                      
                      Contracted
                        Interest
      Rates
                      
                      Maturity
      DatesDecember 31, 2008:Whole
      loans, floating rate  (1)
                      
                      
                      29
                      
                      
                      $
                      431,985
                      
                      LIBOR
      plus 1.50% to LIBOR plus 4.40%
                      
                      April
      2009 toAugust
      2011Whole
      loans, fixed rate  (1)
                      
                      
                      7
                      
                      
                      
                      87,352
                      
                      6.98%
      to 10.00%
                      
                      May
      2009 toAugust
      2012B
      notes, floating rate
                      
                      
                      4
                      
                      
                      
                      33,535
                      
                      LIBOR
      plus 2.50% to LIBOR plus 3.01%
                      
                      March
      2009 toOctober
      2009B
      notes, fixed rate
                      
                      
                      3
                      
                      
                      
                      55,534
                      
                      7.00%
      to 8.68%
                      
                      July
      2011 toJuly
      2016Mezzanine
      loans, floating rate
                      
                      
                      10
                      
                      
                      
                      129,459
                      
                      LIBOR
      plus 2.15% to LIBOR plus 3.45%
                      
                      May
      2009 toFebruary
      2010Mezzanine
      loans, fixed rate
                      
                      
                      7
                      
                      
                      
                      81,274
                      
                      5.78%
      to 11.00%
                      
                      November
      2009 toSeptember
      2016Total (2)
                      
                      
                      60
                      
                      
                      $
                      819,139December 31, 2007:Whole
      loans, floating rate
                      
                      
                      28
                      
                      
                      $
                      430,776
                      
                      LIBOR
      plus 1.50% to LIBOR plus 4.25%
                      
                      May
      2008 toJuly
      2010Whole
      loans, fixed rate
                      
                      
                      7
                      
                      
                      
                      97,942
                      
                      6.98%
      to 8.57%
                      
                      May
      2009 toAugust
      2012B
      notes, floating rate
                      
                      
                      3
                      
                      
                      
                      33,570
                      
                      LIBOR
      plus 2.50% to LIBOR plus 3.01%
                      
                      March
      2008 toOctober
      2008B
      notes, fixed rate
                      
                      
                      3
                      
                      
                      
                      56,007
                      
                      7.00%
      to 8.68%
                      
                      July
      2011 toJuly
      2016Mezzanine
      loans, floating rate
                      
                      
                      11
                      
                      
                      
                      141,894
                      
                      LIBOR
      plus 2.15% to LIBOR plus 3.45%
                      
                      February
      2008 toMay
      2009Mezzanine
      loans, fixed rate
                      
                      
                      7
                      
                      
                      
                      81,268
                      
                      5.78%
      to 11.00%
                      
                      October
      2009 toSeptember
      2016Total (2)
                      
                      
                      59
                      
                      
                      $
                      841,457
 (1)
              Whole
      loans have $26.6 million in unfunded loan commitments as of December 31,
      2008 that are funded as the loans require additional funding and the
      related borrowers have satisfied the requirements to obtain this
      additional funding.
  (2)
              The
      total does not include a provision for loan losses of $15.1 million and
      $3.2 million recorded as of December 31, 2008 and 2007,
      respectively.
 
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
6 – LOANS HELD FOR INVESTMENT − (Continued)
 
 As of
December 31, 2008, the Company had recorded a provision for loan loss of $43.9
million consisting of a $28.8 million provision on the Company’s bank loan
portfolio and a $15.1 million provision on the Company’s commercial real estate
portfolio as a result of the Company having ten bank loans and one commercial
real estate loan that were deemed impaired as well as the establishment of a
general reserve on these portfolios.  As of December 31, 2007, the
Company had recorded a provision for loan loss of $5.9 million consisting of a
$2.7 million provision on the Company’s bank loan portfolio and a $3.2 million
provision on the Company’s commercial real estate portfolio as a result of the
Company having two bank loans and one commercial real estate loan that were
deemed impaired.
  The Company had one mezzanine loan,
with a balance of $11.6 million secured by 100% of the equity interests in two
enclosed regional malls which went into default in February
2008.  During early 2008, the Company began working with the borrower
and special servicer toward a resolution of the default.  However,
during the quarter ended June 30, 2008, the borrower defaulted on the more
senior first mortgage position.  This event triggered the reevaluation
of the Company’s provision for loan loss and the Company determined that, during
the three months ended June 30, 2008, a full reserve of the remaining balance of
$11.6 million was necessary.  Any future recovery from this loan will
be adjusted through the Company’s allowance for loan
loss.




NOTE
7 –DIRECT FINANCING LEASES AND NOTES





The Company’s direct financing leases
and notes have average initial lease and note terms of 69 months and 72 months,
as of December 31, 2008 and 2007, respectively.  The interest rates on
notes receivable range from 2.8% to 17.3% and from 6.8% to 14.5%, as of December
31, 2008 and 2007, respectively.  Investments in direct financing
leases and notes, net of unearned income, were as follows (in
thousands):




December
      31,2008
              
              
              2007Direct
      financing leases, net of unearned
      income
              
              $
              29,423
              
              
              $
              28,880Operating
      Leases
              
              
              337
              
              
              
              –Notes
      receivable
              
              
              74,705
              
              
              
              66,150Subtotal
              
              
              104,465
              
              
              
              95,030Allowance
      for lease
      losses
              
              
              (450
              )
              
              
              −Total
              
              $
              104,015
              
              
              $
              95,030





The components of the net investment in
direct financing leases are as follows (in thousands):




December
      31,2008
              
              
              2007Total
      future minimum lease
      payments
              
              $
              34,105
              
              
              $
              34,009Unguaranteed
      residual
              
              
              237
              
              
              
              21Unearned
      income
              
              
              (4,919
              )
              
              
              (5,150
              )Total
              
              $
              29,423
              
              
              $
              28,880





The components of the net investment in
operating leases are as follows (in thousands):




December
      31,2008
              
              
              2007Investment
      in operating
      leases
              
              $
              371
              
              
              $
              –Accumulated
      depreciation
              
              
              (34
              )
              
              
              –Total
              
              $
              337
              
              
              $
              −





At December 31, 2008, the Company had
seven leases that were sufficiently delinquent with respect to scheduled
payments of interest to require a provision for lease losses.  As a
result, the Company had recorded an allowance for lease losses of $451,000 and
charged these leases off.  The Company also recorded a general reserve
of $300,000 during the three months ended December 31, 2008 to bring the total
general reserve to $450,000 at December 31, 2008.  At December 31,
2007, the Company had three leases that were sufficiently delinquent with
respect to scheduled payments of interest to require a provision for lease
losses.  As a result, the Company had recorded an allowance for lease
losses of $293,000 and charged these leases off.





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 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
7 –DIRECT FINANCING LEASES AND NOTES − (Continued)


The following table shows the changes
in the allowance for lease loss (in thousands):




Allowance
      for lease loss at January 1, 2008
                  
                  $
                  −Provision for lease
      loss
                  
                  
                  901Leases
    charged-off
                  
                  
                  (451
                  )Recoveries
                  
                  
                  −Allowance
      for lease loss at December 31, 2008
                  
                  $
                  450





The
future minimum lease payments expected to be received on non-cancelable direct
financing leases and notes were as follows (in thousands):




Years
      EndingDecember
      31,
                    
                    Direct
                      Financing
      Leases
                    
                    
                    Notes
                    
                    
                    Total2009
                    
                    $
                    11,207
                    
                    
                    $
                    15,833
                    
                    
                    $
                    27,0402010
                    
                    
                    9,867
                    
                    
                    
                    15,411
                    
                    
                    
                    25,2782011
                    
                    
                    6,397
                    
                    
                    
                    14,430
                    
                    
                    
                    20,8272012
                    
                    
                    4,464
                    
                    
                    
                    13,610
                    
                    
                    
                    18,0742013
                    
                    
                    1,919
                    
                    
                    
                    7,277
                    
                    
                    
                    9,196Thereafter
                    
                    
                    251
                    
                    
                    
                    8,144
                    
                    
                    
                    8,395$
                    34,105
                    
                    
                    $
                    74,705
                    
                    
                    $
                    108,810




NOTE
8 – BORROWINGS
 
 The Company has financed the
acquisition of its investments, including securities available-for-sale, loans
and equipment leases and notes, primarily through the use of secured and
unsecured borrowings in the form of CDOs, repurchase agreements, a secured term
facility, warehouse facilities, trust preferred securities issuances and other
secured and unsecured borrowings.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008


NOTE
8 – BORROWINGS − (Continued)





Certain information with respect to the
Company’s borrowings at December 31, 2008 and 2007 is summarized in the
following table (dollars in thousands):


Outstanding
      Borrowings
                  
                  
                  Weighted
      Average Borrowing Rate
                  
                  Weighted
      Average Remaining Maturity
                  
                  Value
      of CollateralDecember 31, 2008:Repurchase
      Agreements (1)
                  
                  $
                  17,112
                  
                  
                  
                  3.50%
                  
                  18.0
      days
                  
                  $
                  39,703RREF
      CDO 2006-1 Senior Notes (2)
                  
                  
                  261,198
                  
                  
                  
                  1.38%
                  
                  37.6
      years
                  
                  
                  322,269RREF
      CDO 2007-1 Senior Notes (3)
                  
                  
                  377,851
                  
                  
                  
                  1.15%
                  
                  37.8
      years
                  
                  
                  467,310Apidos
      CDO I Senior Notes (4)
                  
                  
                  318,469
                  
                  
                  
                  4.03%
                  
                  8.6
      years
                  
                  
                  206,799Apidos
      CDO III Senior Notes (5)
                  
                  
                  259,648
                  
                  
                  
                  2.55%
                  
                  11.5
      years
                  
                  
                  167,933Apidos
      Cinco CDO Senior Notes (6)
                  
                  
                  318,223
                  
                  
                  
                  2.64%
                  
                  11.4
      years
                  
                  
                  207,684Secured
      Term
      Facility
                  
                  
                  95,714
                  
                  
                  
                  4.14%
                  
                  1.3
      years
                  
                  
                  104,015Unsecured
      Junior Subordinated Debentures (7)
                  
                  
                  51,548
                  
                  
                  
                  6.42%
                  
                  27.7 years
                  
                  
                  −Total
                  
                  $
                  1,699,763
                  
                  
                  
                  2.57%
                  
                  20.6 years
                  
                  $
                  1,515,713December 31, 2007:Repurchase
      Agreements (1)
                  
                  $
                  116,423
                  
                  
                  
                  6.33%
                  
                  18.5
      days
                  
                  $
                  190,914RREF
      CDO 2006-1 Senior Notes (2)
                  
                  
                  260,510
                  
                  
                  
                  5.69%
                  
                  38.6
      years
                  
                  
                  282,849RREF
      CDO 2007-1 Senior Notes (3)
                  
                  
                  345,986
                  
                  
                  
                  5.49%
                  
                  38.8
      years
                  
                  
                  444,715Apidos
      CDO I Senior Notes (4)
                  
                  
                  317,882
                  
                  
                  
                  5.47%
                  
                  9.6
      years
                  
                  
                  309,495Apidos
      CDO III Senior Notes (5)
                  
                  
                  259,178
                  
                  
                  
                  5.59%
                  
                  12.5
      years
                  
                  
                  253,427Apidos
      Cinco CDO Senior Notes (6)
                  
                  
                  317,703
                  
                  
                  
                  5.38%
                  
                  12.4
      years
                  
                  
                  311,813Secured
      Term
      Facility
                  
                  
                  91,739
                  
                  
                  
                  6.55%
                  
                  2.3
      years
                  
                  
                  95,030Unsecured
      Junior Subordinated Debentures (7)
                  
                  
                  51,548
                  
                  
                  
                  8.86%
                  
                  28.7 years
                  
                  
                  −Total
                  
                  $
                  1,760,969
                  
                  
                  
                  5.72%
                  
                  20.1 years
                  
                  $
                  1,888,243


(1)
            At
      December 31, 2008, collateral consisted of a RREF CDO 2007-1 Class H bond
      that was retained at closing with a carrying value of $3.9 million and
      loans with a carrying value of $35.8 million.  At December 31,
      2007, collateral consisted of RREF CDO 2007-1 Class H & K bonds that
      were retained at closing with a carrying value of $20.5 million,
      available-for-sale securities with a carrying value of $13.6 million and
      loans with a carrying value of $156.8
million.




(2)
            Amount
      represents principal outstanding of $265.5 million less unamortized
      issuance costs of $4.3 million and $5.0 million as of December 31, 2008
      and December 31, 2007, respectively.  This CDO transaction
      closed in August 2006.




(3)
            Amount
      represents principal outstanding of $383.8 million less unamortized
      issuance costs of $5.9 million as of December 31, 2008 and principal
      outstanding of $352.7 million less unamortized issuance costs of $6.7
      million as of December 31, 2007.  This CDO transaction closed in
      June 2007.




(4)
            Amount
      represents principal outstanding of $321.5 million less unamortized
      issuance costs of $3.0 million as of December 31, 2008 and $3.6 million as
      of December 31, 2007.  This CDO transaction closed in August
      2005.




(5)
            Amount
      represents principal outstanding of $262.5 million less unamortized
      issuance costs of $2.9 million as of December 31, 2008 and $3.3 million as
      of December 31, 2007.  This CDO transaction closed in May
      2006.




(6)
              Amount
      represents principal outstanding of $322.0 million less unamortized
      issuance costs of $3.8 million as of December 31, 2008 and $4.3 million as
      of December 31, 2007.  This CDO transaction closed in May
      2007.
  (7)
              Amount
      represents junior subordinated debentures issued to Resource Capital Trust
      I and RCC Trust II in May 2006 and September 2006,
      respectively.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)






The Company had repurchase agreements
with the following counterparties at the dates indicated (dollars in
thousands):


Amount
      at Risk (1)
                    
                    
                    Weighted
      Average Maturity in Days
                    
                    
                    Weighted
      Average Interest RateDecember 31, 2008:Natixis
      Real Estate Capital Inc.
                    
                    $
                    18,992
                    
                    
                    
                    18
                    
                    
                    
                    3.50%Credit
      Suisse Securities (USA) LLC
                    
                    $
                    3,793
                    
                    
                    
                    23
                    
                    
                    
                    4.50%December 31, 2007:Natixis
      Real Estate Capital Inc.
                    
                    $
                    58,155
                    
                    
                    
                    18
                    
                    
                    
                    6.42%Credit
      Suisse Securities (USA) LLC
                    
                    $
                    15,626
                    
                    
                    
                    25
                    
                    
                    
                    5.91%J.P.
      Morgan Securities, Inc.
                    
                    $
                    886
                    
                    
                    
                    9
                    
                    
                    
                    5.63%Bear,
      Stearns International Limited
                    
                    $
                    1,170
                    
                    
                    
                    15
                    
                    
                    
                    6.22%


(1)
            Equal
      to the estimated fair value of securities or loans sold, plus accrued
      interest income, minus the sum of repurchase agreement liabilities plus
      accrued interest expense.







Repurchase
and Credit Facilities





Commercial
Real Estate Loan – Term Repurchase Facility





In April
2007, the Company’s indirect wholly-owned subsidiary, RCC Real Estate SPE 3,
LLC, entered into a master repurchase agreement with Natixis Real Estate
Capital, Inc. to be used as a warehouse facility to finance the purchase of
commercial real estate loans and commercial mortgage-backed
securities.  The maximum amount of the Company’s borrowing under the
repurchase agreement was $150.0 million.  The financing provided by
the agreement matures April 18, 2010 subject to a one-year extension at the
option of RCC Real Estate SPE 3 and subject further to the right of RCC Real
Estate SPE 3 to repurchase the assets held in the facility
earlier.  The Company paid a facility fee of 0.75% of the maximum
facility amount, or $1.2 million, at closing.  In addition, once the
borrowings exceed a weighted average undrawn balance of $75.0 million for the
prior 90 day period, the Company was required to pay a Non-Usage Fee on the
unused portion equal to the product of (i) 0.15% per annum multiplied by, (ii)
the weighted average undrawn balance during the prior 90 day
period.  Each repurchase transaction specifies its own terms, such as
identification of the assets subject to the transaction, sale price, repurchase
price, rate and term.  These are one-month contracts.  The
repurchase agreement is with recourse only to the assets financed, subject to
standardized exceptions relating to breaches of representations, fraud and
similar matters.  The Company has guaranteed RCC Real Estate SPE 3,
LLC’s performance of its obligations under the repurchase
agreement.  At December 31, 2008, RCC Real Estate SPE 3 had borrowed
$17.0 million, all of which the Company had guaranteed.  At December
31, 2008, borrowings under the repurchase agreement were secured by commercial
real estate loans with an estimated fair value of $35.8 million and had a
weighted average interest rate of one-month LIBOR plus 2.30%, which was 3.50% at
December 31, 2008.  At December 31, 2007, RCC Real Estate SPE 3 had
borrowed $96.7 million, all of which the Company had guaranteed.  At
December 31, 2007, borrowings under the repurchase agreement were secured by
commercial real estate loans with an estimated fair value of $154.2 million and
had a weighted average interest rate of one-month LIBOR plus 1.39%, which was
6.42% at December 31, 2007.





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CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)





Repurchase
and Credit Facilities − (Continued)





Commercial
Real Estate Loan – Term Repurchase Facility − (Continued)





On
September 25, 2008, RCC Real Estate SPE 3 entered into an amendment to the
master repurchase agreement.  The amendment reduced (i) the amount of
the facility from $150,000,000 to $100,000,000 and (ii) the weighted average
Undrawn Balance (as defined in the Agreement) threshold exempting payment of the
non-usage fee from $75,000,000 to $56,250,000. A modification fee of 0.25% of
the amended facility amount of $100,000,000 was charged by Natixis in connection
with the repurchase agreement amendment.





On
September 25, 2008, the Company also entered into a second amendment to its
Guaranty, dated April 12, 2007, with Natixis, pursuant to which the Company’s
minimum net worth covenant was reduced to $200,000,000 from
$250,000,000.





On
November 25, 2008, RCC Real Estate SPE 3 entered into a second amendment to the
master repurchase agreement.  Pursuant to the second
amendment:




·
            The
      Company repaid $41.5 million of amounts outstanding under the
      facility.




·
            The
      maximum facility amount was maintained at $100.0 million, reducing on
      October 18, 2009 to the amounts then outstanding on the
      facility.




·
            Further
      repurchase agreement transactions under the facility may be made in
      Natixis’ sole discretion.




·
            The
      repurchase prices for assets remaining subject to the facility on November
      25, 2008, referred to as the Existing Assets, were set an aggregate of
      $17.0 million.  Premiums over new repurchase prices are required
      for early repurchase by RCC Real Estate SPE 3 of the Existing Assets;
      however, the premiums will reduce the repurchase price of the remaining
      Existing Assets.




·
            RCC
      Real Estate SPE 3’s obligation to pay non-usage fees was
      terminated.




On March
13, 2009, RCC Real Estate SPE 3 entered into a third amendment to the master
repurchase agreement and the guaranty.  The amendment (i) reduces the
amount of the net worth the Company is required to maintain under its guaranty
to $165,000,000 from $200,000,000 for the period from December 31, 2008 through
May 12, 2009 (ii) requires a paydown of $1.0 million of amounts outstanding
under the facility by March 17, 2009 and (iii) requires that
reasonable best efforts be used by (a) the Company to reduce amounts outstanding
under the facility further and (b) the Company and Natixis to reduce the amount
of the net worth requirement.


Secured
Term Facility





In March
2006, the Company entered into a secured term credit facility with Bayerische
Hypo – und Vereinsbank AG to finance the purchase of equipment leases and
notes.  The maximum amount of the Company’s borrowing under this
facility is $100.0 million.  Borrowings under this facility bear
interest at one of two rates, determined by asset class.





The Company received a waiver for the
period ended December 31, 2007 from Bayerische Hypo- und Vereinsbank AG with
respect to the non-compliance by Resource America with a tangible net worth
covenant with respect to it contained in the facility
agreement.  Under the covenant, Resource America had to maintain a
consolidated net worth (stockholder’s equity) of at least $175.0 million plus
90% of the net proceeds of any capital transactions, minus all amounts (not to
exceed $50,000,000) paid by Resource America to repurchase any outstanding
shares of common or preferred stock of Resource America, measured by each
quarter end, as further described in the agreement.





On June 23, 2008, the facility was
amended to base the net worth test on LEAF Financial Corporation (“LEAF”) the
originator and manages of the Company’s equipment lease and notes, and a
subsidiary of Resource America, and to change the measure of net worth to not
less than the sum of (i) $17,000,000, plus (ii) 50% of the aggregate net income
of LEAF for each fiscal quarter beginning with the fiscal quarter ended
September 30, 2008.  See Note 13 regarding arrangements between the
Company and LEAF.




The Company paid $38,000 and $61,000 in
unused line fees as of December 31, 2008 and 2007,
respectively.  Unused line fees are expensed immediately into interest
expense in the consolidated statements of operations.  As of December
31, 2008, the Company had borrowed $95.7 million at a weighted average interest
rate of 4.14%.  As of December 31, 2007, the Company had borrowed
$91.7 million at a weighted average interest rate of 6.55%.  The
facility expires in March 2010.


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CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)





Repurchase
and Credit Facilities − (Continued)




Corporate
Revolving Credit Facility





The
Company had a $10.0 million facility with TD Bank, N.A. that bore interest at
one of two rates elected at the Company’s option; (i) the lender’s prime rate
plus a margin ranging from 0.50% to 1.50% based upon the Company’s leverage
ratio; or (ii) LIBOR plus a margin ranging from 1.50% to 2.50% based upon the
Company’s leverage ratio.  The facility expired December 31,
2008.





Commercial
Real Estate Loans – Non-term Repurchase Facilities





In August 2005, the Company’s
subsidiary, RCC Real Estate, entered into a master repurchase agreement with
Bear, Stearns International Limited (“Bear Stearns”) to finance the purchase of
commercial real estate loans.  The maximum amount of the Company’s
borrowing under the repurchase agreement is $150.0 million.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  The Company has
guaranteed RCC Real Estate’s obligations under the repurchase agreement to a
maximum of $150.0 million.  At December 31, 2008, the Company had
repaid all obligations under this facility.  At December 31, 2007, the
Company had borrowed $1.9 million, all of which was guaranteed, with a weighted
average interest rate of LIBOR plus 1.25%, which was 6.22% at December 31,
2007.





In March 2005, the Company entered into
a master repurchase agreement with Credit Suisse Securities (USA) LLC to finance
the purchase of agency ABS-residential MBS (“RMBS”) securities.  In
December 2006, the Company began using this facility to finance the purchase of
commercial MBS (“CMBS”)-private placement and other securities.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  At December 31, 2008,
the Company had borrowed $90,000 with a weighted average interest rate of
4.50%.  At December 31, 2007, the Company had borrowed $14.6 million
with a weighted average interest rate of 5.91%.





Other
Repurchase Facility





In March 2005, the Company entered into
a master repurchase agreement with J.P. Morgan Securities, Inc. to finance the
purchase of agency ABS-RMBS.  In August 2007, the Company began using
this facility to finance the purchase of CMBS-private placement.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  At December 31, 2008,
the Company had repaid all obligations under this facility.  At
December 31, 2007, the Company had borrowed $3.2 million with a weighted average
interest rate of 5.63%.




Collateralized
Debt Obligations
 
 Resource
Real Estate Funding CDO 2007-1
 
 In June 2007, the Company closed RREF
CDO 2007-1, a $500.0 million CDO transaction that provides financing for
commercial real estate loans and commercial mortgage-backed
securities.  The investments held by RREF CDO 2007-1 collateralize the
debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  RREF CDO 2007-1 issued a
total of $265.6 million of senior notes at par to unrelated
investors.  RCC Real Estate purchased 100% of the class H senior notes
(rated  BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L
senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for
$68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO
Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity
interest representing 100% of the outstanding preference shares.  The
senior notes purchased by RCC Real Estate are subordinated in right of payment
to all other senior notes issued by RREF CDO 2007-1 but are senior in right of
payment to the preference shares.  The equity interest is subordinated
in right of payment to all other securities issued by RREF CDO
2007-1.


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 89
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)




Collateralized
Debt Obligations − (Continued)
 
 Resource
Real Estate Funding CDO 2007-1 − (Continued)




The senior notes issued to investors by
RREF CDO 2007-1 consist of the following classes: (i) $180.0 million of class
A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of
unissued class A-1R notes, which allow the CDO to fund future funding
obligations under the existing whole loan participations that have future
funding commitments; the undrawn balance of the class A-1R notes will accrue a
commitment fee at a rate per annum equal to 0.18%, the drawn balance will bear
interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of class A-2 notes
bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million of class B
notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million of class
C notes bearing interest at a fixed rate of 6.423%; (vi) $26.8 million of class
D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of
class E notes bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9
million of class F notes bearing interest at one-month LIBOR plus 1.30%; (ix)
$11.3 million of class G notes bearing interest at one-month LIBOR plus 1.55%;
(x) $11.3 million of class H notes bearing interest at one-month LIBOR plus
2.30%; (xi) $11.3 million of class J notes bearing interest at one-month LIBOR
plus 2.95%; (xii) $10.0 million of class K notes bearing interest at one-month
LIBOR plus 3.25%; (xiii) $18.8 million of class L notes bearing interest at a
fixed rate of 7.50% and (xiv) $28.8 million of class M notes bearing interest at
a fixed rate of 8.50%.  All of the notes issued mature in September
2046, although the Company has the right to call the notes anytime after July
2017 until maturity.  The weighted average interest rate on all notes
issued to outside investors was 1.15% at December 31, 2008.





During the year ended December 31,
2008, the Company repurchased $5.0 million of the Class J notes in RREF CDO
2007-1 at a price of 65.0% which resulted in a $1.75 million gain, reported as a
gain on the extinguishment of debt in its consolidated statements of
operations.  As a result of the Company’s ownership of 100% of the
Class H, K, L and M senior notes and $5.0 million of the Class J senior note,
the notes retained eliminate in consolidation.





Resource
Real Estate Funding CDO 2006-1





In August 2006, the Company closed RREF
CDO 2006-1, a $345.0 million CDO transaction that provides financing for
commercial real estate loans.  The investments held by RREF CDO 2006-1
collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  RREF CDO
2006-1 issued a total of $308.7 million of senior notes at par to investors of
which RCC Real Estate purchased 100% of the class J senior notes (rated BB:
Fitch) and class K senior notes (rated B:Fitch) for $43.1 million.  In
addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of
RCC Real Estate, purchased a $36.3 million equity interest representing 100% of
the outstanding preference shares.  The senior notes purchased by RCC
Real Estate are subordinated in right of payment to all other senior notes
issued by RREF CDO 2006-1 but are senior in right of payment to the preference
shares.  The equity interest is subordinated in right of payment to
all other securities issued by RREF CDO 2006-1.




The senior notes issued to investors by
RREF CDO 2006-1 consist of the following classes:  (i) $129.4 million
of class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4
million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii)
$5.0 million of class A-2 notes bearing interest at a fixed rate of 5.842%; (iv)
$6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%;
(v) $20.7 million of class C notes bearing interest at one-month LIBOR plus
0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR
plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month
LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at
one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest
at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing
interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of Class J notes
bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of Class K
notes bearing interest at a fixed rate of 6.00%.  As a result of the
Company’s ownership of the Class J and K senior notes, these notes eliminate in
consolidation.  All of the notes issued mature in August 2046,
although the Company has the right to call the notes anytime after August 2016
until maturity.  The weighted average interest rate on all notes
issued to outside investors was 1.38% at December 31, 2008.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)





Collateralized
Debt Obligations − (Continued)




Apidos
Cinco CDO





In May 2007, the Company closed Apidos
Cinco CDO, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos Cinco CDO collateralize the
debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  Apidos Cinco CDO issued a
total of $322.0 million of senior notes at par to investors and RCC commercial
purchased a $28.0 million equity interest representing 100% of the outstanding
preference shares.  The equity interest is subordinated in right of
payment to all other securities issued by Apidos Cinco CDO.





The senior notes issued to investors by
Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class
A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of class
A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class
A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3
notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes
bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes
bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes
bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14,
2020, although the Company has the right to call the notes anytime after May 14,
2011 until maturity.  The weighted average interest rate on all notes
was 2.64% at December 31, 2008.





Apidos
CDO III





In May
2006, the Company closed Apidos CDO III, a $285.5 million CDO transaction that
provides financing for bank loans.  The investments held by Apidos CDO
III collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  Apidos CDO
III issued a total of $262.5 million of senior notes at par to investors and RCC
Commercial purchased a $23.0 million equity interest representing 100% of the
outstanding preference shares.  The equity interest is subordinated in
right of payment to all other securities issued by Apidos CDO III.





The
senior notes issued to investors by Apidos CDO III consist of the following
classes:  (i) $212.0 million of class A-1 notes bearing interest at
3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest
at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing
interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes
bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D
notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes
issued mature on June 12, 2020, although the Company has the right to call the
notes anytime after June 12, 2011 until maturity.  The weighted
average interest rate on all notes was 2.55% at December 31, 2008.





Apidos
CDO I





In August 2005, the Company closed
Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos CDO I collateralize the debt it
issued and, as a result, the investments are not available to the Company, its
creditors or stockholders.  Apidos CDO I issued a total of $321.5
million of senior notes at par to investors and RCC Commercial purchased a $28.5
million equity interest representing 100% of the outstanding preference
shares.  The equity interest is subordinated in right of payment to
all other securities issued by Apidos CDO I.




The senior notes issued to investors by
Apidos CDO I consist of the following classes:  (i) $265.0 million of
class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million
of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5
million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv)
$13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and
(v) $8.0 million of class D notes bearing interest at a fixed rate of
9.251%.  All of the notes issued mature on July 27, 2017, although the
Company has the right to call the notes anytime after July 27, 2010 until
maturity.  The weighted average interest rate on all notes was 4.03%
at December 31, 2008.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
8 – BORROWINGS − (Continued)





Trust
Preferred Securities





In May 2006 and September 2006, the
Company formed RCT I and RCT II, respectively, for the sole purpose of issuing
and selling capital securities representing preferred beneficial
interests.  Although the Company owns 100% of the common securities of
RCT I and RCT II, RCT I and RCT II are not consolidated into the Company’s
consolidated financial statements because the Company is not deemed to be the
primary beneficiary of these entities in accordance with FIN 46-R.  In
connection with the issuance and sale of the capital securities, the Company
issued junior subordinated debentures to RCT I and RCT II of $25.8 million each,
representing the Company’s maximum exposure to loss.  The debt
issuance costs associated with the junior subordinated debentures for RCT I and
RCT II at December 31, 2008 were $691,000 and $701,000,
respectively.  These costs which are included in other assets are
being amortized into interest expense using the effective yield method over a
ten year period and are recorded in the consolidated statements of
operation.





The rights of holders of common
securities of RCT I and RCT II are subordinate to the rights of the holders of
capital securities only in the event of a default; otherwise, the common
securities economic and voting rights are pari passu with the capital
securities.  The capital and common securities of RCT I and RCT II are
subject to mandatory redemption upon the maturity or call of the junior
subordinated debentures held by each.  Unless earlier dissolved, RCT I
will dissolve on May 25, 2041 and RCT II will dissolve on September 29,
2041.  The junior subordinated debentures are the sole assets of RCT I
and RCT II and mature on June 30, 2036 and October 30, 2036, respectively, and
may be called at par by the Company any time after June 30, 2011 and October 30,
2011, respectively.  Interest is payable for RCT I and RCT II
quarterly at a floating rate equal to three-month LIBOR plus 3.95% per
annum.  The rates for RCT I and RCT II, at December 31, 2008, were
5.42% and 7.42%, respectively.  The Company records its investments in
RCT I and RCT II’s common securities of $774,000 each as investments in
unconsolidated trusts and records dividend income upon declaration by RCT I and
RCT II.





NOTE
9 – SHARE REPURCHASE





Under a share repurchase plan
authorized by the board of directors on July 26, 2007, the Company is authorized
to buy back up to 2.5 million outstanding shares.  As of December 31,
2007, the Company had repurchased 263,000 shares at a weighted average price,
including commissions, of $10.54 per share.  No additional shares were
repurchased during the year ended December 31, 2008.




NOTE
10 – SHARE-BASED COMPENSATION





The following table summarizes
restricted common stock transactions:





Manager
              
              
              Non-Employee
      Directors
              
              
              Non-Employees
              
              
              TotalUnvested
      shares as of January 1, 2008
              
              
              113,332
              
              
              
              4,404
              
              
              
              463,757
              
              
              
              581,493Issued
              
              
              −
              
              
              
              17,261
              
              
              
              157,532
              
              
              
              174,793Vested
              
              
              (111,387
              )
              
              
              (4,404
              )
              
              
              (183,818
              )
              
              
              (299,609
              )Forfeited
              
              
              (1,945
              )
              
              
              −
              
              
              
              (2,422
              )
              
              
              (4,367
              )Unvested
      shares as of December 31, 2008
              
              
              −
              
              
              
              17,261
              
              
              
              435,049
              
              
              
              452,310





Pursuant to SFAS 123(R) and EITF 96-18,
the Company is required to value any unvested shares of restricted common stock
granted to the Manager and non-employees at the current market
price.  The estimated fair value of the unvested shares of restricted
stock granted during the years ended December 31, 2008 and 2007, including
shares issued to the four non-employee directors, was $1.5 million and $6.7
million, respectively.





On
January 14, 2008, the Company issued 144,000 shares of restricted common stock
under its 2007 Omnibus Equity Compensation Plan.  These restricted
shares will vest 33.3% on January 14, 2009.  The balance will vest
annually thereafter through January 14, 2011.





(Back to Index)
 92
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 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 DECEMBER
31, 2008
 
 NOTE
10 – SHARE-BASED COMPENSATION − (Continued)
 
 On February 1, 2008 and March 8, 2008,
the Company granted 2,261 and 15,000 shares of restricted stock, respectively,
to the Company’s non-employee directors as part of their annual
compensation.  These shares vested in full on the first anniversary of
the date of grant.
 
 On July 1, 2008, the Company granted
13,532 shares of restricted stock under its 2007 Omnibus Equity Compensation
Plan. These restricted shares will vest 33.3% on June 30, 2009.  The
balance will vest annually thereafter through June 30, 2011.


The following table summarizes stock
option transactions:


Number
      of Options
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted
      Average Remaining Contractual Term (in years)
                
                
                Aggregate
      Intrinsic Value (in thousands)Outstanding
      as of January 1, 2008
                
                
                640,166
                
                
                $
                14.99Granted
                
                
                −
                
                
                
                −Exercised
                
                
                −
                
                
                
                −Forfeited
                
                
                (16,000
                )
                
                
                15.00Outstanding
      as of December 31, 2008
                
                
                624,166
                
                
                $
                14.99
                
                
                
                6
                
                
                $
                93Exercisable
      at December 31, 2008
                
                
                405,833
                
                
                $
                15.00
                
                
                
                6
                
                
                $
                61




The stock options have a remaining
contractual term of six years.  Upon exercise of options, new shares
are issued.




The following table summarizes the
status of the Company’s unvested stock options as of December 31,
2008:


Unvested Options
                    
                    Options
                    
                    
                    Weighted
      Average Grant Date
                        Fair
      ValueUnvested
      at January 1,
      2008
                    
                    
                    205,722
                    
                    
                    $
                    14.97Granted
                    
                    
                    −
                    
                    
                    $
                    −Vested
                    
                    
                    (162,389
                    )
                    
                    $
                    14.98Forfeited
                    
                    
                    −
                    
                    
                    $
                    −Unvested
      at December 31,
      2008
                    
                    
                    43,333
                    
                    
                    $
                    14.88
 
 The weighted average period the Company
expects to recognize the remaining expense on the unvested stock options is less
than one year.
 
 The
following table summarizes the status of the Company’s vested stock options as
of December 31, 2008:
 
 Vested Options
                          
                          Number
      of Options
                          
                          
                          Weighted
      Average Exercise Price
                          
                          Weighted
      Average Remaining Contractual Term (in years)
                          
                          Aggregate
      Intrinsic Value (in thousands)Vested
      as of January 1, 2008
                          
                          
                          357,944
                          
                          
                          $
                          15.00Vested
                          
                          
                          238,889
                          
                          
                          $
                          14.99Exercised
                          
                          
                          −
                          
                          
                          
                          −Forfeited
                          
                          
                          (16,000
                          )
                          
                          $
                          15.00Vested
      as of December 31, 2008
                          
                          
                          580,833
                          
                          
                          $
                          15.00
                          
                          6
                          
                          $         87
 
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
10 – SHARE-BASED COMPENSATION − (Continued)





The stock option transactions are
valued using the Black-Scholes model using the following
assumptions:





As
      of December 31,2008
              
              
              2007
              
              
              2006Expected
      life
              
              8
      years
              
              
              7
      years
              
              
              8
      yearsDiscount
      rate
              
              
              2.94
              %
              
              
              3.97
              %
              
              
              4.78
              %Volatility
              
              
              127.20
              %
              
              
              42.84
              %
              
              
              20.91
              %Dividend
      yield
              
              
              33.94
              %
              
              
              17.62
              %
              
              
              9.73
              %





The fair value of each common stock
transaction for the year ended December 31, 2008 and for the year ended December
31, 2007, respectively, was $0.149 and $0.251.  For the years ended
December 31, 2008, 2007 and 2006, the components of equity compensation expense
were as follows (in thousands):





December
      31,2008
              
              
              2007
              
              
              2006Options
      granted to Manager and non-employees
              
              $
              (52
              )
              
              $
              (91
              )
              
              $
              371Restricted
      shares granted to Manager and non-employees
              
              
              486
              
              
              
              1,582
              
              
              
              2,001Restricted
      shares granted to non-employee Directors
              
              
              106
              
              
              
              74
              
              
              
              60Total
      equity compensation expense
              
              $
              540
              
              
              $
              1,565
              
              
              $
              2,432





During the years ended December 31,
2008 and 2007, the Manager received 60,078 and 47,503 shares as incentive
compensation valued at $341,000 and $723,000, respectively pursuant to the
management agreement.  The incentive management fee is paid one
quarter in arrears.





Apart from incentive compensation
payable under the management agreement, the Company has established no formal
criteria for equity awards as of December 31, 2008.  All awards are
discretionary in nature and subject to approval by the compensation
committee.





NOTE
11 –EARNINGS PER SHARE





The following table presents a
reconciliation of basic and diluted earnings per share for the periods presented
as follows (in thousands, except share and per share amounts):





December
      31,2008
              
              
              2007
              
              
              2006Basic:Net (loss) income
              
              $
              (3,074
              )
              
              $
              8,890
              
              
              $
              15,606Weighted average number of shares
      outstanding
              
              
              24,757,386
              
              
              
              24,610,468
              
              
              
              17,538,273Basic net (loss) income per
      share
              
              $
              (0.12
              )
              
              $
              0.36
              
              
              $
              0.89Diluted:Net (loss) income
              
              $
              (3,074
              )
              
              $
              8,890
              
              
              $
              15,606Weighted average number of shares
      outstanding
              
              
              24,757,386
              
              
              
              24,610,468
              
              
              
              17,538,273Additional shares due to assumed
      conversion of dilutive
                instruments
              
              
              −
              
              
              
              249,716
              
              
              
              343,082Adjusted weighted-average number
      of common shares
                outstanding
              
              
              24,757,386
              
              
              
              24,860,184
              
              
              
              17,881,355Diluted net (loss) income per
      share
              
              $
              (0.12
              )
              
              $
              0.36
              
              
              $
              0.87





Potentially dilutive shares relating to
253,975 shares of restricted stock are not included in the calculation of
diluted net (loss) per share for the year ended December 31, 2008 because the
effect was anti-dilutive.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
12 – THE MANAGEMENT AGREEMENT





On
March 8, 2005, the Company entered into a Management Agreement pursuant to which
the Manager provides the Company investment management, administrative and
related services.  The agreement was amended June 30,
2008.  Under the agreement, the Manager receives fees and is
reimbursed for its expenses as follows:




·
            A
      monthly base management fee equal to 1/12th of the amount of the Company’s
      equity multiplied by 1.50%.  Under the Management Agreement,
      ‘‘equity’’ is equal to the net proceeds from any issuance of shares of
      common stock less other offering related costs plus or minus the Company’s
      retained earnings (excluding non-cash equity compensation incurred in
      current or prior periods) less any amounts the Company paid for common
      stock repurchases.  The calculation may be adjusted for one-time
      events due to changes in GAAP as well as other non-cash charges, upon
      approval of the independent directors of the
  Company.




·
            Incentive
      compensation calculated as follows: (i) twenty-five percent
      (25%) of the dollar amount by which (A) the Company’s Adjusted
      Operating Earnings (before Incentive Compensation but after the Base
      Management Fee) for such quarter per Common Share (based on the weighted
      average number of Common Shares outstanding for such quarter) exceeds
      (B) an amount equal to (1) the weighted average of the price per
      share of the Common Shares in the initial offering by the Company and the
      prices per share of the Common Shares in any subsequent offerings by the
      Company, in each case at the time of issuance thereof, multiplied by
      (2) the greater of (a) 2.00% and (b) 0.50% plus one-fourth
      of the Ten Year Treasury Rate for such quarter, multiplied by
      (ii) the weighted average number of Common Shares outstanding during
      such quarter subject to adjustment; to exclude events pursuant to changes
      in GAAP or the application of GAAP, as well as non-recurring or unusual
      transactions or events, after discussion between the Manager and the
      Independent Directors and approval by a majority of the Independent
      Directors in the case of non-recurring or unusual transactions or
      events.




·
              Reimbursement
      of out-of-pocket expenses and certain other costs incurred by the Manager
      that relate directly to the Company and its
  operations.


Incentive compensation is paid
quarterly.  Up to 75% of the incentive compensation is paid in cash
and at least 25% is paid in the form of an award of common stock.  The
Manager may elect to receive more than 25% of its incentive compensation in
common stock.  All shares are fully vested upon
issuance.  However, the Manager may not sell such shares for one year
after the incentive compensation becomes due and payable.  Shares
payable as incentive compensation are valued as follows:




·
            if
      such shares are traded on a securities exchange, at the average of the
      closing prices of the shares on such exchange over the thirty day period
      ending three days prior to the issuance of such
  shares;




·
            if
      such shares are actively traded over-the-counter, at the average of the
      closing bid or sales price as applicable over the thirty day period ending
      three days prior to the issuance of such shares;
  and




·
            if
      there is no active market for such shares, the value shall be the fair
      market value thereof, as reasonably determined in good faith by the board
      of directors of the Company.




As amended, the Management Agreement
has an initial term ending March 31, 2009 and will automatically renew for a
one-year term annually unless at least two-thirds of the independent directors
or a majority of the outstanding common shares agree to not automatically
renew.  With a two-thirds vote of the independent directors, the
independent directors may elect to terminate the Management Agreement because of
the following:


·
            unsatisfactory
      performance; and/or




·
            unfair
      compensation payable to the Manager where fair compensation cannot be
      agreed upon by the Company (pursuant to a vote of two-thirds of the
      independent directors) and the
Manager.




In
the event that the Management Agreement is terminated based on the provisions
disclosed above, the Company must pay the Manager a termination fee equal to
four times the sum of the average annual base management fee and the average
annual incentive during the two 12-month periods immediately preceding the date
of such termination.  The Company is also entitled to terminate the
Management Agreement for cause (as defined therein) without payment of any
termination fee.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
12 – THE MANAGEMENT AGREEMENT − (Continued)




The base management fee for the years
ended December 31, 2008, 2007 and 2006 was $4.5 million, $5.1 million and $3.7
million, respectively.  The manager earned an incentive management fee
of $1.8 million of which $1.3 million was paid in cash and $440,000 was paid in
stock (86,489 shares) for the period from January 1, 2008 to December 31,
2008.  The manager earned an incentive management fee of $1.5 million
of which $924,000 was paid in cash and $551,000 was paid in stock (37,543
shares) for the period from January 1, 2007 to December 31, 2007.  The
manager earned an incentive management fee of $1.1 million of which $840,000 was
paid in cash and $280,000 was paid in stock (18,298 shares) for the period from
January 1, 2006 to December 31, 2006.


At December 31, 2008, the Company was
indebted to the Manager for base management fees of $725,000 incentive
management fees of $397,000 and expense reimbursements of $73,000.  At
December 31, 2007, the Company was indebted to the Manager for base management
fees of $802,000 and expense reimbursements of $65,000.  These amounts
are included in management and incentive fee payable and accounts payable and
accrued liabilities, respectively.





NOTE
13 – RELATED-PARTY TRANSACTIONS





Relationship
with Resource Real Estate





Resource Real Estate, a subsidiary of
Resource America, originates, finances and manages the Company’s commercial real
estate loan portfolio, including whole loans, A notes, B notes and mezzanine
loans.  The Company reimburses Resource Real Estate for loan
origination costs associated with all loans originated.  At December
31, 2008, the Company was indebted to Resource Real Estate for loan origination
costs in connection with the Company’s commercial real estate loan portfolio of
$24,000.  At December 31, 2007, the Company was indebted to Resource
Real Estate for loan origination costs in connection with the Company’s
commercial real estate loan portfolio of $197,000.  At December 31,
2007, Resource Real Estate was indebted to the Company for deposits held in
trust in connection with the Company’s commercial real estate portfolio of
approximately $90,000.  Resource Real Estate was not indebted to the
Company for any such deposits at December 31, 2008.





Relationship
with LEAF





LEAF, a majority-owned subsidiary of
Resource America, originates and manages equipment leases and notes on the
Company’s behalf.  The Company purchases its equipment leases and
notes from LEAF at a price equal to their book value plus a reimbursable
origination cost not to exceed 1% to compensate LEAF for its origination
costs.  At December 31, 2008 and 2007, the Company acquired $42.5
million and $38.7 million, respectively, of equipment lease and note investments
from LEAF, including $425,000 and $387,000 of origination cost reimbursements,
respectively.  In addition, the Company pays LEAF an annual servicing
fee, equal to 1% of the book value of managed assets, for servicing the
Company’s equipment leases and notes.  At December 31, 2008 and 2007,
the Company was indebted to LEAF for servicing fees in connection with the
Company’s equipment finance portfolio of $172,000 and $133,000,
respectively.  LEAF servicing fees for the years ended December 31,
2008, 2007 and 2006 were $953,000, $810,000 and $659,000,
respectively.





During years ended December 31, 2008
and 2007, the Company sold 16 and nine equipment notes, respectively, back to
LEAF at a price equal to their book value.  The total proceeds
received on the outstanding notes receivable were $6.3 million and $5.1 million
for the years ended December 31, 2008 and 2007, respectively.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
13 – RELATED-PARTY TRANSACTIONS − (Continued)




Relationship
with Resource America
  At December 31, 2008, Resource America,
owned 2,022,578 shares, or 8.0% of the Company’s outstanding common
stock.  In addition, Resource America held 2,166 options to purchase
restricted stock.
 
 The
Company is managed by the Manager pursuant to the Management Agreement that
provides for both base and incentive management fees.  For the years
ended December 31, 2008, 2007 and 2006, the Manager earned base management fees
of approximately $4.5 million, $5.1 million and $3.7 million, respectively, and
incentive compensation fees of $1.8 million, $1.5 million and $1.1 million,
respectively.  The Company may also reimburse the Manager and Resource
America for expenses for employees of Resource America who perform legal,
accounting, due diligence and other services that outside professionals or
consultants would otherwise perform.  For the years ended December 31,
2008, 2007 and 2006, the Company reimbursed the Manager $392,000, $507,000 and
$954,000, respectively, for such expenses.  For a description of the
management agreement and fees paid and payable to the Manager (see Note
12).
 
 At
December 31, 2008, the Company was indebted to the Manager for base management
fees of $725,000, incentive management fees of $397,000 and for the
reimbursement of expenses of $73,000.  At December 31, 2007, the
Company was indebted to the Manager for base management fees of $802,000 and for
reimbursement of expenses of $65,000.  These amounts are included in
accounts payable and other liabilities.
 
 As of
December 31, 2008 and 2007, the Company had executed six CDO transactions,
respectively.  These CDO transactions were structured for the Company
by the Manager, but, under the management agreement the Manager was not
separately compensated by the Company for these transactions.


Relationship
with Law Firm





Until 1996, the Company’s Chairman,
Edward Cohen, was of counsel to Ledgewood, P.C., a law firm.  For the
years ended December 31, 2008, 2007 and 2006, the Company paid Ledgewood
$164,000, $361,000 and $361,000, respectively.  Mr. Cohen receives
certain debt service payments from Ledgewood related to the termination of his
affiliation with Ledgewood and its redemption of his interest.





NOTE
14 – DISTRIBUTIONS





In order to qualify as a REIT, the
Company must currently distribute at least 90% of its taxable
income.  In addition, the Company must distribute 100% of its taxable
income in order not to be subject to corporate federal income taxes on retained
income.  The Company anticipates it will distribute substantially all
of its taxable income to its stockholders.  Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses
(such as depreciation and provisions for loan and lease losses), in certain
circumstances, the Company may generate operating cash flow in excess of its
distributions or, alternatively, may be required to borrow to make sufficient
distribution payments.




The Company’s 2009 dividends will be
determined by the Company’s board who will also consider the composition of any
common dividends declared, including the option of paying a portion in cash and
the balance in additional common shares. Generally, dividends payable in stock
are not treated as dividends for purposes of the deduction for dividends, or as
taxable dividends to the recipient.  The Internal Revenue Service, in
Revenue Procedure 2009-15, has given guidance with respect to certain stock
distributions by publicly traded REITs.  That Revenue Procedure
applies to distributions made on or after January 1, 2008 and declared with
respect to a taxable year ending on or before December 31, 2009. It provides
that publicly-traded REITs can distribute stock (common shares in the Company’s
case) to satisfy their REIT distribution requirements if stated conditions are
met. These conditions include that at least 10% of the aggregate declared
distributions be paid in cash and the shareholders be permitted to elect whether
to receive cash or stock, subject to the limit set by the REIT on the cash to be
distributed in the aggregate to all shareholders.  The Company did not
use this Revenue Procedure with respect to any distributions for its 2008
taxable year, but may do so for distributions with respect to
2009.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
14 – DISTRIBUTIONS − (Continued)




During the year ended December 31,
2008, the Company declared and paid distributions totaling $40.7 million, or
$1.60 per share.  This includes $9.9 million, in the aggregate,
declared on December 18, 2008 and paid on January 28, 2009 to stockholders of
record as of December 30, 2008.  During the year ended December 31,
2007, the Company declared and paid distributions totaling $40.7 million, or
$1.62 per share.  During the year ended December 31, 2006, the Company
declared and paid distributions totaling $26.5 million, or $1.49 per
share.  For tax purposes, 100% of the distributions declared in 2008
and 2007 have been classified as ordinary income.





NOTE
15 – FAIR VALUE OF FINANCIAL INSTRUMENTS





Effective January 1, 2008, the Company
adopted the provisions of SFAS 157 which did not have a material effect on the
Company’s consolidated financial statements as the Company historically has
valued its investment securities available-for-sale and derivatives at fair
value.  SFAS 157 establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The Company determines fair value
based on quoted prices when available or through the use of alternative
approaches, such as discounting the expected cash flows using market interest
rates commensurate with the credit quality and duration of the
investment.  SFAS 157’s hierarchy defines three levels of inputs that
may be used to measure fair value:





The fair value framework requires the
categorization of assets and liabilities into one of three levels based on the
assumptions (inputs) used in valuing the asset or liability.  Level 1
provides the most reliable measure of fair value, while Level 3 generally
requires significant management judgment.  The three levels are
defined as follows:





Level 1 − Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.




Level 2 − Observable inputs
other than quoted prices included within Level 1, such as quoted prices for
similar assets or liabilities in active markets or quoted prices for identical
assets or liabilities in inactive markets.





Level 3 − Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.





The determination of where an asset or
liability falls in the hierarchy requires significant judgment.  The
Company evaluates its hierarchy disclosures each quarter; and depending on
various factors, it is possible that an asset or liability may be classified
differently from quarter to quarter.  However, the Company expects
that changes in classifications between levels will be rare.





Certain
assets and liabilities are measured at fair value on a recurring
basis.  The following is a discussion of these assets and liabilities
as well as the valuation techniques applied to each for fair value
measurement.




Investment
securities available-for-sale are valued by taking a weighted average of the
following three measures:




i.
              using
      an income approach and utilizing an appropriate current risk-adjusted,
      time value and projected estimated losses from default assumptions based
      of underlying loan
performance;




ii.
              quotes
      on similar-vintage, higher rate, more actively traded CMBS securities
      adjusted for the lower subordinated level of the Company’s securities;
      and




iii.
              dealer
      quotes on the Company’s securities for which there is not an active
      market.





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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
15 – FAIR VALUE OF FINANCIAL INSTRUMENTS − (Continued)




Derivatives (interest rate swap
contracts), both assets and liabilities, are valued by a third-party pricing
agent using an income approach and utilizing models that use as their primary
basis readily observable market parameters.  This valuation process
considers factors including interest rate yield curves, time value, credit
factors and volatility factors.  Although the Company has determined
that the majority of the inputs used to value its derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates
of current credit spreads to evaluate the likelihood of default by the Company
and its counterparties.  The Company has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its
derivative positions and has determined that the credit valuation adjustments
are not significant to the overall valuation of its derivatives.  As a
result, the Company has determined that its derivative valuations in their
entirety are classified in Level 2 of the fair value
hierarchy.


As of December 31, 2008, the fair
values of our financial assets and liabilities were as follows:


Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalAssets:Investment securities
      available-for-sale
                
                $
                −
                
                
                $
                −
                
                
                $
                29,260
                
                
                $
                29,260Total assets at fair
      value
                
                $
                
                
                
                $
                −
                
                
                $
                29,260
                
                
                $
                29,260Liabilities:Derivatives
(net)
                
                
                −
                
                
                
                31,589
                
                
                
                −
                
                
                
                31,589Total liabilities at fair
      value
                
                $
                −
                
                
                $
                31,589
                
                
                $
                −
                
                
                $
                31,589
 
 The
following table presents additional information about assets which are measured
at fair value on a recurring basis for which the Company has utilized Level 3
inputs.
 
 Level
      3Beginning
      balance, January 1,
      2008
                
                $
                65,464Total
      gains or losses (realized/unrealized):Included in
      earnings
                
                
                (1,556
                )Purchases, sales, issuances and
      settlements,
      net
                
                
                (10,360
                )Unrealized losses – included in
      accumulated other comprehensive income
                
                
                (24,288
                )Ending
      balance, December 31,
      2008
                
                $
                29,260




SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of financial instruments for which it is practicable to estimate that
value. The fair value of short-term financial instruments such as cash and cash
equivalents, restricted cash, interest receivable, principal receivable,
repurchase agreements, warehouse lending facilities and accrued interest expense
approximates their carrying value on the consolidated balance sheet. The fair
value of the Company’s investment securities available-for-sale is reported
in Note 5. The fair value of the Company’s derivative instruments is
reported in Note 16.





The fair values of the Company’s
remaining financial instruments that are not reported at fair value on the
consolidated statement of financial position are reported below.


Fair Value of Financial
      Instruments(in
      thousands)December
      31, 2008
                  
                  
                  December
      31, 2007Carrying
      value
                  
                  
                  Fair
      value
                  
                  
                  Carrying
      value
                  
                  
                  Fair
      valueLoans
      held-for-investment
                  
                  $
                  1,712,779
                  
                  
                  $
                  1,037,927
                  
                  
                  $
                  1,766,639
                  
                  
                  $
                  1,713,040CDOs
                  
                  $
                  1,535,389
                  
                  
                  $
                  690,926
                  
                  
                  $
                  1,501,259
                  
                  
                  $
                  1,501,259Junior
      subordinated notes
                  
                  $
                  51,548
                  
                  
                  $
                  10,310
                  
                  
                  $
                  51,548
                  
                  
                  $
                  51,548
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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
16 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS





A significant market risk to the
Company is interest rate risk.  Interest rates are highly sensitive to
many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond the
Company’s control.  Changes in the general level of interest rates can
affect net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest expense incurred in
connection with the interest-bearing liabilities, by affecting the spread
between the interest-earning assets and interest-bearing
liabilities.  Changes in the level of interest rates also can affect
the value of the Company’s interest-earning assets and the Company’s ability to
realize gains from the sale of these assets.  A decline in the value
of the Company’s interest-earning assets pledged as collateral for borrowings
under repurchase agreements could result in the counterparties demanding
additional collateral pledges or liquidation of some of the existing collateral
to reduce borrowing levels.





The Company seeks to manage the extent
to which net income changes as a function of changes in interest rates by
matching adjustable-rate assets with variable-rate borrowings.  During
periods of changing interest rates, interest rate mismatches could negatively
impact the Company’s consolidated financial condition, consolidated results of
operations and consolidated cash flows.  In addition, the Company
mitigates the potential impact on net income of periodic and lifetime coupon
adjustment restrictions in its investment portfolio by entering into interest
rate hedging agreements such as interest rate caps and interest rate
swaps.





At December 31, 2008, the Company had
31 interest rate swap contracts outstanding whereby the Company will pay an
average fixed rate of 5.07% and receive a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $325.0
million at December 31, 2008.





At December 31, 2007, the Company had
30 interest rate swap contracts outstanding whereby the Company paid an average
fixed rate of 5.36% and received a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $347.9
million at December 31, 2007.





The estimated fair value of the
Company’s interest rate swaps was ($31.6) million as of December 31,
2008.  The Company had aggregate unrealized losses of $33.8 million on
the interest rate swap agreements, as of December 31, 2008, which is recorded in
accumulated other comprehensive loss.  In connection with the August
2006 close of RREF CDO 2006-1, the Company realized a swap termination loss of
$119,000, which is being amortized over the maturity of RREF CDO
2006-1.  The amortization is reflected in interest expense in the
Company’s consolidated statements of operations.  In connection with
the June 2007 close of RREF CDO 2007-1, the Company realized a swap termination
gain of $2.6 million, which is being amortized over the maturity of RREF CDO
2007-1.  The accretion is reflected in interest expense in the
Company’s consolidated statements of operations.  In connection with
the termination of a $53.6 million swap related to RREF CDO 2006-1 during the
nine months ended September 30, 2008, the Company realized a swap termination
loss of $4.2 million, which is being amortized over the maturity of a new $45.0
million swap.  The amortization is reflected in interest expense in
the Company’s consolidated statements of operations.  In connection
with the payoff of a fixed-rate commercial real estate loan during the three
months ended September 30, 2008, the Company terminated a $12.7 million swap and
realized a $574,000 swap termination loss, which is being amortized over the
maturity of the terminated swap and the amortization is reflected in interest
expense in the Company’s consolidated statements of operations.





The estimated fair value of the
Company’s interest rate swaps was ($18.0) million as of December 31,
2007.  The Company had aggregate unrealized losses of $15.7 million on
the interest rate swap agreements, as of December 31, 2007, which is recorded in
accumulated other comprehensive loss.  In connection with the August
2006 close of RREF CDO 2006-1, the Company realized a swap termination loss of
$119,000, which is being amortized over the maturity of RREF CDO 2006-1 and the
amortization is reflected in interest expense in the Company’s consolidated
statements of operations.  In connection with the June 2007 close of
RREF CDO 2007-1, the Company realized a swap termination gain of $2.6 million,
which is being amortized over the maturity of RREF CDO 2007-1 and the accretion
is reflected in interest expense in the Company’s consolidated statements of
operations.





Changes in interest rates may also have
an effect on the rate of mortgage principal prepayments and, as a result,
prepayments on mortgage-backed securities in the Company’s investment
portfolio.  The Company seeks to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets purchased at a premium
with assets purchased at a discount.  At December 31, 2008, the
aggregate discount exceeded the aggregate premium on the Company’s
mortgage-backed securities by approximately $3.7 million.  At December
31, 2007, the aggregate discount exceeded the aggregate premium on the Company’s
mortgage-backed securities by approximately $4.1 million.




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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
17 – STOCK INCENTIVE PLANS





Upon formation of the Company, the
2005 Stock Incentive Plan (the “2005 Plan”) was adopted for the purpose of
attracting and retaining executive officers, employees, directors and other
persons and entities that provide services to the Company.  The 2005
Plan authorizes the issuance of up to 1,533,333 shares of common stock in the
form of options to purchase common stock, stock awards, performance shares and
stock appreciation rights.





In July 2007, the Company’s
shareholders approved the 2007 Omnibus Equity Compensation Plan (the “2007
Plan”).  The 2007 Plan authorizes the issuance of up to 2,000,000
shares of common stock in the form of options to purchase common stock, stock
awards, performance shares and stock appreciation rights.





NOTE
18 – INCOME TAXES





The Company has made an election to be
taxed, and believes it qualifies, as a REIT under Sections 856 through 860 of
the Code.  To maintain REIT status for federal income tax purposes,
the Company is generally required to distribute at least 90% of its REIT taxable
income to its shareholders as well as comply with certain other qualification
requirements as defined under the Code.  Accordingly, the Company is
not subject to federal corporate income tax to extent that it distributes 100%
of its REIT taxable income each year.  Taxable income from non-REIT
activities managed through Resource TRS, the Company's taxable REIT subsidiary,
is subject to federal, state and local income taxes.





Resource
TRS' income taxes are accounted for under the asset and liability method as
required under SFAS 109 "Accounting for Income Taxes."  Under the
asset and liability method, deferred income taxes are recognized for the
temporary differences between the financial reporting basis and tax basis of
Resource TRS' assets and liabilities.





The following table details the
components of Resource TRS’ income taxes (in thousands):





Years
      Ended December 31,2008
              
              
              2007
              
              
              2006(Benefit)
      provision for income taxes:Current:Federal
              
              $
              (331
              )
              
              $
              354
              
              
              $
              51State
              
              
              (25
              )
              
              
              119
              
              
              
              16Deferred
              
              
              115
              
              
              
              (135
              )
              
              
              −Income
      tax (benefit) provision
              
              $
              (241
              )
              
              $
              338
              
              
              $
              67





The components of Resource TRS’
deferred tax assets and liabilities are as follows (in thousands):





December
      31,2008
                  
                  
                  2007Deferred
      tax assets related to:Foreign, state and local loss
      carryforwards
                  
                  $
                  303
                  
                  
                  $
                  −Provision for loan and lease
      losses
                  
                  
                  206
                  
                  
                  
                  135Total deferred tax assets,
      net
                  
                  $
                  509
                  
                  
                  $
                  135Deferred
      tax liabilities related to:Property and equipment basis
      differences
                  
                  $
                  (186
                  )
                  
                  $
                  −Total deferred tax
      liabilities
                  
                  $
                  (186
                  )
                  
                  $
                  −




Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO, the Company’s foreign TRSs, are organized as exempted companies
incorporated with limited liability under the laws of the Cayman Islands, and
are generally exempt from federal and state income tax at the corporate level
because their activities in the United States are limited to trading in stock
and securities for their own account.  Therefore, despite their status
as taxable REIT subsidiaries, they generally will not be subject to corporate
tax on their earnings and no provision for income taxes is required; however,
because they are “controlled foreign corporations,” the Company will generally
be required to include Apidos CDO I’s, Apidos CDO III’s and Apidos Cinco CDO’s
current taxable income in its calculation of REIT taxable
income.


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RESOURCE
CAPITAL CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


DECEMBER
31, 2008





NOTE
18 – INCOME TAXES − (Continued)





Effective January 1, 2007, the Company
adopted the provisions of FIN 48, “Accounting for Uncertainties in Income Taxes
- an Interpretation of SFAS 109” (“FIN 48”), which did not have an impact on its
balance sheet on the date of adoption nor as of December 31,
2008.  FIN 48 prescribes that a tax position should only be recognized
if it is more likely than not that the position will be sustained upon
examination by the appropriate taxing authority.  A tax position that
meets this threshold is measured as the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate
settlement.  The Company is required under FIN 48 to disclose its
accounting policy for classifying interest and penalties, the amount of interest
and penalties charged to expense each period as well as the cumulative amounts
recorded in the consolidated balance sheets.  The Company will
continue to classify any tax penalties as other operating expenses and any
interest as interest expense.  The Company does not have any
unrecognized tax benefits that would affect the Company’s financial
position.





As of December 31, 2008, income tax
returns for the calendar years 2005 - 2007 remain subject to examination by
Internal Revenue Service ("IRS") and/or any state or local taxing
jurisdiction.  The Company has not executed any agreements with the
IRS or any state and/or local taxing jurisdiction to extend a statue of
limitations in relation to any previous year.





NOTE
19 – QUARTERLY RESULTS





The following is a presentation of the
quarterly results of operations for the years ended December 31, 2008 and
2007:





March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              (unaudited)(in
      thousands, except per share data)Year ended December 31,
2008Interest
      income
              
              $
              36,983
              
              
              $
              32,258
              
              
              $
              32,312
              
              
              $
              32,788Interest
      expense
              
              
              23,148
              
              
              
              18,924
              
              
              
              18,664
              
              
              
              18,883Net
      interest income
              
              $
              13,835
              
              
              $
              13,334
              
              
              $
              13,648
              
              
              $
              13,905Net
      income (loss)
              
              $
              9,363
              
              
              $
              (5,257
              )
              
              $
              88
              
              
              $
              (7,268
              )Net
      income (loss) per share − basic
              
              $
              0.38
              
              
              $
              (0.21
              )
              
              $
              0.00
              
              
              $
              (0.29
              )Net
      income (loss) per share − diluted
              
              $
              0.38
              
              
              $
              (0.21
              )
              
              $
              0.00
              
              
              $
              (0.29
              )Year ended December 31,
2007Interest
      income
              
              $
              40,010
              
              
              $
              43,826
              
              
              $
              48,791
              
              
              $
              44,541Interest
      expense
              
              
              26,789
              
              
              
              30,222
              
              
              
              34,266
              
              
              
              30,460Net
      interest income
              
              $
              13,221
              
              
              $
              13,604
              
              
              $
              14,525
              
              
              $
              14,081Net
      income (loss)
              
              $
              9,439
              
              
              $
              9,836
              
              
              $
              (13,915
              )
              
              $
              3,530Net
      income (loss) per share − basic
              
              $
              0.39
              
              
              $
              0.40
              
              
              $
              (0.56
              )
              
              $
              0.14Net
      income (loss) per share − diluted
              
              $
              0.38
              
              
              $
              0.39
              
              
              $
              (0.56
              )
              
              $
              0.14




NOTE
20 – SUBSEQUENT EVENT
 During
the three months ended March 31, 2009, the Company bought back 700,000 shares at
a weighted average price of $4.00 per share as part of the share repurchase
program authorized by the board of directors.  Including these
transactions, the total number of shares repurchased under this program is
963,000.


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ITEM
9.                    CHANGES
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING


AND FINANCIAL
DISCLOSURE





None.





ITEM
9A.                 CONTROLS
AND PROCEDURES




We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Securities Exchange Act of 1934 or Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.  In designing and evaluating
the disclosure controls and procedures, our management recognized that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 Under the supervision of our Chief
Executive Officer and Chief Financial Officer, we have carried out an evaluation
of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report.  Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
 
 There have been no significant changes
in our internal controls over financial reporting that have partially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting during the three month period ended December 31,
2008.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Management assessed the effectiveness
of our internal control over financial reporting as of December 31,
2008.  In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework.
 
 Based on this assessment management
believes that, as of December 31, 2008, our internal control over financial
reporting is effective.
 
 Our independent registered public
accounting firm, Grant Thornton LLP, audited our internal control over
financial reporting as of December 31, 2008 and their report dated March 16,
2009 expressed an unqualified opinion on our internal control over financial
reporting.  This report is included in this Item 9A.


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Report of
Independent Registered Public Accounting Firm








Stockholders and Board of
Directors


Resource Capital
Corp.





We have audited Resource Capital
Corp. and subsidiaries’ (a Maryland Corporation) (the Company) internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal
Control--Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  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, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting.  Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.
 
 A company’s internal control over
financial reporting is a process designed 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 its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 In our
opinion, Resource Capital Corp. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control-Integrated
Frameworkissued by COSO.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Resource
Capital Corp. and subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for the years ended December 31, 2008, 2007 and 2006 and our report dated
March 16, 2009 expressed an unqualified opinion.
  /s/ Grant
Thornton LLP
 
 
 
 Philadelphia,
Pennsylvania
 March 16,
2009


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ITEM  9B.                      OTHER
INFORMATION





None.









PART
III





ITEM
10.                      DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





All members of the board of directors
are elected for a term of one year or until their successors are elected and
qualified.  Information is set forth below regarding the principal
occupation of each of our directors.  There are no family
relationships among the directors and executive officers except that Jonathan Z.
Cohen, our Chief Executive Officer, President and a director, is a son of Edward
E. Cohen, our Chairman of the Board.





Names
of Directors, Principal Occupation and Other Information





Edward E.
Cohen, age 70, has been our Chairman since March
2005.  Mr. Cohen is Chairman of Resource America, a position he
has held since 1990.  He was Resource America’s Chief Executive
Officer from 1988 to 2004 and its President from 2000 to 2003.  He is
Chairman, Chief Executive Officer and President of Atlas America, Inc., a
publicly-traded (NASDAQ: ATLS) energy company, a position he has held since
2000, Chairman of Atlas Pipeline Holdings GP, LLC, a wholly-owned subsidiary of
Atlas America that is the general partner of Atlas Pipeline Holdings, L.P., a
publicly-traded (NYSE: AHD) holding company, a position he has held since 2006,
Chairman and Chief Executive Officer of Atlas Energy Resources, LLC, a
publicly-traded (NYSE:ATN) energy company, a position he has held since 2006 and
Chairman of the Managing Board of Atlas Pipeline Partners GP, LLC, a
wholly-owned subsidiary of Atlas America that is the general partner of Atlas
Pipeline Partners, L.P., a publicly-traded (NYSE: APL) natural gas pipeline
company.  He is also Chairman of Brandywine Construction &
Management, Inc., a privately-held real estate management
company.  From 1981 to 1999 he was Chairman of the Executive Committee
of JeffBanks, Inc., a bank holding company acquired by Hudson United
Bancorporation.  From 1969 to 1989 he was Chairman of the Executive
Committee of State National Bank of Maryland (now a part of Wachovia
Bank).





Jonathan Z.
Cohen, age 38, has been our Chief Executive Officer, President and a
director since March 2005.  Mr. Cohen has been President since
2003, Chief Executive Officer since 2004 and a Director since 2002 of Resource
America.  He was Executive Vice President of Resource America from
2001 to 2003, and a Senior Vice President from 1999 to 2001.  He has
been Vice Chairman of the Managing Board of Atlas Pipeline Partners GP since its
formation in 1999, Vice Chairman of Atlas America since 2000, Vice Chairman of
Atlas Energy Resources since 2006 and Vice Chairman of Atlas Pipeline Holdings
GP since 2006.  He was the Vice Chairman of RAIT Investment Trust,
(now RAIT Financial Trust) a publicly-traded (NYSE: RAS) REIT, from 2003 to
2006, and Secretary, trustee and a member of RAIT’s investment committee from
1997 to 2006.





Walter T.
Beach, age 42, has been a director since March
2005.  Mr. Beach has been Managing Director of Beach Investment
Counsel, Inc., an investment management firm, since 1997.  From 1993
to 1997, Mr. Beach was a Senior Analyst and Director of Research at
Widmann, Siff and Co., Inc., an investment management firm where, beginning in
1994, he was responsible for the firm’s investment decisions for its principal
equity product.  Before that he was an associate and financial analyst
at Essex Financial Group, a consulting and merchant banking firm, and an analyst
at Industry Analysis Group, an industry and economic consulting
firm.  Mr. Beach has served as a director of The Bancorp, Inc., a
publicly-traded (NASDAQ: TBBK) Delaware bank holding company, and its subsidiary
bank, The Bancorp Bank, since 1999.





William B.
Hart, age 65, has been a director since March
2005.  Mr. Hart was Chairman of the Board of Trustees of the
National Trust for Historic Preservation from 1999 to 2004.  He was
also a director of Anthem, Inc. (now Wellpoint, Inc.), a publicly-traded (NYSE:
WLP) health insurance company, from 2000 to 2004.  Mr. Hart was
Director of SIS Bancorp (now Banknorth Massachusetts, a division of Banknorth,
N.A.) from 1995 to 2000.  From 1988 to 1999, Mr. Hart served in
various positions with Blue Cross/Blue Shield of New Hampshire, ending as
Chairman of the Audit Committee and Chairman of the Board of Directors from 1996
to 1999.  He also served as President of the Foundation for the
National Capital Region, Washington, DC, from 1993 to 1996 and President of The
Dunfey Group, a private investment firm, from 1986 to 1998.  From 1986
to 1994 he was also director of First NH Banks where he was Chairman of the
Audit Committee from 1992 to 1994.





Gary
Ickowicz, age 53, has been a director since February 2007.  Mr.
Ickowicz has been a Principal of Lazard Freres Real Estate Investors, a manager
of funds invested in debt and equity securities of North American real estate
assets and enterprises, since 2001.  In addition, he was a director of
Lazard Freres’s real estate investment banking unit from 1989 through
2001.  Since 2000 he has been a director of Grant Street Settlement,
and since 2002 he has been a director of NCC/Neumann, both not-for-profit
developers of senior housing.  Since 2001 he has been a director of
Commonwealth Atlantic Properties, Inc., a privately-held REIT.  From
2001 to 2006 he was a director of Kimsouth, Inc., a joint venture with Kimco
Realty Corporation, a publicly-traded (NYSE: KIM) REIT.




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Murray S.
Levin, age 66, has been a director since March
2005.  Mr. Levin is a senior litigation partner at Pepper
Hamilton LLP, a law firm with which he has been associated since
1970.  Mr. Levin served as the first American president of the
Association Internationale des Jeunes Avocats (Young Lawyers International
Association), headquartered in Western Europe.  He is a past president
of the American Chapter and a member of the board of directors of the Union
Internationale des Avocats (International Association of Lawyers), a Paris-based
organization that is the world’s oldest international lawyers
association.  Mr. Levin was a member of the managing board of
Atlas Pipeline Partners GP from 2001 to March 2005.





P. Sherrill
Neff, age 57, has been a director since March
2005.  Mr. Neff is a founder of Quaker BioVentures, Inc., a life
sciences venture fund, and has been Managing Partner since 2002.  He
was a director of Resource America from 1998 to March 2005.  From 1994
to 2002 he was President and Chief Financial Officer, and from 1994 to 2003, a
director of Neose Technologies, Inc., a then-publicly-traded (NASDAQ: NTEC) life
sciences company.  Mr. Neff was also a director of The Bancorp,
Inc. (NASDAQ: TBBK) from its formation in 1999 until 2002.





Non-Director
Executive Officers





David J.
Bryant, age 51, has been our Senior Vice President, Chief Financial
Officer, Chief Accounting Officer and Treasurer since June 2006.  From
2005 to 2006 Mr. Bryant served as Senior Vice-President, Real Estate
Services, at Pennsylvania Real Estate Investment Trust, a publicly-traded (NYSE:
PEI) REIT principally engaged in owning, managing, developing and leasing malls
and strip centers in the eastern United States.  From 2000 to 2005,
Mr. Bryant served as PEI’s Senior Vice President - Finance and Treasurer,
and was its principal accounting officer.





Jeffrey D.
Blomstrom, age 40, has been our Senior Vice President-CDO structuring
since March 2005.  Mr. Blomstrom has been President and Managing
Director of Resource Financial Fund Management, Inc., an asset management
subsidiary of Resource America, since 2003.  Mr. Blomstrom serves
as the head of collateral origination and as a member of the credit committee
for Trapeza Capital, Resource America’s trust preferred security collateral
manager.  From 2001 to 2003 Mr. Blomstrom was a Managing Director
at Cohen and Company, an investment bank specializing in the financial services
sector.  From 2000 to 2001 he was Senior Vice President of
iATMglobal.net, Inc., an ATM software development
company.  Mr. Blomstrom was, from 1999 to 2000, an associate at
Covington & Burling, a law firm, where he focused on mergers and
acquisitions and corporate governance.





Steven J.
Kessler, age 66, has been our Senior Vice President - Finance since
September 2005 and, before that, served as our Chief Financial Officer, Chief
Accounting Officer and Treasurer from March 2005.  Mr. Kessler
has been Executive Vice President since 2005 and Chief Financial Officer since
1997 and was Senior Vice President from 1997 to 2005 of Resource
America.  He was Vice President - Finance and Acquisitions at Kravco
Company, a then national shopping center developer and operator, from 1994 to
1997.  He was a Trustee of GMH Communities Trust, a previously
publicly traded (NYSE: GCT) specialty housing REIT, from 2004 to 2008 when GCT
was sold.  From 1983 to 1993 he was employed by Strouse
Greenberg & Co., a regional full service real estate company, ending as
Chief Financial Officer and Chief Operating Officer.  Before that, he
was a partner at Touche Ross & Co. (now Deloitte & Touche
LLP), independent public accountants.





David E.
Bloom, age 44, has been our Senior Vice President-Real Estate Investments
since March 2005.  Mr. Bloom has been Senior Vice President of
Resource America since 2001.  He has also been President of Resource
Real Estate, Inc., a wholly-owned real estate subsidiary of Resource America,
since 2004 and President of Resource Capital Partners, a subsidiary of Resource
Real Estate, from 2002 to 2006.  From 2001 to 2002 he was President of
Resource Properties, a former real estate subsidiary of Resource
America.  Before that he was Senior Vice President at Colony Capital,
LLC, an international real estate opportunity fund, from 1999 to
2001.  From 1998 to 1999 he was Director at Sonnenblick-Goldman
Company, a real estate investment bank.  From 1995 to 1998 he was an
attorney at the law firm of Willkie Farr & Gallagher, LLP.





Other
Significant Employees





The
following sets forth certain information regarding other significant employees
of the Manager and Resource America who provide services to us:





Christopher D.
Allen, age 39, has been our Senior Vice President-Commercial Lending
since March 2005.  Mr. Allen has been a Managing Director of
Resource Financial Fund Management since 2003.  At Resource Financial
Fund Management, Mr. Allen is in charge of identifying, implementing and
overseeing new leveraged loan and CDO products.  He is a member of the
investment committee of Apidos Capital Management, LLC, a wholly-owned asset
management subsidiary of Resource America, where he serves as the Chief
Operating Officer.  Before joining Resource Financial Fund Management,
from 2002 to 2003 he was a Vice President at Trenwith Securities, the investment
banking arm of BDO Seidman, LLP, where he was in charge of corporate finance,
mergers and acquisitions and restructuring transactions.  From 1994 to
1997 he was an Associate with Citicorp Venture Capital working on leveraged
buyout and recapitalization transactions.




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Gretchen L.
Bergstresser, age 46, has been our Senior Vice President-Bank Loans since
March 2005.  Ms. Bergstresser has been the President and Senior
Portfolio Manager of Apidos Capital Management since 2005.  Before
joining Apidos Capital Management, from 2003 to 2005 she was the Managing
Director and Portfolio Manager of MJX Asset Management, a multi-billion dollar
boutique asset management firm managing leveraged loans across five structured
vehicles.  From 1996 to 2003 Ms. Bergstresser was CDO Portfolio
Manager and Head Par Loan Trader at Eaton Vance Management, an investment
management company.  From 1995 to 1996 she was a Vice President in the
Diversified Finance Division of Bank of Boston.  From 1991 to 1995 she
was a Vice President at ING (U.S.), Capital Markets, an investment banking
firm.





Crit
DeMent, age 56, has been our Senior Vice President-Equipment Leasing
since March 2005.  Mr. DeMent has been Chairman and Chief
Executive Officer of LEAF Financial Corporation, a majority-owned commercial
finance subsidiary of Resource America, since 2001.  Mr. DeMent
was Chairman and Chief Executive Officer of its subsidiary, LEAF Asset
Management, Inc., from 2002 until 2004.  From 2000 to 2001 he was
President of the Small Ticket Group, an equipment leasing division of European
American Bank.  Before that, he was President and Chief Operating
Officer of Fidelity Leasing, Inc., then the equipment leasing subsidiary of
Resource America, and its successor, the Technology Finance Group of CitiCapital
Vendor Finance, from 1996 to 2000.  From 1987 to 1996 he was Vice
President of Marketing for Tokai Financial Services, an equipment leasing
firm.





Thomas C.
Elliott, age 35, has been our Senior Vice President-Loan Originations
since September 2006 and, prior to that, was our Chief Financial Officer, Chief
Accounting Officer and Treasurer from September 2005 to June 2006.  He
was our Senior Vice President - Assets and Liabilities Management from June 2005
until September 2005 and, before that, served as our Vice President - Finance
from March 2005.  Mr. Elliott has been Senior Vice President -
Finance and Operations of Resource America since 2006; was its Senior Vice
President from 2005 to 2006 and was its Vice President - Finance from 2001 to
2005.  He has also been Chief Financial Officer of Resource Financial
Fund Management since 2004.  From 1997 to 2001 Mr. Elliott was a
Vice President at Fidelity Leasing, where he managed all capital market
functions, including the negotiation of all securitizations and credit and
banking facilities in the U.S. and Canada.  Mr. Elliott also
oversaw the financial controls and budgeting departments.





Alan F.
Feldman, age 45, has been our Senior Vice President-Real Estate
Investments since March 2005.  Mr. Feldman has been Chief
Executive Officer of Resource Real Estate since 2004 and Senior Vice President
of Resource America since 2002.  Mr. Feldman was President of
Resource Properties from 2002 to 2005.  From 1998 to 2002,
Mr. Feldman was Vice President at Lazard Freres & Co., an
investment banking firm, specializing in real estate mergers and acquisitions,
asset and portfolio sales and recapitalization.  From 1992 through
1998, Mr. Feldman was Executive Vice President of PREIT-RUBIN, Inc. the
management subsidiary of Pennsylvania Real Estate Investment Trust and its
predecessor, The Rubin Organization.  Before that, from 1990 to 1992,
he was a Director at Strouse, Greenberg & Co., a regional full service
real estate company.





Kevin M.
Finkel, age 37, has been our Vice President-Real Estate Investments since
January 2006.  He has also been employed by Resource Capital Partners
since 2002, having been its Vice President and Director of Acquisitions from
2003 to 2006 and President since 2006.  Mr. Finkel has also been
an officer of Resource Real Estate since 2004, and is currently its Executive
Vice President and Director of Acquisitions.  In 2000, Mr. Finkel
was an investment banking Associate at Lehman Brothers.  From 1998 to
1999, Mr. Finkel was an Associate at Barclays Capital, the investment
banking division of Barclays Bank PLC.  From 1994 to 1998,
Mr. Finkel was an investment banker at Deutsche Bank Securities, the
investment banking division of Deutsche Bank AG.





Kyle
Geoghegan, age 40, has been our Senior Vice President – Loan Originations
since 2007.  Mr. Geoghegan has been a Managing Director of Resource
Real Estate Funding, Inc., a real estate subsidiary of Resource America, since
July 2006.  Mr. Geoghegan co-manages the whole loan origination
platform for Resource Real Estate Funding and is based in Los
Angeles.  Mr. Geoghegan worked at Bear Stearns from January 1998 to
May 2006, serving as a Managing Director who co-managed the Bear Stearns
Commercial Mortgage office in Los Angeles which originated over $1.0 billion of
loans annually.  Prior to joining Bear Stearns, Mr. Geoghegan spent
four years as a real estate loan officer at PNC Bank in Philadelphia, PA,
primarily originating construction and bridge loans.





Yvana
Melini,age
33, has been our Vice President and Director of Asset Management since
2008.  Ms. Melini has served as Vice President of Debt Asset
Management for Resource Real Estate since 2006.  Prior to joining
Resource Real Estate, Ms. Melini served for over six years as a Vice President
of both the Structured Asset Management and CMBS Credit Administration groups
for Capmark Finance, Inc. (formerly GMAC Commercial Mortgage
Corporation).  Prior to her employment with Capmark, Ms. Melini served
as Senior Underwriter for the Northeast Commercial Real Estate Lending division
of Washington Mutual Bank.  Ms. Melini has also privately consulted on
various due diligence projects for large institutional investors and B-Piece
buyers within the CMBS marketplace.





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Darryl
Myrose, age 35, has been our Senior Vice President – Loan Originations
since 2007.  Mr. Myrose has been a Managing Director of Resource Real
Estate Funding since July 2006.  Mr. Myrose co-manages the whole
loan origination platform for Resource Real Estate Funding and is based in Los
Angeles.  Mr. Myrose worked at Bear Stearns from April 1996 to
May 2006, serving as a Managing Director who co-managed the Bear Stearns
Commercial Mortgage office in Los Angeles which originated over $1.0 billion of
loans annually.  Prior to joining Bear Stearns, Mr. Myrose was
employed with Clarion Advisors (formerly Jones Lang Wootton Realty Advisors)
where he was an asset management analyst.





Thomas C.
Powers, age 44, has been our Vice President – Real Estate Investment
since 2007.  Mr. Powers has been Senior Vice President of Resource
Real Estate Funding since January 2008 and was Vice President from 2006 to
2008.  Mr. Powers is responsible for all real estate asset management
including investment origination and all aspects of transaction
management.  Mr. Powers has over 20 years of commercial real estate,
workout and risk management experience.  Prior to joining Resource
Real Estate Funding, Mr. Powers was a senior member of the real estate credit
risk management and workout group at Merrill Lynch.  Prior to his
employment with Merrill Lynch, Mr. Powers worked in the project finance group at
UBS Investment Bank.





Joan M.
Sapinsley, age 57, has been our Senior Vice President – CMBS since
2007.  Ms. Sapinsley joined Resource Financial Fund Management, Inc.
in February 2007 as Managing Director and manages our CMBS portfolio. Prior to
joining Resource Financial Fund Management, Ms. Sapinsley was a Managing
Director at TIAA, where she worked from 1992 through 2006 purchasing CMBS. She
was responsible for all single borrower and single asset CMBS, as well as
subordinate CMBS and B-notes.  She also directed TIAA’s conduit
origination and securitization activities. Before TIAA, Ms. Sapinsley was a
Director in the Financial Services Group of Cushman & Wakefield and a real
estate consultant at Laventhol & Horwath.





Michael S.
Yecies, age 41, has been our Chief Legal Officer and Secretary since
March 2005 and our Senior Vice President since July
2007.  Mr. Yecies has been Senior Vice President of Resource
America since 2005, Chief Legal Officer and Secretary since 1998 and was Vice
President from 1998 to 2005.  From 1994 to 1998 he was an attorney at
the law firm of Duane Morris LLP.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act
requires our officers, directors 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 Securities and Exchange Commission and to furnish
us with copies of all such reports.





Based solely on our review of the
reports received by us, we believe that, during fiscal 2008, our officers,
directors and greater than ten percent shareholders complied with all applicable
filings requirements, except Mr. Bloom filed one late Form 5 relating to a
restricted stock grant.





Code
of Ethics





We have adopted a code of business
conduct and ethics applicable to all directors, officers and
employees.  We will provide to any person without charge, upon
request, a copy of our code of conduct.  Any such request should be
directed to us as follows: Resource Capital Corp., 1845 Walnut Street, Suite
1000, Philadelphia, PA 19103, Attention: Secretary.  Our code of
conduct is also available on our website: www.resourcecapitalcorp.com.We intend to satisfy the
disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or
waiver from, a provision of this code of conduct by posting such information on
our website, unless otherwise required by applicable law or
regulation.





Information
Concerning the Audit Committee




Our Board of Directors has a standing
audit committee.  The audit committee reviews the scope and
effectiveness of audits by the independent accountants, is responsible for the
engagement of independent accountants, and reviews the adequacy of our internal
financial controls.  Members of the committee are Messrs. Neff
(Chairman), Beach and Hart.  The board of directors has determined
that each member of the audit committee meets the independence standards for
audit committee members set forth in the listing standards of the New York Stock
Exchange, or NYSE, including those set forth in Rule 10A-3(b)(1) of the
Securities Exchange Act of 1934, and that Messrs. Beach and Neff each qualifies
as an “audit committee financial expert” as that term is defined in the rules
and regulations thereunder.




ITEM
11.  EXECUTIVE
COMPENSATION





Compensation
Discussion and Analysis





We are required to provide information
regarding the compensation program in place for our CEO, CFO and the three other
most highly-compensated executive officers. In the following discussion, we
refer to our CEO, CFO and the other most highly-compensated executive officers
whose compensation in fiscal 2008 exceeded $100,000 as our “Named Executive
Officers” or “NEOs.”


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Objectives
of Our Compensation Program


We have no employees.  We are
managed by our Manager pursuant to a management agreement, amended on June 30,
2008, between our Manager and us.  All of our NEOs are employees of
our Manager or one of its affiliates.  We have not paid, and do not
intend to pay, any cash compensation to our NEOs. However, our Compensation
Committee may, from time to time, grant equity awards in the form of restricted
stock, stock options or performance awards to our NEOs pursuant to our 2005
Stock Incentive Plan and/or the 2007 Omnibus Equity Compensation
Plan.  These awards are designed to align the interests of our NEOs
with those of our stockholders, by allowing our NEOs to share in the creation of
value for our stockholders through stock appreciation and
dividends.  These equity awards are generally subject to time-based
vesting requirements designed to promote the retention of management and to
achieve strong performance for our company. These awards further provide us
flexibility in our ability to enable our Manager to attract, motivate and retain
talented individuals at our Manager.


Setting
Executive Compensation


Our NOEs are employees of Resource
America, which determines the base salary, cash incentive compensation and, for
grants of Resource America equity securities, equity incentive compensation that
is paid to our NEOs.  A portion of the base salary and cash incentive
compensation paid to them is derived from the fees paid by us under the
management agreement.  We do not control how such fees are allocated
by Resource America to its employees.  For a description of our
management agreement, see Item 1: “Business-Management Agreement.”  We
disclose the cash amounts paid by Resource America to our chief financial
officer, our only NEO who devotes his full business time or our affairs in the
Summary Compensation Table below even though we do not pay these amounts to
him.





When Resource America makes its
determination of the amount of compensation it will award to one of our NEOs,
including in particular the amount of Resource America securities that Resource
America will grant as equity incentive compensation, Resource America also
considers, but does not determine, the amount of Resource Capital securities we
propose to grant as our equity incentive compensation to that
NEO.  Similarly, in determining the amount of equity incentive
compensation we grant to one of our NEOs, our compensation committee considers,
but does not determine, the compensation that Resource America proposes to grant
to that NEO, including Resource America’s grant of Resource America securities
as equity incentive compensation.  Our respective compensation
committees base their analyses and determinations upon recommendations submitted
by Jonathan Z. Cohen, who is chief executive officer of both companies, for all
of our NEOs other than himself.  Resource America’s compensation
committee determines the amount of compensation Resource America will award Mr.
J. Cohen, while our compensation committee determines the amount of any Resource
Capital equity incentive compensation we award to Mr. J. Cohen.  These
analyses and determinations are not based upon any particular compensation
matrix or formula, but instead are based upon qualitative evaluations by Mr.
J. Cohen and the compensation committees.  Our compensation
committee does not make recommendations to Resource America as to the amount of
compensation Resource America grants to our NEOs, nor does Resource America’s
compensation committee make recommendations to us regarding the amount of equity
incentive compensation awarded by us to our NEOs.





Our compensation committee operates
under a written charter adopted by our Board of Directors, a copy of which is
available on our website at www.resourcecapitalcorp.com.  Our
compensation ccommittee determines compensation amounts after the end of
Resource America’s fiscal year, September 30, and makes equity awards in the
first quarter of the following year.  Our compensation committee has
the discretion to issue equity awards at other times during the fiscal
year.


Elements
of Our Compensation Program





As described above, our NEOs do not
receive cash compensation from us.  However, our compensation
committee may, from time to time, grant equity awards in the form of restricted
stock, stock options or performance awards to our NEOs pursuant to our 2005
Stock Incentive Plan and/or the 2007 Omnibus Equity Compensation Plan as
follows:





Stock
Options.  Stock options provide value to the executive only if
our stock price increases after the grants are made.  Stock options
typically vest 33.3% per year.




Restricted
Stock.  Restricted stock units reward stockholder value
creation slightly differently than stock options:  restricted stock
units are impacted by all stock price changes, both increases and
decreases.  Restricted stock units generally vest 33.3% per year and
include a right to receive dividends on unvested shares.





Resource America Restricted
Stock.  As described above, Resource America’s compensation
committee approves awards of Resource America restricted stock to
NEOs.  These awards generally vest 25% per year, and may include a
right to receive dividends on unvested shares.





Resource America Stock
Options.  As described above, Resource America’s compensation
committee approves awards of Resource America options to receive restricted
stock to NEOs.  These awards generally vest 25% per year.




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Supplemental Incentive
Arrangements with David Bloom.  In October 2007, we entered to
an agreement with David Bloom, our Senior Vice President−Real Estate
Investments, which awarded him 50,000 shares of our restricted stock under our
2005 Stock Incentive Plan.  These shares vest one-ninth (1/9) at the
end of each fiscal quarter, beginning December 31, 2007.  In addition,
all unvested shares will vest upon a change of control, as defined in the 2005
Stock Incentive Plan.  The right to receive unvested shares will
terminate upon the termination of Mr. Bloom’s employment by Resource America,
unless the termination results from Mr. Bloom’s death or from illness or injury
that lasts at least 6 months, is expected to be permanent and renders Mr. Bloom
unable to carry out his duties.  We pay dividends on unvested
awards.





In December 2007, Resource America
entered into another agreement with Mr. Bloom which provides for awards to him
of our restricted stock and Resource America restricted stock.  With
respect to our restricted stock, Mr. Bloom was awarded 120,000 shares, 60,000 of
which are subject to vesting over time and 60,000 of which are earned based on
the achievement of predetermined, objective performance goals over a multi-year
performance period.  We pay dividends on unvested
awards.  With respect to the shares that vest over time, 15% vested on
June 30, 2008, 15% vest on June 30, 2009 and 70% vest on December 31, 2010,
provided that Mr. Bloom is employed by Resource America at each vesting
date.  The award opportunities, presented in number of potential
shares earned, are included in the Grant of Plan-Based Awards table
below.  With respect to the performance-based shares, they will be
earned on achievement of performance goals over the performance period beginning
July 1, 2007 and ending June 30, 2010, with one-third of the units being earned
at the end of each 12-month period measurement period. The performance measures
are as follows:




·
            Loan Origination.For each
      measurement period, the loan origination volume generated by Mr. Bloom and
      his colleagues in Resource America’s Los Angeles office, which we refer to
      as Mr. Bloom’s team, must be equal to or greater than 90% of the loan
      origination volume generated by Mr. Bloom’s team for the previous 12-month
      period.  Resource America may waive the loan origination
      performance criteria, if in its reasonable discretion, reaching such
      levels could not be reasonably achieved notwithstanding Mr. Bloom’s team’s
      best efforts.  Our compensation committee along with Resource
      America’s compensation committee will exercise this
      discretion.




·
            Portfolio
      Diversity.The loans
      generated by Mr. Bloom’s team during the measurement period must conform
      to the diversity and loan type standards set forth in the investment
      parameters of the commercial real estate CDOs managed on our
      behalf.




·
            Pricing.  The
      gross weighted average spread on loans generated by Mr. Bloom’s team
      during the measurement period must be not less than 250 basis points over
      the applicable index.  Resource America may exclude certain
      loans from this calculation and/or may waive the pricing provision for the
      measurement period in its entirety.




·
            Credit Quality.There shall have
      been no principal losses during the measurement period on any loan
      originated by Mr. Bloom’s team and no greater than 10% of the loans
      originated by Mr. Bloom’s team (measured by principal balance) shall have
      been in default during such measurement
period.





If the performance criteria for a given
measurement period are largely, but not entirely, met, the compensation
committeeswill
reasonably take such substantial performance into account in determining an
equitable partial earning of the award for such measurement
period.  Once earned, the shares of restricted stock vest over the
following two years, at the rate of one-eighth (1/8) per quarter, as long as Mr.
Bloom is employed by Resource America on the last day of such quarter. The
performance-based stock awards are disclosed under the Grants of Plan-Based
Awards table under the heading “Estimated future payouts under equity incentive
plan awards” and in the Outstanding Equity Awards at Fiscal Year-End table under
the heading “Equity incentive plan awards.”





How We Determined 2008 Compensation
Amounts




Upon our CEO’s recommendation, our
Compensation Committee made the following awards for fiscal 2008:




·
            Mr.
      J. Cohen was awarded 0 options and 0 shares of restricted stock for fiscal
      2008, as compared to 0 options and 87,158 shares of restricted stock for
      fiscal 2007.




·
            Mr.
      Bryant was awarded 0 options and 13,484 shares of restricted stock for
      fiscal 2008, as compared to 0 options and 4,183 shares of restricted stock
      for fiscal 2007.  Mr. Bryant was also awarded 5,000 Resource
      America options for fiscal 2008 and 1,846 shares of restricted Resource
      America stock for fiscal 2007.




·
            Mr.
      Bloom was awarded 0 options and 18,878 shares of restricted stock for
      fiscal 2008, as compared to 0 options and 181,621 shares of restricted
      stock for fiscal 2007.  See “− Elements of Our Compensation
      Program−Supplemental Incentive Arrangements with David
    Bloom.”





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Report of the Compensation
Committee





The compensation committee has reviewed
and discussed the Compensation Discussion and Analysis with management and based
on its review and discussions, the compensation committee recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in
this filing.





This report has been provided by the
compensation committee of the Board of Directors of Resource Capital
Corp.





Murray S.
Levin


P.
Sherrill Neff


Walter T.
Beach





The following table sets forth certain
information concerning the compensation paid or accrued in fiscal 2008, 2007 and
2006 for our NEOs:





SUMMARY
COMPENSATION




Name
      and Principal Position
                
                Year
                
                Salary ($)
                
                
                Bonus ($)
                
                
                Stock
                    Awards ($)(2)
                
                
                Option
                  Awards ($)(3)
                
                
                All Other
                    Compen-sation ($)(4)
                
                
                Total
      ($)Jonathan
      Z. Cohen
                
                2008
                
                
                −
                
                
                
                −
                
                
                
                (135,418
                )(5)
                
                
                (7,122
                )(5)
                
                
                −
                
                
                
                (142,540
                )Chief
      Executive Officer,
                
                2007
                
                
                −
                
                
                
                −
                
                
                
                538,860
                
                
                
                (14,449
                )(5)
                
                
                −
                
                
                
                524,411President and
    Director
                
                2006
                
                
                −
                
                
                
                −
                
                
                
                773,309
                
                
                
                107,611
                
                
                
                −
                
                
                
                880,920David
      J. Bryant
                
                2008
                
                
                240,000
                (1)
                
                
                185,000
                (1)
                
                
                29,746
                
                
                
                (712
                )(5)
                
                
                15,425
                
                
                
                469,459Senior
      Vice President,
                
                2007
                
                
                240,000
                (1)
                
                
                120,000
                (1)
                
                
                25,862
                
                
                
                (1,445
                )(5)
                
                
                47,978
                
                
                
                432,395Chief Financial
      Officer,
                  Chief Accounting
      Officer
                  and Treasurer
                
                2006
                
                
                122,769
                (1)
                
                
                −
                (1)
                
                
                −
                
                
                
                10,761
                
                
                
                −
                
                
                
                133,530David
      E. Bloom
                
                2008
                
                
                −
                
                
                
                −
                
                
                
                290,245
                
                
                
                (7,122
                )(5)
                
                
                
                
                
                
                283,123Senior
      Vice President−
                
                2007
                
                
                −
                
                
                
                −
                
                
                
                205,803
                
                
                
                (14,449
                )(5)
                
                
                −
                
                
                
                191,354Real Estate
      Investments
                
                2006
                
                
                −
                
                
                
                −
                
                
                
                38,662
                
                
                
                107,611
                
                
                
                −
                
                
                
                146,273


(1)
              Mr.
      Bryant joined us as our Senior Vice President and Chief Financial Officer,
      Chief Accounting Officer and Treasurer on June 28, 2006.  Mr.
      Bryant’s salary and bonus were paid by Resource America.  We do
      not reimburse Resource America for any part of Mr. Bryant’s salary or
      bonus.




(2)
              The
      dollar value of stock awards represents the dollar amount recognized for
      financial statement reporting purposes.  For financial statement
      purposes, we are required to value these shares under EITF 96-18 because
      neither the Manager, nor our NEOs are employees of our company.  See
      Item 7, “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations – Critical Accounting Policies - Stock Based
      Compensation” and Note 11 to our consolidated financial statements for an
      explanation of the assumptions for this
  valuation.




(3)
              The
      dollar value of option awards represents the dollar amount recognized for
      financial statement reporting purposes.  For financial statement
      purposes, we are required to value these options under EITF 96-18 because
      neither the Manager nor our NEOs are employees of our
      company.  See Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations – Stock Based Compensation”
      for a more detailed discussion.  In valuing
      options awarded to Messrs. J. Cohen, Bryant, and Bloom at $0.04 per
      option, we used the Black-Scholes option pricing model to estimate the
      weighted average fair value of each option granted with weighted average
      assumptions for (a) expected dividend yield of 27.3%, (b) risk-free
      interest rate of 3.3%, (c) expected volatility of 51.0%, and (d) an
      expected life of 7.0
years.




(4)
              2008
      amount represents award of options to purchase Resource America restricted
      common stock.  In valuing options awarded at $3.09 per option,
      we used the Black-Scholes option pricing model to estimate the fair value
      of each option granted with assumptions for (a) expected dividend yield of
      3.4%, (b) risk-free interest rate of 3.8%, (c) expected volatility of
      49.5%, and (d) an expected life of 6.3 years.  2007 represents
      award of Resource America restricted stock earned during 2007, valued at
      the closing price of Resource America common stock on the date of the
      grant in January 2007.




(5)
              These
      values were net income for us due to stock and option revaluation which we
      are required to do quarterly until the shares and options vest under EITF
      96-18 because neither the Manager nor the grantees are employees of
      ours.  The shares and options are amortized from the date of the
      grant until they vest and re-priced quarterly.  If the share
      price or option value drops, we are required to recapture some of the
      expense that we had previously recognized.  These numbers
      represent such a recapture.




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GRANTS
OF PLAN-BASED AWARDS TABLE





During 2008, we made restricted stock
awards to our NEOs.  In addition our Chief Financial Officer received
an award of Resource America options.





The following table sets forth
information with respect to each of these awards on a grant-by-grant
basis.


Name
                
                Grant
      date
                
                All
      other stock awards: number of shares of stock (#)
                
                
                Grant
      date fair value of stock and option awards ($)(1)
                
                
                All
      other option awards: number of securities underlying
                    options
      (#)
                
                
                Exercise
      or base price of option awards ($/Sh)
                
                
                Grant
      date fair value of stock and option awards ($)David
      J. BryantOur restricted
    stock
                
                01/11/08
                
                
                13,484
                
                
                
                124,997Resource America
      options
                
                05/21/08
                
                
                
                
                
                
                
                
                
                
                5,000
                
                
                
                8.14
                
                
                
                15,425David
      E. BloomOur restrictedstock
                
                01/14/08
                
                
                18,878
                
                
                
                174,999


(1)
            Based
      on the closing price of our stock on the respective grant
      date.








OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
 
 Option
      Awards
                Stock
      AwardsName
                
                Number
      of Securities Underlying Unexercised Options (#) Exercisable
                
                
                Number
      of Securities Underlying Unexercised Options (#)  Unexercisable
                
                
                Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned
                  Options (#)
                
                
                Option
      Exercise Price($)
                
                Option
                  Expiration
      Date
                
                Number of
      Shares or Units of Stock That Have Not
                  Vested (#)
                
                
                Market
      Value of Shares or Units of Stock That Have Not
                  Vested ($)(1)
                
                
                Equity 
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
    (#)
                
                
                Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares,
      Units or Other Rights That Have Not Vested ($) (1)Jonathan
      Z. Cohen
                
                
                66,667
                
                
                
                33,333
                (2)
                
                
                −
                
                
                
                15.00
                
                03/07/15
                
                
                47,428
                
                
                
                181,649
                
                
                
                −
                
                
                
                −David
      J. Bryant
                
                
                6,667
                
                
                
                3,333
                (3)
                
                
                −
                
                
                
                15.00
                
                03/07/15
                
                
                15,229
                
                
                
                58,327
                
                
                
                −
                
                
                
                −−
                
                
                
                5,000
                (5)
                
                
                
                
                
                
                8.16
                
                05/21/18
                
                
                1,040
                (6)
                
                
                4,160
                (7)
                
                
                −
                
                
                
                −David
      E. Bloom
                
                
                66,667
                
                
                
                33,333
                (2)
                
                
                −
                
                
                
                15.00
                
                03/07/15
                
                
                97,503
                
                
                
                373,436
                
                
                
                40,000
                (4)
                
                
                153,200


(1)
            Based
      on the closing price of our common stock $3.83 on December 31,
      2008.




(2)
            Represents
      options to purchase our common stock that vest on May 17,
      2009.




(3)
            Represents
      options to purchase our common stock that vest on June 28,
      2009.




(4)
            Represents
      performance-based restricted stock awards under our 2007 Omnibus Equity
      Compensation Plan that vest based on the achievement of pre-determined
      objective performance goals over a multi-year performance
      period.  See “Compensation Discussion and
    Analysis.”




(5)
            Represents
      options to purchase shares of Resource America common stock that vest 1⁄4 on
      each anniversary date through May 21,
2012.




(6)
            Represents
      shares of Resource America common stock.  Based upon a price of
      $4.00, the price of Resource America’s common stock on December 31,
      2008.





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2008
OPTION EXERCISES AND STOCK VESTED




Stock
      AwardsName
              
              Number
      of Shares
                  Acquired
      on Vesting (#)
              
              Value
      Realized on
                  Vesting
      ($) (1)Jonathan
      Z. Cohen
              
              95,285
              
              714,399David
      J. Bryant
              
              2,438
              
              19,757David
      E. Bloom
              
              40,218
              
              271,959


(1)
              Represents
      market value of our common stock on vesting
  date.





Director
Compensation





For 2008, the board of directors
approved compensation for each independent director consisting of an annual cash
retainer of $52,500 and an annual stock award valued at $22,500 on the date of
grant on the anniversary of the date each of them became a
director.  The following table sets forth director compensation for
2008:


Name
      (1)
              
              Fees
      Earned or Paid in Cash ($)
              
              Stock
      Awards ($) (2)
              
              Total
      ($)Walter
      T. Beach
              
              52,500
              
              21,088
              
              73,588William
      B. Hart
              
              52,500
              
              21,088
              
              73,588Murray
      S. Levin
              
              52,500
              
              21,088
              
              73,588P.
      Sherrill Neff
              
              52,500
              
              21,088
              
              73,588Gary
      Ickowicz
              
              52,500
              
              21,872
              
              74,372Edward
      E. Cohen
              
              −
              
              −
              
              −
 
 (1)
              Table
      excludes Mr. J. Cohen, our NEO, whose compensation is set forth in the
      Summary Compensation table.


(2)
              Dollar
      value represents the amount recognized for financial statement reporting
      purposes with respect to 2008.  The amount for each of Messrs.
      Beach, Hart, Levin and Neff is based upon 897 restricted shares granted
      March 7, 2007 ($14,998 grant date fair value) which vested March 8, 2008
      and 3,750 restricted shares granted March 8, 2007 ($22,500 grant date fair
      value) which vested on March 8, 2009; and, for Mr. Ickowicz, the amount is
      based upon 816 restricted shares granted February 1, 2007 ($14,998 grant
      date fair value) which vested on February 1, 2008 and 2,261 restricted
      shares granted March 8, 2008 ($22,497 grant date fair value) which vested
      on February 1, 2009.





Compensation
Committee Interlocks and Insider Participation





The compensation committee of the board
during 2008 consisted of Messrs.
Beach, Levin and Neff.  None of such persons was an officer or
employee, or former officer or employee, of our company or any of its
subsidiaries during 2008.  None of our executive officers was a
director or executive officer of any entity of which any member of the
compensation committee was a director or executive officer during
2008.





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ITEM
12.               SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND


MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS





The following table sets forth the
number and percentage of shares of common stock owned, as ofMarch 2, 2009, by (a) each person who, to our
knowledge, is the beneficial owner of more than 5% of the outstanding shares of
common stock, (b) each of our present directors, (c) each of our executive
officers and (d) all of our named executive officers and directors as a
group.  This information is reported in accordance with the beneficial
ownership rules of the Securities and Exchange Commission under which a person
is deemed to be the beneficial owner of a security if that person has or shares
voting power or investment power with respect to such security or has the right
to acquire such ownership within 60 days.  Shares of common stock
issuable pursuant to options or warrants are deemed to be outstanding for
purposes of computing the percentage of the person or group holding such options
or warrants but are not deemed to be outstanding for purposes of computing the
percentage of any other person.




Shares owned
                  
                  
                  Percentage(1)Executive
      officers and directors: (2)Edward
      E. Cohen (3)
                  
                  
                  265,786
                  
                  
                  
                  1.07
                  %Jonathan
      Z. Cohen (3)
                  
                  
                  442,824
                  
                  
                  
                  1.78
                  %Walter
      T. Beach (4)(5)
                  
                  
                  1,048,218
                  
                  
                  
                  4.22
                  %William
      B. Hart (5)
                  
                  
                  16,703
                  
                  
                  
                  *Gary
      Ickowicz (5)
                  
                  
                  9,793
                  
                  
                  
                  *Murray
      S. Levin (5)
                  
                  
                  10,703
                  
                  
                  
                  *P.
      Sherrill Neff (5)
                  
                  
                  16,703
                  
                  
                  
                  *Jeffrey
      D. Blomstrom (3)
                  
                  
                  44,645
                  
                  
                  
                  *David
      E. Bloom (3)
                  
                  
                  228,261
                  
                  
                  
                  *David
      J. Bryant (3)
                  
                  
                  60,197
                  
                  
                  
                  *Steven
      J. Kessler (3)
                  
                  
                  50,468
                  
                  
                  
                  *All
      executive officers and directors as a group (11 persons)
                  
                  
                  2,194,301
                  
                  
                  
                  8.78
                  %Owners
      of 5% or more of outstanding shares: (6)Resource
      America, Inc. (7)
                  
                  
                  2,022,578
                  
                  
                  
                  8.15
                  %Leon
      G. Cooperman (8)
                  
                  
                  2,737,033
                  
                  
                  
                  11.03
                  %


*      Less
than 1%.




(1)
              Includes
      169,996 shares of common stock issuable upon exercise of stock
      options.
  (2)
              The
      address for all of our executive officers and directors is c/o Resource
      Capital Corp., 712 Fifth Avenue, 10th Floor, New York, New York
      10019.
  (3)
              Includes
      restricted stock awards granted to certain officers and directors as
      follows:  (i) on January 3, 2006: Mr. Blomstrom – 1,666 shares;
      Mr. Bloom – 1,666 shares; and Mr. J. Cohen – 33,333 shares; all these
      shares vested 33.33% per year, (ii) on January 5, 2007: Mr. Blomstrom –
      14,526 shares; Mr. Bloom – 11,621 shares; Mr. Bryant – 4,183 shares; and
      Mr. J. Cohen – 87,158 shares; all these shares vested 33.33% on January 5,
      2008 and vest 8.33% quarterly thereafter, (iii) on October 30, 2007:
      50,000 shares to Mr. Bloom; these shares vest quarterly through December
      31, 2009; (iv) on December 26, 2007: 60,000 shares to Mr. Bloom; these
      shares vested 15% on June 30, 2008, and will vest 15% on June 30, 2009 and
      70% on December 31, 2010; (v) on January 14, 2008: Mr. Blomstrom – 10,787
      shares; Mr. Bloom – 18,878 shares; Mr. Bryant – 13,484 shares; Mr. E.
      Cohen – 10,787 shares; and Mr. Kessler – 5,393 shares; all these shares
      vest 33.33% per year; (vi) an January 26, 2009:  16,181 shares
      to Mr. Kessler; these shares vest in full on January 26, 2010; and (vii)
      on February 20, 2009: 23,364 shares to Mr. Bryant; these shares vest in
      full on February 20, 2009.  Each such person has the right to
      receive distributions on and vote, but not to transfer, such
      shares.
  (4)
              Includes
      (i) 1,041,515 shares purchased by Beach Asset Management, LLC, Beach
      Investment Counsel, Inc. and/or Beach Investment Management, LLC,
      investment management firms for which Mr. Beach is a principal and
      possesses investment and/or voting power over the shares.  The
      address for these investment management firms is Five Tower Bridge, 300
      Barr Harbor Drive, Suite 220, West Conshohocken, Pennsylvania
      19428.
  (5)
              Includes
      (i) 3,750 shares of restricted stock issued to each of Messrs. Beach,
      Hart, Levin and Neff on March 8, 2008 which vest on March 8, 2009, and
      (ii) 6,716 shares of restricted stock issued to Mr. Ickowicz on February
      1, 2009 which vest on February 1, 2010.  Each non-employee
      director has the right to receive distributions on and vote, but not to
      transfer, such shares.
  (6)
              The
      addresses for our 5% or more holders are as follows: Resource America,
      Inc.: 1845 Walnut Street, Suite 1000, Philadelphia, Pennsylvania 19103;
      and Leon G. Cooperman: 88 Pine Street, Wall Street Plaza, 31st
      Floor, New York, New York 10005.
  (7)
              Includes
      (i) 921 shares of restricted stock granted to the Manager in connection
      with our March 2005 private placement that the Manager has not allocated
      to its employees, (ii) 100,000 shares purchased by the Manager in our
      initial public offering, (iii) 900,000 shares purchased by Resource
      Capital Investor in our March 2005 private placement, (iv) 900,000
      shares purchased by Resource Capital Investor in our initial public
      offering, and (v) 121,657 shares transferred to the Manager as incentive
      compensation pursuant to the terms of its management agreement with
      us.
  (8)
              This
      information is based on a Form 4 filed with the SEC on February 12,
      2009.  Omega Advisors Inc., of which Mr. Cooperman is President
      and majority stockholder, was previously granted a limited waiver with
      respect to ownership limitations in our declaration of
    trust.
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Equity
Compensation Plan Information





The following table summarizes certain
information about our 2005 Stock Incentive Plan and 2007 Omnibus Equity
Compensation Plan as of December 31, 2008:


(a)
                            (b)
                            (c)Plan
      category
                            Number
      of securities to be issued upon exercise of outstanding
      options,
                              warrants
      and rights
                            Weighted-average
      exercise price of
                              outstanding
      options,
                              warrants
      and rights
                            Number
      of securities remaining
                              available
      for future issuance under equity compensation plans excluding securities
      reflected in column (a)Equity
      compensation plans
                              approved by securityholders:Options
                            624,166
                            $14.99Restricted
      shares
                            452,310
                            N/ATotal
                            1,076,476
                            
                            1,615,580
      (1)
      (2)


(1)
            Upon
      the July 2006 hiring of certain significant employees of the Manager, we
      agreed to pay up to 100,000 shares of restricted stock and 100,000 options
      to purchase restricted stock upon the achievement of certain performance
      thresholds, the first of which was met in June 2007 and, as a result,
      60,000 shares of restricted stock and 60,000 options to purchase
      restricted stock were issued at that time.  As of December 31,
      2008, 40,000 shares of restricted stock and 40,000 options to purchase
      restricted stock are unissued.  These shares and options to
      purchase restricted stock, which have been reserved for future issuance
      under the plans, have been deducted from the number of securities
      remaining available for future issuance.  See Item 8, “Financial
      Statements and Supplementary Data” at Note 11 for a more detailed
      discussion.




(2)
            We
      agreed to award certain personnel up to 300,595 shares of restricted stock
      upon the achievement of certain performance thresholds.  During
      the year ended December 31, 2008, 2,706 of those shares were
      forfeited.  The remaining 297,889 shares, which have been
      reserved for future issuance under the plans, have been deducted from the
      number of securities remaining available for future
    issuance.






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ITEM
13.                      CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR


INDEPENDENCE





Relationships
and Related Transactions





We have entered into a management
agreement under which the Manager receives substantial fees.  We
describe these fees in Item 1 − “Business − Management
Agreement.”  For the year ended December 31, 2008, the Manager earned
base management fees of approximately $4.5 million and incentive compensation
fees of $1.8 million (including $440,000 paid in the form of 86,489
shares).  We also reimburse the Manager and Resource America for
financial services expense, rent and other expenses incurred in the performance
of their duties under the management agreement.  For the year ended
December 31, 2008, we reimbursed the Manager $392,000 for such
expenses.  In addition, we may reimburse the Manager and Resource
America for expenses for employees of Resource America who perform legal,
accounting, due diligence and other services that outside professionals or
consultants would otherwise perform.  No such expense reimbursements
were made in the year ended December 31, 2008.  As of December 31,
2008 we had executed six CDO transactions.  These CDO transactions
were structured for us by the Manager; however, the Manager was not separately
compensated by us for executing these transactions and is not separately
compensated by us for managing the CDO entities and their assets.





Resource America, entities affiliated
with it and our executive officers and directors collectively beneficially own
4,216,879 shares of common stock, representing approximately 16% of our common
stock on a fully-diluted basis.  Our executive officers are also officers
of our Manager and/or of Resource America or its subsidiaries.





LEAF Financial Corp. a majority-owned
subsidiary of Resource America, originates and manages our equipment lease and
note investments.  We purchase these investments from LEAF Financial
at a price equal to their book value plus a reimbursable origination cost not to
exceed 1% to compensate LEAF Financial for its origination costs.  In
addition, we pay LEAF Financial an annual servicing fee, equal to 1% of the book
value of managed assets, for servicing our equipment lease
investments.  For the year ended December 31, 2008, we acquired $42.5
million of equipment lease and note investments from LEAF Financial, including
$425,000 of origination cost reimbursements.  During the year ended
December 31, 2008, we paid LEAF Financial $953,000 in annual servicing
fees.  During the year ended December 31, 2008, we sold 16 leases back to LEAF Financial for $6.3 million,
their book value.





Until 1996, our Chairman, Edward Cohen,
was of counsel to Ledgewood, P.C., a law firm.  For the year ended
December 31, 2008, we paid Ledgewood $164,000.  Mr. Cohen receives
certain debt service payments from Ledgewood related to the termination of his
affiliation with Ledgewood and its redemption of his interest in the
firm.  For the year ended December 31, 2008, those payments were
$215,000.





Policies
and Procedures Regarding Related Transactions





Under our Management Agreement with the
Manager and Resource America, we have established policies regarding the offer
of potential investments to us, our acquisition of those investments and the
allocation of those investments among other programs managed by the Manager or
Resource America.  We have also established policies regarding
investing in investment opportunities in which the Manager or Resource America
has an interest and regarding investing in any investment fund or CDO
structured, co-structured or managed by the Manager or Resource
America.





The Manager and Resource America must
offer us the right to consider all investments they identify that are within the
parameters of our investment strategies and policies.  For all
potential investments other than in equipment leases and notes, if the Manager
and Resource America identify an investment that is appropriate both for us and
for one or more other investment programs managed by them, but the amount
available is less than the amount sought by all of their investment programs,
they will allocate the investment among us and such other investment programs in
proportion to the relative amounts of the investment sought by
each.  If the portion of the investment allocable to a particular
investment program would be too small for it to be appropriate for that
investment program, either because of economic or market inefficiency,
regulatory constraints (such as REIT qualification or exclusion from regulation
under the Investment Company Act) or otherwise, that portion will be reallocated
among the other investment programs.  Investment programs that do not
receive an allocation will have preference in future investments where
investment programs are seeking more of the investment than is available so
that, on an overall basis, each investment program is treated
equitably.





To equitably allocate investments that
the Manager or Resource America has acquired at varying prices, the Manager and
Resource America will allocate the investment so that each investment program
will pay approximately the same average price.





With respect to equipment leases and
notes, if an investment is appropriate for more than one investment program,
including us, the Manager and Resource America will allocate the investment
based on the following factors:




·
            which
      investment program has been seeking investments for the longest period of
      time;




·
            whether
      the investment program has the cash required for the
      investment;




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·
            whether
      the amount of debt to be incurred with respect to the investment is
      acceptable for the investment
program;




·
            the
      effect the investment will have on the investment program’s cash
      flow;




·
            whether
      the investment would further diversify, or unduly concentrate, the
      investment program’s investments in a particular lessee, class or type of
      equipment, location or industry;
and




·
            whether
      the term of the investment is within the term of the investment
      program.




The Manager and Resource America may
make exceptions to these general policies when other circumstances make
application of the policies inequitable or uneconomic.





The Manager has also instituted
policies designed to mitigate potential conflicts of interest between it and us,
including:




·
            We
      will not be permitted to invest in any investment fund or CDO structured,
      co-structured or managed by the Manager or Resource America other than
      those structured, co-structured or managed on our behalf.  The
      Manager and Resource America will not receive duplicate management fees
      from any such investment fund or CDO to the extent we invest in
      it.




·
            We
      will not be permitted to purchase investments from, or sell investments
      to, the Manager or Resource America, except that we may purchase
      investments originated by those entities within 60 days before our
      investment.





Except as described above or provided
for in our management agreement with the Manager and Resource America, we have
not adopted a policy that expressly prohibits transactions between us or any of
our directors, officers, employees, security-holders or
affiliates.  However, our code of business conduct and ethics
prohibits any transaction that involves an actual or potential conflict except
for transactions permitted under guidelines which may be adopted by our Board of
Directors.  No such guidelines have been adopted as of the date of
this report.  In addition, our Board of Directors may approve a waiver
of the code of ethics and business conduct for a specific transaction, which
must be reported to our stockholders to the extent required by applicable law or
NYSE rule.  No such waivers have been granted through the date
hereof.





Director
Independence





Our common stock is listed on the NYSE
and, as a result, we are subject to its listing standards.  The board
of directors has determined that Messrs. Beach, Hart, Ickowicz, Levin and Neff
each satisfy the requirement for independence set out in Section 303A.02 of the
rules of the NYSE and that each of these directors has no material relationship
with us (other than being a director and/or a stockholder).  In making
its independence determinations, the board of directors sought to identify and
analyze all of the facts and circumstances relating to any relationship between
a director, his immediate family or affiliates and our company and our
affiliates and did not rely on categorical standards other than those contained
in the NYSE rule referenced above.





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ITEM
14.                      PRINCIPAL
ACCOUNTING FEES AND SERVICES





Audit
Fees





The aggregate fees billed by our
independent auditors, Grant Thornton LLP, for professional services rendered for
the audit of our annual financial statements for the years ended December 31,
2008 and 2007 (including a review of internal controls for 2008 as required
under Section 404 of the Sarbanes-Oxley Act of 2002) and for the reviews of the
consolidated financial statements included in our Quarterly Reports on Form 10-Q
during each of the years then ended were $422,000 and $541,000,
respectively.





The aggregate fees billed by Grant
Thornton LLP for audit services in connection with the filing of our
registration statements with the Securities and Exchange Commission were
approximately $43,000 for the year ended December 31, 2008.  There
were no such fees for the year ended December 31, 2007.





Tax
Fees





There were no fees paid to Grant
Thornton LLP for professional services related to tax compliance, tax advice or
tax planning for the years ended December 31, 2007 and 2008.





All
Other Fees





The aggregate fees billed by Grant
Thornton, LLP for the review of the deconsolidation accounting of Ischus CDO II
were $16,000 for the year ended December 31, 2007.  We did not incur
fees in 2008 and 2007 for other services not included above.





Audit
Committee Pre-Approval Policies and Procedures





The audit committee will, on at least
an annual basis, review audit and non-audit services performed by Grant
Thornton, LLP as well as the fees charged by Grant Thornton, LLP for such
services. Our policy is that all audit and non-audit services must be
pre-approved by the audit committee.  All of such services and fees
were pre-approved during the year ended December 31, 2008.





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PART
IV





ITEM
15.                      EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES





(a)
            The
      following documents are filed as part of this Annual Report on Form
      10-K:





1.
            Financial
      Statements





Report of
Independent Registered Public Accounting Firm


Consolidated Balance Sheets at December 31, 2008 and
2007


Consolidated Statements of Operation for the years ended December 31,
2008, 2007 and 2006


Consolidated Statements of Changes in Stockholders’
Equity for years ended


December
31, 2008, 2007 and 2006


Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006


Notes to Consolidated Financial Statements





2.
            Financial
      Statement Schedules





Schedule II –Valuation and Qualifying
Accounts


Schedule IV–Mortgage Loans on Real
Estate


3.
              Exhibits


Exhibit
      No.
                                            Description3.1
                                            Restated
      Certificate of Incorporation of Resource Capital Corp. (1)3.2
                                            Amended
      and Restated Bylaws of Resource Capital Corp. (1)4.1
                                            Form
      of Certificate for Common Stock for Resource Capital Corp. (1)4.2
                                            Junior
      Subordinated indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated May 25, 2006. (3)4.3
                                            Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated May 25, 2006. (3)4.4
                                            Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      May 25, 2006. (3)4.5
                                            Junior
      Subordinated Indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated September 29, 2006. (4)4.6
                                            Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated September 29, 2006. (4)4.7
                                            Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      September 29, 2006. (4)10.1(a)
                                            Master
      Repurchase Agreement between RCC Real Estate SPE 3, LLC and Natixis Real
      Estate Capital. (2)10.1(b)
                                            First
      Amendment to Master Repurchase Agreement between RCC Real Estate SPE 3,
      LLC and Natixis Real Estate Capital, dated September 25, 2008. (5)10.2(a)
                                            Guaranty
      made by Resource Capital Corp. as guarantor, in favor Natixis Real Estate
      Capital, Inc., dated April 20, 2007. (3)10.2(b)
                                            Second
      Amendment to Guaranty made by Resource Capital Corp. as guarantor, in
      favor of Natixis Real Estate Capital, Inc., dated September 25, 2008.
      (5)10.3
                                            Agreement
      between David Bloom and Resource America, Inc., dated as of June 30, 2008.
      (6)10.4
                                            Amended
      and Restated Management Agreement between Resource Capital Corp., Resource
      Capital Manager, Inc. and Resource America, Inc. dated as of June 30,
      2008. (6)10.5
                                            2005
      Stock Incentive Plan. (1)10.6
                                            2007 Omnibus Equity Compensation
    Plan.10.7
                                            Form
      of Stock Option Agreement. (1)10.8
                                            Form
      of Stock Award Agreement. (1)10.9
                                            Amended
      and Restated Management Agreement dated June 30, 2008. (7)10.10
                                            Third
      Amendment dated April 11, 2008 but effective as of March 31, 2008 to the
      Loan Agreement dated December 15, 2005, by and among Resource Capital
      Corp. and Commerce Bank, N.A. (8)10.11
                                            Fourth
      Amendment dated July 22, 2008 but effective as of March 31, 2008 to the
      Loan Agreement dated December 15, 2005, by and among Resource Capital
      Corp. and TD Bank, N.A. (Successor by merger to Commerce Bank, N.A.).
      (9)21.1
                                            List of Subsidiaries of Resource Capital
      Corp.23.1
                                            Consent of Grant Thornton
  LLP
  119
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31.1
                  Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
      Executive Officer.31.2
                  Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
      Financial Officer.32.1
                  Certification of Chief Executive Officer pursuant to
      Section 1350 of Chapter 63 of Title 18 of the United States
      Code.32.2
                  Certification of Chief Financial Officer pursuant to
      Section 1350 of Chapter 63 of Title 18 of the United States
      Code.
 
 (1)
                Filed
      previously as an exhibit to the Company’s registration statement on Form
      S-11, Registration No.
333-126517.
  (2)
                Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on April 23, 2007.
  (3)
                Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended June 30,
2006.
  (4)
                Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended September 30,
2006.
  (5)
                Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on September 29, 2008.
  (6)
                Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on August 18, 2008.
  (7)
                Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on July 3, 2008.
  
 (8)
                Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on April 17, 2008.
  (9)
                Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended June 30,
2008.
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SIGNATURES








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





RESOURCE CAPITAL CORP.
      (Registrant)March
      16, 2009
                By:
                /s/ Jonathan
      Z. CohenJonathan Z. CohenChief Executive Officer and President




Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





/s/
      Edward E. Cohen
            
            Chairman
      of the Board
            
            March
      16, 2009EDWARD
      E. COHEN/s/
      Jonathan Z. Cohen
            
            Director,
      President and Chief Executive Officer
            
            March
      16, 2009JONATHAN
      Z. COHEN/s/
      Walter T. Beach
            
            Director
            
            March
      16, 2009WALTER
      T. BEACH/s/
      William B. Hart
            
            Director
            
            March
      16, 2009WILLIAM
      B. HART/s/
      Gary Ickowicz
            
            Director
            
            March
      16, 2009GARY
      ICKOWICZ/s/
      Murray S. Levin
            
            Director
            
            March
      16, 2009MURRAY
      S. LEVIN/s/
      P. Sherrill Neff
            
            Director
            
            March
      16, 2009P.
      SHERRILL NEFF/s/
      David J. Bryant
            
            Senior
      Vice President
            
            March
      16, 2009DAVID
      J. BRYANT
            
            Chief
      Financial Officer,Chief
      Accounting Officer and Treasurer





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SCHEDULE II


Resource
Capital Corp.


Valuation
and Qualifying Accounts


(dollars
in thousands)


Balance
      at beginning of period
                
                
                Charge
      to expense
                
                
                Write-offs
                
                
                Balance
      at end of periodAllowance
      for loans and lease losses:Year Ended December 31,
      2008
                
                $
                5,918
                
                
                $
                46,160
                
                
                $
                (7,761
                )
                
                $
                44,317Year Ended December 31,
      2007
                
                $
                −
                
                
                $
                6,211
                
                
                $
                (293
                )
                
                $
                5,918


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  Resource Capital
Corp.
 Schedule IV—Mortgage Loans on Real Estate
 As
of December 31, 2008
 (Dollars
in thousands)
 
 NetInterest
                        
                        Final
                        
                        Periodic
                        
                        
                        
                        
                        
                        Face
                        
                        
                        CarryingDescription/
                        
                        Payment
                        
                        Maturity
                        
                        Payment
                        
                        
                        Prior
                        
                        
                        Amount
      of
                        
                        
                        Amount
      ofType
      of Loan/ Borrower
                        
                        Location
                        
                        Rates
                        
                        Date
                        
                        Terms
      (1)
                        
                        
                        Liens
      (2)
                        
                        
                        Loans
      (3)
                        
                        
                        LoansWhole
      Loans:Borrower A
                        
                        Multi-Family/
                          San
      Francisco, CA
                        
                        LIBOR
      + 4.25%
                        
                        4/8/2010
                        
                        
                        I/O
                        
                        
                        
                        −
                        
                        
                        
                        46,500
                        
                        
                        
                        46,147Borrower B
                        
                        Multi-Family/
                          Renton,
      WA
                        
                        LIBOR
      + 1.90%
                        
                        7/10/2009
                        
                        
                        I/O
                        
                        
                        
                        −
                        
                        
                        
                        30,934
                        
                        
                        
                        30,756Borrower C
                        
                        Hotel
                          Tucson/AZ
                        
                        LIBOR
      + 2.50%
                        
                        1/01/2010
                        
                        
                        I/O
                        
                        
                        
                        −
                        
                        
                        
                        30,500
                        
                        
                        
                        30,326Borrower D-1
                        
                        Hotel/
                          Los
      Angeles, CA
                        
                        LIBOR
      + 8.235%
                        
                        6/05/2010
                        
                        
                        I/O
                        (4)
                        
                        
                        −
                        
                        
                        
                        28,000
                        
                        
                        
                        27,801Borrower D-2
                        
                        Hotel
                          Los
      Angeles, CA
                        
                        LIBOR
      + 10.0%
                        
                        6/05/2010
                        
                        
                        I/O
                        (4)
                        
                        
                        −
                        
                        
                        
                        2,200
                        
                        
                        
                        2,193Borrower E
                        
                        Multi-Family/
                          Northglenn,
      CO
                        
                        LIBOR
      + 2.60%
                        
                        3/05/2010
                        
                        
                        I/O
                        
                        
                        
                        −
                        
                        
                        
                        27,705
                        
                        
                        
                        27,497All
      other Whole Loans
                          Individually less than
      3%
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        355,176
                        
                        
                        
                        353,060Total
      Whole Loans
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        521,015
                        
                        
                        
                        517,780Mezzanine
      Loans:Borrower F
                        
                        Hotel/
                          Various
                        
                        LIBOR
      + 2.85%
                        
                        5/9/2009
                        
                        
                        I/O
                        
                        
                        
                        −
                        
                        
                        
                        38,072
                        
                        
                        
                        37,970All
      other Whole Loans
                          Individually less than
      3%
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        177,183
                        
                        
                        
                        159,479Total
      Mezzanine Loans
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        215,255
                        
                        
                        
                        197,449B
      Notes:All
      other Whole Loans
                          Individually less than
      3%
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        89,005
                        
                        
                        
                        88,801Total
      B Notes
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        89,005
                        
                        
                        
                        88,801Total
      Loans
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        825,275
                        (5)
                        
                        
                        804,030
                        (6)
 (1)
              IO
      = interest only.
 (2)
              Represents
      only Third Party Liens
 (3)
              Does
      not include unfunded commitments.
 (4)
              Borrower
      D is a whole loan and the participations above represent the Senior (D-1)
      and Mezzanine (D-2) portions.
 (5)
              All
      loans a re current with respect to principal and interest payments
      due.
 (6)
              The
      net carrying amount of loans includes an allowance for loan loss of $15.1
      million at December 31, 2008 allocated as follows:  Whole Loans
      ($1.5 million); Mezzanine Loans ($13.3 million) and B Notes ($0.3
      million).