**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

| **ý**                                       |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                             |   |                                                                                          |
| **For  the fiscal year ended December 31, 2003** |
|                                             |   |                                                                                          |
| **OR**                                           |
|                                             |   |                                                                                          |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 1-13237**

 

**CHARTERMAC**

(Exact name ofRegistrant as specified in its Trust Agreement)

 

| **Delaware**                                                                |   | **13-3949418**                              |
|-----------------------------------------------------------------------------|--------|---------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)            |   | (I.R.S.  Employer  Identification No.) |
|                                                                        |   |                                        |
| **625  Madison Avenue, New York, New York**                                 |   | **10022**                                   |
| (Address of principal  executive offices)                                   |   | (Zip Code)                                  |
|                                                                        |   |                                        |
| Registrant’s telephone  number, including area code **(212) 421-5333** |

 

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

 

| **Title of  each class**                        |
|-------------------------------------------------|
| Shares of Beneficial  Interest                  |
|                                            |
| **Name of  each exchange on which registered:** |
| American Stock Exchange                         |

 

Securities registered pursuant to Section 12(g) of theAct:

 

**None**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes    ý    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).  Yes    ý    No o

 

The approximate aggregate market value of the voting and non-voting commonequity held by non-affiliates of the Registrant as of June 30, 2003 was$776,896,042, based on a price of $19.01 per share, the closing sales price forthe Registrant’s shares of beneficial interest on the American Stock Exchangeon that date.

 

As of March 12, 2004 there were 44,468,778 outstanding shares of theRegistrant’s shares of beneficial interest.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Part III: Those portions of the Registrant’s Proxy Statement for the AnnualMeeting of Shareholders to be held on June 10, 2004, which are incorporatedinto Items 10, 11, 12 and 13.

 

Index to exhibits may be found on page 88

 

 

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**CAUTIONARY STATEMENT FOR PURPOSES OF**

**THE “SAFE HARBOR” PROVISIONS OF**

**THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

 

 

WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS “BELIEVES,”“ANTICIPATES,” “EXPECTS” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFYFORWARD-LOOKING STATEMENTS.  STATEMENTSLOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KPURSUANT TO THE “SAFE HARBOR” PROVISION OF THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995.  SUCH STATEMENTS ARESUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TODIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.”  READERS ARE CAUTIONED NOTTO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLYAS OF THE DATE HEREOF.

 

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PART I

Item 1.  Business.

 

General

 

We are CharterMac, a Delaware statutory trust, which commencedoperations in October 1997.  We and our subsidiaries are in the business of(i) portfolio investing, which includes acquiring and holding (directly andindirectly through our subsidiaries) federally tax-exempt multi-family housingrevenue bonds issued by various state or local governments, agencies orauthorities and other investments designed to produce federally tax-exemptincome; (ii) mortgage banking, which includes originating and servicingmortgage loans on behalf of third parties such as the Federal National MortgageAssociation (“Fannie Mae”), the Federal Home Loan Mortgage Corporation(“Freddie Mac”), the Government National Mortgage Association (“Ginnie Mae”)and the Federal Housing Authority (“FHA”); (iii) credit enhancement, whichincludes guaranteeing tax credit equity returns and mortgage loans; and (iv)fund management, which includes sponsoring investment programs for a fee.

 

We and a majorityof our subsidiaries, are each either treated as partnerships or disregarded forfederal income tax purposes.  Therefore,we pass through to our shareholders, in the form of distributions, income(including federally tax-exempt income) derived from our investments withoutpaying federal income tax on that income.

 

Corporate Strategy

 

We are one of the nation’s leadingfull-service multi-family finance companies. We focus on providing both capital solutions to developers and owners ofmulti-family rental housing throughout the country, as well as qualityinvestment products to institutional and retail investors.  Collectively, we and our subsidiaries offerfinancing for every part of a multi-family property’s capital structure.

 

Significant Subsidiaries

 

*CharterMac Equity Issuer Trust*

 

In1999, we created CharterMac Equity Issuer Trust, a wholly owned subsidiary,(“Equity Issuer”) which holds a substantial portion of our revenue bonds.  From time to time, Equity Issuer may issueCumulative Preferred Shares (“Preferred Shares”) to institutionalinvestors.  The Preferred Shares have asenior claim to the tax-exempt income derived from the investments owned byEquity Issuer.  Any income in EquityIssuer after the payment of the cumulative distributions on its PreferredShares, and after the fulfillment of certain covenants, may then be distributedto CharterMac.  The assets of EquityIssuer, while included in our consolidated financial statements, are legallyowned by Equity Issuer.  We conduct mostof our portfolio investing through Equity Issuer.

 

*CharterMac Corporation*

 

InJuly 2001, we formed CharterMac Corporation (“CM Corp.”) as a wholly owned,consolidated taxable subsidiary to help us more efficiently manage our taxablebusinesses.  CM Corp. and itssubsidiaries conduct most of our taxable business, including many of thefee-generating activities in which we may engage.  CM Corp. isolates a substantial portion of the taxable income andexpenses of our Company.  Unlike our Company,CM Corp. is a corporation which is subject to both Federal and State incometax.  Any distributions of net incomefrom CM Corp. to us are taxable and are passed through to our shareholders inits dividend.  We conduct our creditenhancement business through CM Corp.

 

*PW Funding Inc.*

 

InDecember 2001, we acquired, through CM Corp., 80% of the outstanding capitalstock of PW Funding, Inc.  and itssubsidiaries (“PWF”).  Under theacquisition agreement, the stockholders of PWF were granted the right to puttheir remaining 20% stock interest to CM Corp. after an initial period of 24 to36 months.  The agreement also grants CMCorp. the right to call the remaining 20% stock interest of PWF from PWF’sstockholders after the same initial period of 24 to 36 months.  Subsequent to the initial purchase of PWFstock, we have purchased additional shares pursuant to individual employeestock purchase agreements.  As ofDecember 31, 2003, we own approximately 87% of the outstanding shares ofPWF.  We conduct our mortgage bankingactivities through PWF.

 

*Related Capital Company*

 

On November 17,2003, we acquired 100% of the ownership interests in and substantially all ofthe businesses operated by Related Capital Company (“Related”) (other thanspecific excluded interests).  Theacquisition was structured so that the selling principals of Related contributedtheir ownership interests in Related to CharterMac Capital Company, LLC, anewly formed subsidiary of CM Corp. which we refer to as “CCC”, in exchange for15,854,505 special common units in CCC. The special common units (“SCUs”) are exchangeable for cash or, at ouroption, common shares on a one-for-one basis. All of the selling principals were also issued one special preferredvoting share of our Company for each special common unit they received.  The special preferred voting shares have noeconomic interest, but entitle the holder to one vote per special preferredvoting share on all matters subject to a vote of the holders of our commonshares.  One of the selling principalsalso received $50 million in cash.  Theselling principals of Related included its four executive managing partners(Stuart J. Boesky, Alan P. Hirmes, Marc D. Schnitzer and Denise L. Kiley), allof whom are members of our board of trustees, a former principal of Related,and an affiliate of The Related Companies, L.P., a New York limited partnership(“TRCLP”) with a majority of its equity controlled by Stephen M.  Ross, who is also the non-executive Chairmanof our board of trustees.  As a resultof the acquisition, the economic interest in our Company of (i) TRCLP equalsapproximately 15.4% and (ii) our management and employees equals approximately7.1%.  We conduct our fund managementbusiness through Related.

 

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Governance 

 

Weare governed by a board of trustees comprised of fifteen managing trustees,eight of whom are independent.  As aresult of our acquisition of Related, we are now internally managed.  Since most of our employees work directlyfor Related, we and our subsidiaries have entered into management and/orservicing agreements with Related.

 

*Committeesof the Board of Trustees*

 

Our board of trustees has six committees: (1) Audit; (2) Compensation,(3) Nominating/Governance; (4) Investment; (5) Capital Markets; and (6) Conflicts.

 

Business Plan

 

We and our subsidiaries are in the business of (i) portfolioinvesting,  (ii) mortgage banking (iii)credit enhancement and (iv) fund management.

 

*PortfolioInvesting*

 

We conduct most ofour portfolio investing through Equity Issuer. Portfolio investing includes the acquisition and ownership (directly andindirectly through our subsidiaries) of federally tax-exempt multi-family housingrevenue bonds issued by various state or local governments, agencies orauthorities and other investments designed to produce federally tax-exemptincome.  The proceeds of the revenuebonds are used to make mortgage loans for the construction, rehabilitation,acquisition or refinancing of affordable multi-family housing propertiesthroughout the United States.  WhileEquity Issuer currently holds a small amount of participating revenue bonds, wedo not expect to acquire a significant amount of participating revenue bonds inthe future.  Equity Issuer holds aportion of our revenue bond and loan investments directly, however, tofacilitate securitization and financing of our investments, a substantialportion of our investments are held indirectly through the subsidiaries ofEquity Issuer.  Accordingly, our commonshareholders’ and our Convertible Community Reinvestment Act Preferred(“Convertible CRA Shares”) shareholders’ interests in the cash flow frominvestments held by Equity Issuer and our other subsidiaries are subordinate tothe rights of the debt holders, preferred shareholders and senior interestholders of Equity Issuer and its subsidiaries.

 

We believe we havea competitive advantage in our portfolio investing due to our “Direct PurchaseProgram”.  The traditional methods offinancing affordable multi-family housing with tax-exempt bonds are complex andtime consuming and involve the participation of many intermediaries.  Through our “Direct Purchase Program”, wehave streamlined the process by removing all intermediaries (except for the governmentalissuer of the revenue bond) and enabling the developer to deal directly withone source.  Because we purchase ourrevenue bonds directly from the governmental issuer, our program eliminates theneed for underwriters and their counsel, rating agencies and costly documentation.  This reduces the financing life cycle, oftenby several months, and also reduces the bond issuance costs, usually by 30% ormore.  In dealing directly with us, developersfeel more confident about the terms and timing of their financing.

 

Thevarious loan documents that are negotiated, executed and delivered upon theissuance of the revenue bonds define our rights and the specific terms of thoserevenue bonds.  All of the properties,which secure our revenue bonds (“Underlying Properties”), are “qualified residentialrental properties” under Section 142(d) of the Code (or a predecessorprovision), which requires that a specified percentage of rental units of theseproperties be rented to individuals or families whose incomes do not exceedcertain area median income levels. Accordingly, our revenue bonds are “qualified bonds” within the meaningof Section 141(e) of the Code and, based upon the opinions of bond counsel orspecial tax counsel rendered at the time of initial issuance or re-issuance ofeach issue of revenue bonds, interest paid on our revenue bonds is excludablefrom gross income for federal income tax purposes.  In addition to investing in tax-exempt revenue bonds secured byaffordable multi-family housing properties, we may acquire other tax-exemptbonds including those issued to finance affordable multi-family properties andfacilities for the elderly owned by Section 501(c)(3) not-for-profit organizations.

 

As of December 31,2003, our revenue bond portfolio included direct or indirect interests inrevenue bonds with an aggregate carrying value of approximately $1.9 billion,secured by affordable multi-family properties containing 40,556 units locatedin 24 states and the District of Columbia.

* *

*Mortgage Banking*

 

Weconduct our mortgage-banking activity through PWF.  PWF is a full service, direct mortgage banking firm specializingin originating, underwriting, and servicing mortgage loans for conventionalapartment properties, affordable housing, senior’s housing, and commercialproperties nationwide.  In addition toconventional financing, PWF provides forward commitments on tax credit andmarket rate multi-family properties, and arranges tax-exempt bond creditenhancements.  During 2003, PWForiginated approximately $604.8 million of loans on behalf of Fannie Mae,Freddie Mac, Ginnie Mae, and FHA.  AtDecember 31, 2003, PWF services a portfolio of approximately $4.1 billion.

 

PWFis one of 26 approved Fannie Mae Delegated Underwriters and Services(“DUS”).  DUS is Fannie Mae’s principalmulti-family loan program.  Fannie Maedelegates the responsibility for originating, underwriting, closing anddelivering multi-family mortgages to the DUS lenders and the DUS lenders sharethe risk of loss with Fannie Mae and service the loans for a fee.  PWF also (i) closes and deliversmulti-family mortgages to Freddie Mac as a Freddie Mac Program PlusSeller/Servicer (ii) is a leading commercial loan correspondent for Wall Streetconduits and life insurance companies; and (iii) is an approved loanprocessor/servicer for the Federal Housing Authority.

 

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*Credit Enhancement*

 

We conduct ourcredit enhancement activities through CM Corp., which includes guaranteeing mortgage loans and tax creditequity specified returns to investors in tax credit equity funds in exchangefor fees.

 

*FundManagement*

 

We conduct ourfund management business through Related, which offers the following financialproducts and services:

 

•                  sponsoring realestate equity investment programs that acquire interests in and financeaffordable multi-family housing on behalf of third-party investors;

•                  acting asmanager or advisor to us and certain of our subsidiaries, and American MortgageAcceptance Company (“AMAC”), a publicly-traded real estate investment trustthat originates and acquires taxable, construction, permanent, bridge,mezzanine and participating mortgage debt for multi-family housing;

•                  providing realestate underwriting, asset management, construction and permanent loanservicing, capital markets and advisory services to us and these investmentprograms; and

•                  arranging andstructuring credit enhancement transactions to guarantee the delivery of taxbenefits to institutional investors.

 

Related generatescash flow predominately from acquisition and partnership management fees inconnection with the capital raising and sponsorship of investment programs;investment fees associated with acquisition and disposition activity of eachinvestment program; and asset management and advisory fees associated withon-going administration of each investment program.

 

Business Segments

 

We have threereportable business segments which include portfolio investing, mortgagebanking, and fund management.

 

The portfolioinvesting segment primarily consists of subsidiaries holding investments inrevenue bonds producing primarily tax-exempt interest income and includes ourcredit enhancement activities.

 

The mortgagebanking segment consists of subsidiaries which originate mortgages on behalf ofthird parties and receive mortgage origination and mortgage servicing feesgenerated by those activities.

 

The fundmanagement segment consists of subsidiaries that generate fee income from theasset management, underwriting, originating and other services provided to thereal estate equity investment programs Related sponsors, and the management andrelated services provided to us and a publicly-traded real estate investmenttrust.

 

Segment resultsinclude all direct and contractual revenues and expenses of each segment andallocations of indirect expenses based on specific methodologies.  These reportable segments are strategicbusiness units that primarily generate revenue streams that are distinctlydifferent and are generally managed separately.

 

The following table provides summary information regarding our segments:

 
|                        |   | **December  31, 2003**   |      | **December  31, 2002** |   |
|-----------------------------|--------|--------------------------|-----------|------------------------|--------|
| **(Dollars  in thousands)** |   | **Portfolio  Investing** |      | **Mortgage  Banking**  |   | **Fund  Management** |   | **Total** |   | **Portfolio  Investing** |   | **Mortgage  Banking** |   | **Total** |   |
|                        |   |                     |      |                   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues              |   | $                        | 120,775   |                   | $      | 17,690 |   | $ | 13,745 |   | $ | 152,210 |   | $ | 98,208 |   | $ | 18,205 |   | $ | 116,413 |   |
|                        |   |                     |      |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)           |   | $                        | 72,168    |                   | $      | (329 | ) | $ | (5,253 | ) | $ | 66,586 |   | $ | 58,352 |   | $ | 2,481 |   | $ | 60,833 |   |
|                        |   |                     |      |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Assets                |   | $                        | 2,102,755 |                   | $      | 90,094 |   | $ | 390,425 |   | $ | 2,583,274 |   | $ | 1,729,194 |   | $ | 123,674 |   | $ | 1,858,668 |   |

 

 

Raising Capital

 

A major aspect ofour business plan includes the acquisition of additional revenue bonds, whichrequires capital.  We have primarilyused three sources of capital, either directly or through our subsidiaries: (i)loan securitizations, (ii) commercial bank borrowings and (iii) equityofferings.

 

*Securitizations*

 

Historically, wehave used two primary floating rate securitization programs: our Private LabelTender Option Program (“TOP”) and the P-FLOATsSM/RITESSM(“P-FLOAT”) program.  During 2003, weadded a fixed rate securitization and an auction rate securitization.  Securitizations continue to offer the lowestcost of capital, albeit with certain covenants and leverage limits.  Pursuant to our trust agreement, we are onlyable to incur leverage or other financing up to 50% of our total market value;this leverage restriction is generally consistent with or more conservativethan leverage covenants on our securitized debt.  With respect to these securitization programs, we are obligatedto pay interest at short-term floating rates and retain an inverse floatingrate residual interest in revenue bonds carrying a fixed rate of interest.

 

*MBIASecuritization Programs*

 

MBIA is a financial insurer, which has entered intoa surety commitment with our Company and certain of its subsidiaries wherebyMBIA has agreed to credit enhance certain pools of bonds in exchange forcertain fees.  We currently use twodifferent structures in our dealings with MBIA; the Floater Certificatestructure and the Auction Certificate structure.  Under each structure, we contributerevenue bonds to CharterMac Origination Trust I (“Origination Trust”), a whollyowned, indirect subsidiary of our Company. Origination Trust then contributes certain of these revenue bonds toCharterMac Owner Trust I (“Owner Trust”) and others to CharterMac Auction RateTrust I (“ARCS1”), which are controlled by us. Owner Trust and ARCS1 contribute selected bonds to specific “SeriesTrusts.”  As of December 31, 2003, sevensuch Series Trusts existed.  Six ofthese series trusts reside beneath Owner Trust including two California onlyseries and four National (non-state specific) series.  This is our Floater Certificate structure.  One series trust resides beneath ARCS1,which is our Auction Certificate structure.

 

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Each Series Trust, issues two equity certificates:  (i) a Senior Certificate which has been depositedinto a “Certificate Trust” which issues and sells “Floater Certificates” or“Auction Certificates” representing proportional interests in the SeniorCertificate to new investors and (ii) a Residual Certificate, issued toOrigination Trust which represents the remaining beneficial ownership interestin each Series Trust.

 

Asof December 31, 2003, the maximum amount of capital that could be raised underour MBIA securitizations programs was $650 million, including $425 million inFloater Certificates under Owner Trust and $225 million in Auction Certificatesunder ARCS1.  In addition, the suretycommitment by MBIA was recently extended for eight years, through October 1,2011.  As of December 31, 2003, ourtotal outstanding under our MBIA programs was $483.5 million, including $383.5million in Floater Certificates and $100.0 million in Auction Certificates.

 

Thesurety commitment by MBIA can be used to enhance certificates sold under lowfloater and auction rate programs.  Thelow floater program requires the existence of liquidity due to the put optionavailable to the buyers of the low floater certificates.  The liquidity is currently supplied by aconsortium of highly-rated banks.  Theliquidity commitments are one-year renewable contracts.  We expect to renew or replace suchcommitments upon expiration of their terms. The auction rate program does not require liquidity as the buyers ofthose securities do not have the option to put their certificates back to theseller.

 

Theeffect of our MBIA securitizations is that a portion of the interest receivedon the revenue bonds in Owner Trust and ARCS1 is distributed through the SeniorCertificate to the holders of the Floater or Auction Rate Certificates with anyremaining interest remitted to Origination Trust (and thus to our benefit) viathe Residual Certificate.  The revenuebonds remaining in Origination Trust (aggregate principal amount ofapproximately $160 million) are an additional collateral pool for Owner Trust’sobligations.  In addition, five taxablerevenue bonds totaling $10.8 million in principal outstanding, have beencontributed as additional collateral for this program.

 

Ourfloating rate cost of funds relating to our MBIA securitizations (calculated asinterest expense plus recurring fees as a percentage of the weighted averageamount of the outstanding Senior Certificates) was approximately 2.2%, 2.4% and3.5% for the years ended December 31, 2003, 2002 and 2001, respectively.

 

*P-FLOATs*

 

Another source of financingfor our investments is the securitization of selected revenue bonds through theMerrill Lynch P-FLOATsSM/RITESSM program.  Merrill Lynch typically deposits individualrevenue bonds purchased from us into a special purpose trust together with a creditenhancement guarantee.  A creditenhanced custodial receipt is issued and deposited into a second trust whichissues two types of securities: (1) P-FLOATs, a short-term senior securitywhich bears interest at a floating rate that is determined weekly by MerrillLynch as the lowest rate possible that will clear the market at par, and (2)Residual Interest Tax-Exempt Securities (“RITESSM”), a subordinatesecurity which receives the remainder of the interest on the revenue bond afterpayment of interest on the P-FLOATs and ongoing transaction fees.  The P-FLOATs are sold to third-partyinvestors and the RITESSM are generally sold back to us.  We have the right, upon at least 14 daysnotice to the trustee, to purchase the outstanding P-FLOATsSM issuedby the special purpose trust and to withdraw the revenue bond from suchtrust.  When the revenue bonds are depositedinto the trust, we receive the proceeds from the sale of the P-FLOATsSMless certain transaction costs.  Incertain cases, Merrill Lynch may directly buy the revenue bonds from localissuers, deposit them in the trust, sell the P-FLOATSM security tothird-party investors and then sell the RITESSM to us.  As of December 31, 2003, revenue bonds, withan aggregate outstanding bond amount of approximately $316.5 million, have beensecuritized by Merrill Lynch under the P-FLOATsSM/RITESSMprogram.  In order to facilitate thesecuritization under the P-FLOATsSM/RITESSM program, wehave, as of December 31, 2003, pledged additional revenue bonds as collateralfor the benefit of the credit enhancer with an aggregate outstanding bondamount of approximately $168.9 million. For financial reporting purposes, due to our right to repurchase therevenue bonds, we account for the net proceeds received upon transfer of ourrevenue bonds through the P-FLOATsSM/RITESSM program assecured borrowings (which is reflected on our consolidated balance sheet as aliability) and, accordingly, continue to account for our revenue bonds asassets.

 

*Fixed Rate Securitization*

 

On April 1, 2003,Equity Issuer completed a $100 million revenue bond securitization financingthrough the sale of Tax-Exempt Multi-family Housing Trust Certificates Series2003A.  Equity Issuer placed revenuebonds, totaling $196.8 million in aggregate principal amount, into a trust fromwhich $100 million in Class A Certificates were sold to various institutionalinvestors.  The Class A Certificatesbear interest at the fixed rate of 3.25% per annum to, but not including March15, 2005, on which date the Class A Certificates are subject to mandatorytender for purchase.  Merrill Lynchacted as placement agent.  A wholly owned, indirect subsidiary ofEquity Issuer was issued the subordinated Class B Certificates totalingapproximately $96.8 million.  Equity Issuerhas agreed that one of its affiliates will hold the Class B Certificatesthroughout the duration of this transaction. For financial reporting purposes, due to our obligation to repurchasethe revenue bonds, we have accounted for the net proceeds received upon sale ofthe class A certificate as secured borrowings (which is reflected on our consolidatedbalance sheet as a liability) and accordingly, combine to account for ourrevenue bonds as assets.

 

*Commercial Bank Borrowings*

 

On March 31, 2003,Equity Issuer entered into a $75 million secured revolving credit facility withFleet Bank and Wachovia Bank.  Throughthis facility, Equity Issuer can pledge certain of its revenue bonds assecurity for amounts borrowed under this credit facility from time to time.  The outstanding borrowings can be repaid atany time without penalty.  Equity Issuerpays a floating rate of interest on borrowings outstanding on a quarterly basisequal to the London Interbank Offered Rate (“LIBOR”) plus 1.50% or prime plus0.25%.  At December 31, 2003, revenuebonds pledged under the facility had an aggregate principal amount of approximately$37.3 million.  Equity Issuer had approximately$21.7 million outstanding under the facility as of December 31, 2003.

 

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On November 17, 2003, CMCorp. entered into $50 million and $10 million acquisition bridge loanfacilities with Wachovia Bank in order to fund the cash portion, fees andexpenses of our acquisition of Related. These bridge loan facilities have a nine-month term with two 90-dayextension options.  We have pledged ourcommon ownership interest in Equity Issuer as security under thesefacilities.  The facilities arepre-payable at any time and bear interest at LIBOR plus 1.5% and 2.4%,respectively.  As of December 31, 2003,CM Corp. had borrowed the full $60 million available under these twofacilities.

 

Similarly, in2001, CM Corp. entered into a loan agreement with Fleet Bank to provide thefunds used to purchase the 80% interest in PWF.  This loan has a term of five years with an interest rate of LIBORplus 2.25%.  The loan was interest onlyfor the first 12 months.  In January2003, we began making quarterly straight-line principal payments based on theinitial amount borrowed on a ten-year amortization schedule.

 

PWF has a $100million secured, revolving mortgage warehouse facility, subject to annualrenewal.  The interest rate for eachadvance under this facility is the fed funds rate plus 1.25%, which at December31, 2003 was 2.24%  At December 31, 2003we had approximately $21.9 million outstanding under this facility.

 

OnNovember 17, 2003, Related entered into a warehouse facility in the amount of$85 million, with Fleet National Bank, Merrill Lynch, CDC and Citicorp USA.  The facility has a maturity date of October29, 2004 and bears interest, at Related’s option, at either LIBOR plus 2.00% orthe prime rate plus 1/8%.  At December31, 2003, there was an outstanding balance of $24.5 million with a weightedaverage interest rate of 3.73%.

 

*InterestRate Hedging*

 

We currentlymanage a portion of our interest rate risk through the use of The Bond MarketAssociation (“TBMA”) indexed interest rate swaps.  Under each interest rate swap agreement, for a specified periodof time we are required to pay a fixed rate of interest on a specified notionalamount to the transaction counterparty and we receive a floating rate of interestequivalent to the TBMA index, which is the most widely used tax-exempt floatingrate index.  As of December 31, 2003, wehave entered into two such swaps with MLCS as counterparty: the first has anotional amount of $50 million fixed at an annual rate of 3.98%, which expiresin January 2006.  The second has a notionalamount of $100 million fixed at an annual rate of 3.64%, which expired inFebruary 2004.  We have also enteredinto two interest rate swaps with Fleet Bank as the counterparty.  One has a notional amount of $100 millionfixed at an annual rate of 2.56% beginning in January 2005 and expiring in December2007.  The other swap with Fleet has anotional amount of $50 million and fixed rates of 2.00%, 2.78%, and 3.27% forthe twelve months beginning January 2005, 2006, and 2007, respectively.

 

The receipt of paymentspursuant to these or other swaps would constitute taxable, rather thantax-exempt income.  Related analyzes theinterest rate environment and the costs and risks of such strategies on anongoing basis and upon expiration of these swaps, will evaluate whether weshould enter into replacement swaps.  Apossible risk of such swap agreements is the possible inability to meet theterms of the contracts with us; however, there is no current indication of suchan inability.

 

OurOutstanding Equity

 

*CommonEquity Issuances*

 

As of December 31,2003, we have raised net proceeds of over $259.7 million through publicofferings of our common shares.

 

*Preferred Equity Issuances*

 

As of December 31,2003, we have completed public and private offerings of our Series AConvertible and our Convertible CRA Shares (collectively “Convertible CRAShares”) raising net proceeds of approximately $160.7 million.

 

*Special Preferred VotingShares*

 

In connection with our acquisition of Related, eachholder of SCUs also acquired one special preferred voting share (at $.01 pershare) for each special common unit received. The special preferred voting shares have no economic interest, butentitle the holder to vote, on a one-for-one basis, on all matters subject to avote of the holders of our common shares. We have the right to require that each special preferred voting share beredeemed (for $.01 per share) and cancelled simultaneously upon the exchange ofa special common unit by the holder thereof into cash or our commonshares.  Other than the payment of $.01per share upon redemption of the special preferred voting shares or theliquidation of our Company, the special preferred voting shares are notentitled to any distributions or other economic rights.  The selling principals of Related enteredinto a voting agreement which governs the voting of all of their specialpreferred voting shares, common shares, issuable upon exchange of their SCUsand any other common shares currently owned or which may be acquired by them inthe future.  The voting agreementprovides that the selling principals of Related will (a) vote on any matterrequiring a vote of our common shareholders not more than 90% of the votingpower represented by the special preferred voting shares (and any common sharesto be issued in exchange for the SCUs) until November 17, 2005; (b) vote theircommon shares or special preferred voting shares in favor of the election ofany independent trustee approved by our board of trustees or in the sameproportion as the unaffiliated holders of our common shares vote in suchelection, and (c) not exercise any right as shareholder of our Company tonominate any independent trustee.  Withthe exception of Mr.  Ross, the votingagreement will terminate for each of the remaining selling principals at thetime he or she is no longer an employee, officer, or trustee of ourCompany.  The voting agreement withrespect to Mr.  Ross will remain ineffect as long as he owns any of our special preferred voting shares or commonshares.

 

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*Preferred Equity Issuancesby Subsidiary*

 

One of our subsidiaries,Equity Issuer, has issued preferred shares to institutional investors with anaggregate liquidation amount of approximately $273.5 million.  Attributes of each series of Cumulative PreferredShares are as follows:

 
| **Preferred  Series** |   | **Date  of********Issuance** |   | **Mandatory********Tender** |   | **Mandatory********Repurchase** |   | **Number  of********Shares** |   | **Liquidation********Preference per  Share** |      | **Total  Face********Amount** |   | **Dividend********Rate** |   |
|-----------------------|--------|------------------------------|--------|-----------------------------|--------|---------------------------------|--------|------------------------------|--------|----------------------------------------------|-----------|-------------------------------|--------|--------------------------|--------|
|                  |   |                         |   |                        |   |                            |   |                         |   |                                         |      |                          |   |                     |   |
| Series A              |   | 06/29/99                     |   | 06/30/09                    |   | 06/30/49                        |   | 45                           |   | $                                            | 2,000,000 |                          | $      | 90,000,000               |   | 6.625 | % |
| Series A-1            |   | 07/21/00                     |   | 06/30/09                    |   | 06/30/49                        |   | 48                           |   | 500,000                                      |      | 24,000,000                    |   | 7.100                    | %      |
| Series A-2            |   | 10/09/01                     |   | 06/30/09                    |   | 06/30/49                        |   | 62                           |   | 500,000                                      |      | 31,000,000                    |   | 6.300                    | %      |
| Series A-3            |   | 06/04/02                     |   | 10/31/14                    |   | 10/31/52                        |   | 60                           |   | 500,000                                      |      | 30,000,000                    |   | 6.800                    | %      |
| Series B              |   | 07/21/00                     |   | 11/30/10                    |   | 11/30/50                        |   | 110                          |   | 500,000                                      |      | 55,000,000                    |   | 7.600                    | %      |
| Series B-1            |   | 10/09/01                     |   | 11/30/10                    |   | 11/30/50                        |   | 37                           |   | 500,000                                      |      | 18,500,000                    |   | 6.800                    | %      |
| Series B-2            |   | 06/04/02                     |   | 10/31/14                    |   | 10/31/52                        |   | 50                           |   | 500,000                                      |      | 25,000,000                    |   | 7.200                    | %      |
|                       |        |                              |        |                             |        |                                 |        |                              |        |                                              |           |                               |        |                          |        |  |  |

 

We collectively refer tothe Series A Cumulative Preferred Shares, Series A-1 Cumulative PreferredShares, Series A-2 Cumulative Preferred Shares and Series A-3 CumulativePreferred Shares as the “Series A Shares.” We collectively refer to the SeriesB Subordinate Cumulative Preferred Shares, Series B-1 Subordinate CumulativePreferred Shares and Series B-2 Subordinate Cumulative Preferred Shares as the“Series B Shares.” We also collectively refer to the Series A Shares and theSeries B Shares as the “Preferred Shares.”

 

The PreferredShares are not convertible into common shares of Equity Issuer or our commonshares.  The Preferred Shares have anannual preferred dividend payable quarterly in arrears on January 31, April 30,July 31 and October 31 of each year, but only upon declaration thereof byEquity Issuer’s board of trustees and only to the extent of Equity Issuer’stax-exempt income (net of expenses) for the particular quarter.  Since inception, all quarterly distributionshave been declared at the stated annualized dividend rate for each respectiveseries.

 

The Series AShares all have identical terms except as to the distribution commencementdate, the annual preferred dividend rate, the remarketing date, the mandatory repurchasedate and the liquidation amount per share. Equity Issuer may not redeem the Series A, A-1 and A-2 preferred sharesbefore June 30, 2009 and they are subject to mandatory tender for remarketingand purchase on such date and each remarketing date thereafter at a price equalto their respective per share liquidation amounts plus an amount equal to alldistributions accrued but unpaid on the Series A, A-1 and A-2 preferredshares.  Equity Issuer may not redeemthe Series A-3 preferred shares before October 31, 2014 and they are subject tomandatory tender for remarketing and purchase on such date and each remarketingdate thereafter at a price equal to its per share liquidation amount plus anamount equal to all distributions accrued but unpaid on the Series A-3preferred shares.  Holders of the SeriesA Shares may elect to retain their shares upon remarketing, with a distributionrate to be determined immediately prior to the remarketing date by the remarketingagent.  After the initial remarketing dates,all or a portion of the shares may be redeemed, subject to certainconditions.  Each holder of the SeriesA, Series A-1 and Series A-2 preferred shares, and each holder of the SeriesA-3 preferred shares, will be required to tender its shares to Equity Issuerfor mandatory repurchase on June 30, 2049 and October 31, 2052, respectively,unless Equity Issuer decides to remarket the shares on such dates.

 

The Series AShares rank, with respect to payment of distributions and amounts uponliquidation, dissolution or winding-up of Equity Issuer, senior to the Series BShares and all classes or series of common shares of Equity Issuer and, therefore,effectively rank senior to our common shares, our Convertible CRA Shares, andour preferred shares, if any.

 

The Series BShares all have identical terms, except as to the distribution commencementdate, the annual preferred dividend rate, the remarketing date and themandatory repurchase date.  EquityIssuer may not redeem the Series B and Series B-1 preferred shares beforeNovember 30, 2010 and they are subject to mandatory tender for remarketing andpurchase on such date and each remarketing date thereafter at a price equal totheir per share liquidation amount plus an amount equal to all distributionsaccrued but unpaid on the Series B and Series B-1 preferred shares.  Equity Issuer may not redeem the Series B-2preferred shares before October 31, 2014, and they are subject to mandatory tenderfor remarketing and purchase on such date and each remarketing date thereafterat a price equal to its per share liquidation amount plus an amount equal toall distributions accrued but unpaid on the Series B-2 preferred shares.  Holders of the Series B Shares may elect toretain their shares upon remarketing, with a distribution rate to be determinedimmediately prior to the remarketing date by the remarketing agent.  After the initial remarketing dates, all ora portion of the shares may be redeemed, subject to certain conditions.  Each holder of the Series B and Series B-1preferred shares and each holder of the Series B-2 preferred shares will be requiredto tender its shares to Equity Issuer for mandatory repurchase on November 30,2050 and October 31, 2052, respectively, unless Equity Issuer decides toremarket the shares on such dates.

 

The Series BShares rank, with respect to payment of distributions and amounts uponliquidation, dissolution or winding up of Equity Issuer, senior to all classesor series of common shares of Equity Issuer and, therefore, effectively ranksenior to our common shares, our Series A Convertible CRA Shares, ourConvertible CRA Shares and our preferred shares, if any, and junior to theSeries A Shares.

 

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Equity Issuer issubject to, among others, the following covenants with respect to the PreferredShares:

 

*Tax-Exempt Interest and Distribution*

 

Equity Issuer mayonly acquire new investments that it reasonably believes will generate interestand distributions excludable from gross income for federal income taxpurposes.  Equity Issuer will dispose ofany investment the interest on which becomes includable in gross income forfederal income tax purposes, for any reason, as soon as commerciallypracticable.

 

*Leverage*

 

Equity Issuer willnot, and will not permit any of its subsidiaries to, directly or indirectly,incur any obligation except if (i) Equity Issuer is not in default under itstrust agreement, (ii) Equity Issuer has paid or declared and set aside forpayment all accrued and unpaid distributions on the Cumulative PreferredShares, and (iii) after giving effect to the incurrence of the obligation, theleverage ratio on the portfolio is less than 0.6 to 1.0.

 

*Failure topay distributions*

 

If Equity Issuerhas not paid in full six consecutive quarterly distributions on the PreferredShares, Equity Issuer is required to reconstitute its board of trustees so thata majority of the board of trustees consists of trustees who are independentwith respect to Equity Issuer, us or Related.

 

*Allocationof Taxable Interest Income and Market Discount*

 

Equity Issuer willspecially allocate taxable interest income and market discount that is taxableas ordinary income to us.  Marketdiscount, if any, may arise where Equity Issuer acquires a bond other than uponits original issuance for less than its stated redemption price at maturity andthe difference is greater than a de minimis amount (generally 1⁄4 of 1% of abond’s stated redemption price at maturity multiplied by the number of completeyears to maturity).

 

*Special Common Unit Issuanceby Subsidiary*

 

In connection with ouracquisition of Related, CCC issued membership interests in the form of specialcommon units (“SCUs”).  Holders of SCUs,which amount to 16,071,785 units, are entitled to distributions at the sametime as, and only if, distributions are paid on our common shares.  However, unlike distributions payable toholders of our common shares, which consist of substantially tax-exempt income,distributions payable to holders of the SCUs will consist of taxableincome.  In order to take into accountthe difference in tax treatment and enable holders of the SCUs to receive anequivalent after-tax return on distributions as holders of our common sharesreceive on their distributions, the amount of the special common unitholders’initial distribution was set to equal our per share distribution, annualized asof the closing date of our acquisition of Related, divided by 0.72.  Subsequent distributions to the holders ofSCUs will be increased (or decreased) proportionately with increases (ordecreases) in distributions paid to holders of our common shares.  To the extent that, in any year, CCC doesnot have sufficient cash flow to pay the entire distribution due on the SCUs,we have agreed to contribute or to lend to CCC all but $5 million of thesedistributions.  The remaining shortfall,if any, will earn interest at a market rate and will only be payable at thetime CCC has sufficient cash flow.  Eachholder of SCUs has the right, upon expiration of any lock-up period, to (a)exchange all or a portion of their SCUs for cash and (b) receive cash in anamount equal to any accrued but unpaid distributions with respect to the SCUsbeing exchanged (not including accrued and unpaid distributions for the quarterlyperiod in which the exchange occurs). In lieu of cash, we may, at our discretion, exchange such SCUs (and anyaccrued but unpaid distributions) for common shares on a one-for-one basis,subject to anti-dilution adjustments. The common shares will be issued at a price equal to the average closingmarket price of our common shares for the five consecutive trading days priorto the date upon which CCC and CM Corp. receive notice of conversion.

 

Competition

 

We, from time to time, may be in competition withprivate investors, regional investment banks, mortgage banking companies,lending institutions, quasi-governmental agencies such as Fannie Mae andFreddie Mac, trust funds, mutual funds, domestic and foreign credit enhancers,bond insurers, investment partnerships and other entities with objectivessimilar to ours.  Although we operate ina competitive environment, competitors focused on providing tax-exemptfinancing on multi-family housing consistent with our custom-designed programsare relatively few.

 

Our business is also affected by competition to theextent that the properties which secure our revenue bonds from which we deriveinterest and, ultimately, principal payments may be subject to competitionrelating to rental rates and relative levels of amenities from those offered bycomparable neighboring properties.

 

In addition, through PWF, we are also in competitionwith 25 other licensed DUS lenders which originate multi-family mortgages onbehalf of Fannie Mae.  However, PWFthrough its affiliation with us, is better positioned to offer a full range offinancing programs on both affordable and market-rate multi-familyhousing.  PWF’s origination groups areable to cross market our Company’s tax-exempt revenue bonds and Related’s LowIncome Tax Credit equity with our loan products, thereby offering developers asingle, streamlined execution.

 

Our affiliates have formed, and may continue to form,various entities to engage in businesses that may be competitive with us.  At this time, there is no other suchbusiness that has a tax-exempt execution.

 

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Employees

 

We and our subsidiaries have entered into separatemanagement agreements with Related pursuant to which Related provides eachrespective entity with investment advice, portfolio management, and all otherservices vital to such entity’s operations.

 

Prior to the acquisition of PWF in December 2001, wehad no employees.  PWF, which is asubsidiary of CM Corp., operates as a stand-alone entity and is activelyself-managed with 75 employees.  We alsoadded approximately 175 employees with the acquisition of Related.  Thus on a consolidated basis through oursubsidiaries, we had approximately 250 employees as of December 31, 2003.  These employees are not a party to anycollective bargaining agreement.

 

Regulatory Matters

 

*Investment Company Act*

 

Neither we nor our subsidiaries are registered under the InvestmentCompany Act of 1940, as amended (the “Investment Company Act”).  We would not be able to conduct ouractivities as we currently do if we were required to register.

 

We at all times intend to conduct our activities and the activities ofour subsidiaries, so as not to become regulated as an “investment company”under the Investment Company Act.  Whilewe are not an “investment company”, if one of our subsidiaries were deemed tobe an “investment company,” we could also be subject to regulation under theInvestment Company Act.  There are anumber of exemptions from registration under the Investment Company Act that webelieve apply to us and our subsidiaries, and, therefore, which we believeexempts us from the requirement to register under the Investment Company Act.

 

*Internal Revenue Service*

 

With regard to ourrevenue bond investing and Related’s sponsorship of investment programs thatgenerate Low Income Housing Tax Credits (“LIHTCs”), we operate in a regulatoryenvironment that is governed primarily by two sections of the Internal RevenueCode of 1986 (“the Code”) relating to affordable housing.  The first is Section 142(d) of the Code,which governs the issuance of federally tax-exempt revenue bonds for affordablemulti-family housing to be owned by private, for-profit developers and thesecond is Section 42 of the Code, which authorizes federal LIHTCs forqualifying affordable housing properties.

 

*Tax-exempt financing*

 

Section 142(d) of theCode provides for the issuance of federally tax-exempt revenue bonds, theproceeds of which will be loaned to private developers for the new constructionor acquisition and rehabilitation of multi-family rental housing.  Under the Code, in order to qualify forfederally tax-exempt financing, certain ongoing requirements must be compliedwith on a continuous basis.  Theprincipal requirement is that the property be operated as a rental property andthat during the Qualified Project Period (defined below) at least either (i)20% of the units must be rented to individuals or families whose income is lessthan 50% of the area median gross income, or (ii) 40% of the units must berented to individuals or families whose income is less than 60% of the areamedian gross income, in each case with adjustments for family size.  The Qualified Project Period begins when 10%of the units in the property are first occupied and ends on the latest of thedate: (i) which is 15 years after 50% of the units are occupied, (ii) on whichall the bonds have been retired, or (iii) on which any assistance providedunder Section 8 of the U.S.  Housing Actof 1937 terminates.  If these requirementsare not complied with on a continual basis interest on the revenue bonds couldbe determined to be includable in gross income, retroactively to the date suchbonds were issued.  There is no statutoryor regulatory limit on the amount of rent that may be charged.  The availability of federally tax-exemptfinancing for affordable multi-family housing to be owned by private,for-profit developers in each state is limited by an annual volume capcontained in Section 146 of the Code. At the end of 2000 Congress enacted legislation which, for the firsttime, increased the volume cap.  Thevolume cap increased by 25% in both 2001 and 2002 and thereafter has been, andwill continue to be, indexed for inflation. Bonds issued for affordable multi-family housing properties must competewith all other types of private activity bonds (other than private activitybonds issued for qualifying Section 501(c)(3) organizations) for an allocationof a state’s available volume cap. Non-profit organizations described in Section 501(c)(3) of the Codewhose charitable purpose is to provide low income housing may also availthemselves of federally tax-exempt financing to construct or acquire andrehabilitate affordable multi-family housing properties.  Revenue bonds for such charities aregoverned by Section 145 of the Code and may be issued without regard to thestatewide volume cap that applies to for-profit developers.  Under Section 145 of the Code at least 95%of the proceeds of the bond issue must be used in a manner that furthers thecharitable purpose of the Section 501(c)(3) organization, or a relatedpurpose.  In Revenue Procedure 96-32 theIRS promulgated a non-exclusive safe harbor for Section 501(c)(3) organizationswhose charitable purpose is to provide affordable housing: if either the 20/50or 40/60 tests described above are met and, in addition, at least 75% of allunits are rented to families whose income does not exceed 80% of area mediangross income (adjusted for family size) and the Section 501(c)(3) organizationcharges tenants “affordable rents”, the proceeds of a revenue bond issue willbe treated as being used to further the Section 501(c)(3) organization’scharitable purpose.

 

*Federal LIHTCs*

 

Section 42 of the Codeauthorizes federal LIHTCs for affordable multi-family rental housing.  Under this program, developers receive anallocation of federal LIHTCs from an agency designated by each stategovernment.  There are two types ofcredits, 4% credits and 9% credits. Developers that receive an allocation of volume cap for revenue bondsare also entitled automatically to receive an allocation of federal LIHTCs,which are the 4% credits.  Propertiesfinanced using 9% credits must receive an allocation for such credits from theappropriate state agency.  Both the 4%credits and the 9% credits provide the owner of an affordable multi-familyhousing property that has received a federal LIHTC allocation with a dollar fordollar credit against federal income taxes. The credit is taken over a period of 10 years, which can span over an 11year operating period.  The creditamount is based on the qualified basis of each building and the number of unitsset aside for low income tenants. Purchasers

 

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of federal LIHTCs are usually Fortune 500 corporations that haveprojected long-term positive tax positions. These purchasers generally become limited partners in thedeveloper/owner of the affordable housing property and pay the present value ofthe projected credits in the form of an up-front equity contribution to thedeveloper.  In the case of propertiesutilizing 4% credits, this payment will usually provide between 25% and 35% ofthe costs of the development.  Forproperties utilizing 9% credits, this payment will usually provide between 45%and 55% of the cost of the development.

 

In order to qualify forthe federal LIHTC the property must comply with either of the 20/50 or 40/60tests that apply to tax-exempt bonds. However, in addition, the amount of rent that may be charged toqualifying low income tenants cannot exceed 30% of the “imputed income” foreach unit, as determined pursuant to Section 42(g) of the Code.  Failure to comply continuously with theserequirements could result in a recapture of the federal LIHTCs.  In addition, in the event that the rentsfrom the property generate insufficient revenue to pay debt service on therevenue bonds and a default ensues, the initial borrower could lose ownershipof the project as the result of foreclosure of the mortgage securing thebonds.  In such event, the initialequity investors would no longer be entitled to the federal LIHTCs which wouldinure to benefit of the foreclosing revenue bond owner.  As a result, there is a strong incentive forthe federal LIHTC investor to ensure that the development is current on debtservice payments by making capital contributions or otherwise.  With respect to most of the properties thatsecure our revenue bonds, all the multi-family units are rented to individualsor families at 60% of area median income and, thus, 100% of the qualified basismay be used to determine the amount of the federal LIHTC.  This maximizes the amount of equity raisedfrom the purchasers of the federal LIHTCs for each development and createsstrong occupancy demand.

 

*Government sponsored enterprise lending*

 

PWF’s mortgage lendingbusiness is subject to various governmental and quasi-governmentalregulations.  PWF is licensed orapproved to service and/or originate and sell mortgage loans under Fannie Mae,Freddie Mac, Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal government and Fannie Maeand Freddie Mac are federally-chartered, public corporations.  These agencies require PWF to meet minimumnet worth and capital requirements and to comply with other requirements.  Mortgage loans made under these programs arealso required to meet the requirements of these programs.  In addition, under Fannie Mae’s DUS program,PWF has the authority to originate loans without a prior review by Fannie Maeand is required to share in the losses on loans originated under thisprogram.  If PWF fails to comply withthe requirements of these programs, the agency can terminate its license orapproval.  In addition, Fannie Mae andFreddie Mac have the authority under their guidelines to terminate a lender’sauthority to originate and service their loans for any reason.  If PWF’s authority is terminated under anyof these programs, it would prevent PWF from originating or servicing loansunder that program.  We were required toguarantee the obligations of PWF under these programs as a condition forreceiving Fannie Mae and Freddie Mac’s approval of our of PWF by CM Corp.

 

Risk Factors

 

Aswith any business, our Company faces a number of risks.  If any of the following risks actuallyoccur, our business, prospects, results of operations and financial conditionwould likely suffer.  This sectionincludes or refers to certain forward-looking information and as such should beread with regard to the cautionary statement for purposes of the “Safe Harbor”provisions of the Private Security Limitation Reform Act of 1995.

 

Risks related to investing in revenue bonds

 

*A large portion of our income issubject to the risks of investing in affordable multi-family rental residentialproperties.*

 

We derive a largeportion of our income by investing in revenue bonds secured by affordablemulti-family rental residential properties. Investing in such revenue bonds subjects us to various types and degreesof risk that could adversely affect the value of our assets and our ability togenerate revenue, net income and cash available for distributions toshareholders, including the following:

 

•                  the property securing a revenue bonddoes not generate sufficient income to meet its operating expenses and paymentson its related revenue bond;

•                  local, regional or national economicconditions may limit the amount of rent that can be charged for rental units atthe properties, and may result in a reduction in rent payments or the timelinessof rent payments or a reduction in occupancy levels;

•                  occupancy and rent levels may be affected byconstruction of additional housing units and national, regional and localpolitics, including current or future rent stabilization and rent control lawsand agreements;

•                  federal LIHTCs and city, state and federalhousing subsidy or similar programs which apply to many of the propertiesimpose rent limitations that could adversely affect the ability to increaserents to generate the funds necessary to maintain the properties in propercondition, which is particularly important during periods of rapid inflation ordeclining market value of such properties; and

•                  if a revenue bond defaults, the value of theproperty securing such revenue bond (plus, for properties that have availedthemselves of the federal LIHTC, the value of such credit) may be less than theunamortized principal amount of such revenue bond.

 

*We may suffer adverse consequences from changes in interestrates*

 

An increase inmarket interest rates may reduce the carrying value of our investments,including our residual interests in tax-exempt securitization transactions,decrease the amount we could realize on the sale of those investments andadversely affect the amount of funds available for distribution to the CRAshareholders.  Since a significantportion of our investments represent residual interests in revenue bonds orother securities whose cash flow is first used to pay senior securities withshort-term floating interest rates, any increase in short-term interest rateswill increase the amount of interest we are required to pay on the seniorsecurities and reduce the cash flow from our residual interests.  Any significant increase in short-terminterest rates could adversely affect the market value of our shares byreducing the amount of cash available for distribution to ourshareholders.  A decrease in marketinterest rates may lead to the refinancing of some of the revenue bonds we own,through redemption thereof by the issuing entities or the borrowers.  We may not be able to reinvest the proceedsof any such redemption in a comparable revenue

 

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bond at anattractive rate of return.  In addition,we may not be able to purchase new revenue bonds at the same interest rates aswe have in the past.  This may affectour ability to generate sufficient income to make distributions and otherpayments in respect of our shares.

 

*We have no recourse against state or local governments orproperty owners upon default of our revenue bonds or upon the bankruptcy of anowner of properties securing our revenue bonds*

 

Although state orlocal governments or their agencies or authorities issue the revenue bonds wepurchase, the revenue bonds are not general obligations of any state or localgovernment.  No government is liable torepay the revenue bonds, nor is the taxing power of any government pledged forthe payment of principal or interest on the revenue bonds.  An assignment by the issuing governmentagency or authority of the mortgage loan to the owner of the related propertiesin favor of a bond trustee on behalf of us or one of our subsidiaries, or insome cases, an assignment directly to the bondholder, secures the applicablerevenue bond we own.  The loan issecured by a mortgage on the related property or properties and an assignmentof rents.  The underlying mortgage loansare non-recourse to the property owner, other than customary recoursecarve-outs for bad acts such as fraud; that is, the owners of the propertiessecuring the revenue bonds that we own are liable for the payment of principaland interest under the loans only to the extent of cash flow from, and sale orrefinancing proceeds of, such properties. Accordingly, the revenue derived from the operation of the propertiessecuring the revenue bonds that we own and amounts derived from the sale,refinancing or other disposition of the properties are the sole sources offunds for payment of principal and interest on the revenue bonds.  Our revenue may also be adversely affectedby the bankruptcy of an owner of properties securing the revenue bonds that wedirectly or indirectly own.  An owner ofproperties under bankruptcy protection may be able to forcibly restructure itsdebt service payments and stop making, temporarily or otherwise, debt servicepayments to us.  Our rights in thisevent would be defined by applicable law.

 

*Some of the properties underlying our revenue bonds areowned by charities*

 

As of December 31,2003, nine of our revenue bonds with an aggregate carrying value ofapproximately $78.4 million were issued on behalf of non-profit organizationsdescribed in Section 501(c)(3) of the Code and finance low income multi-familyproperties or facilities for the elderly. Because an allocation of a state’s volume cap is not needed for theserevenue bonds, they may be more readily available than revenue bonds whichrequire an allocation of volume cap. However, because charities are not profit motivated, they may notoperate properties as efficiently as for-profit owners.  Many charities are thinly capitalized andare unable to invest significant amounts of equity into affordable multi-familyproperties acquired by them.  This mayincrease the likelihood of default because the charity (i) may not have thecapital required to operate and maintain the property if the cash flow expectedto be generated by rental income is less than expected or (ii) may be morewilling to abandon a property experiencing financial difficulty because its investmentis minimal.  In addition, investing inrevenue bonds owned by charities is subject to other risks, including:

 

•                  changes in governmental sponsorship ofsubsidized programs;

•                  subsidization of indigent persons who usetheir facilities, which may reduce the cash flow available to pay debt serviceon revenue bonds secured by such facilities;

•                  the possibility that a charity’s status as anexempt organization could be revoked or the possibility that the property issold to a person which is not an exempt organization that is described inSection 501(c)(3) of the Code, for example, as a result of a foreclosure sale,thereby resulting in the interest on the revenue bonds issued for the benefitof such charity becoming includable in gross income for purposes of federalincome taxation from the date of issue of the respective revenue bond; and

•                  the inability of the owner of the revenue bondto recover sufficient value in the event of a default and subsequent foreclosure,because of the loss of the benefit of the tax-exempt financing and, in somecases, real estate tax abatements, unless the property is promptly resold toanother qualifying non-profit organization.

 

*There may be negative effects of requirements with respectto rent restrictions and permissible income of occupants of properties securingour revenue bonds*

 

All of theproperties securing our revenue bonds are subject to certain federal, stateand/or local requirements with respect to the permissible income of their tenants.  The LIHTC program and, often, state or locallaw establish a rent ceiling for some or all tenants.  In addition, pursuant to the Code, all of the properties securingour revenue bonds are required to have at least 20% (and in the case of lowincome properties owned by most charities, up to 75%) of the units reserved foroccupancy by low or moderate income persons or families.  The Code provides that, as a general rule,for revenue bonds issued on or after January 1, 1986, the income limitationsfor low or moderate income tenants will be adjusted for family size.  Since federal subsidies are not generallyavailable in connection with the mortgage loans, rents must be charged on suchportions of the units at a level to permit such units to be continuouslyoccupied by low or moderate income persons or families.  As a result, such rents may not besufficient to cover all operating costs with respect to such units and debtservice on the related revenue bond.  Insuch event, the rents on the remaining units may have to be higher than theywould otherwise be and may, therefore, exceed competitive rents, which mayadversely affect the occupancy rate of a property securing an investment andthe developer’s ability to service its debt.

 

*We are subject to construction completion and rehabilitationrisks*

 

As of December 31, 2003, revenue bonds with an aggregate carrying valueof approximately $520.7 million were secured by affordable multi-family housingproperties which are still in various stages of construction and revenue bondswith an aggregate carrying value of approximately $192.4 million were securedby affordable multi-family housing properties which are undergoing substantialrehabilitation.  Construction and/orrehabilitation of such properties generally takes approximately 12 to 24months.  The principal risk associatedwith this type of lending is the risk of non-completion of construction orrehabilitation which may arise as a result of: (i) underestimated initialconstruction or rehabilitation costs; (ii) cost overruns; (iii) delays; (iv)failure to obtain governmental approvals; and (v) adverse weather and otherunpredictable contingencies beyond the control of the developer.  If a mortgage loan is called due toconstruction and/or rehabilitation not being completed as required in the

 

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mortgage loan documents, we, as the holder of the revenue bonds securedby such mortgage, may incur certain costs and be required to invest additionalcapital in order to preserve our investment.

* *

*The properties securing certain of our revenue bonds, whichare currently in a lease-up stage, may experience financial distress if they donot meet occupancy and debt service coverage levels sufficient to stabilizesuch properties*

 

As of December 31, 2003, revenue bonds in our portfolio with a carryingvalue of approximately $530.4 million are secured by mortgages on propertieswhich are currently in a lease-up stage. The lease-up of these Underlying Properties may not be completed onschedule or at anticipated rent levels, resulting in a greater risk that suchrevenue bonds may go into default than bonds secured by mortgages on propertiesthat are fully leased-up.  Moreover,there can be no assurance that the Underlying Property will achieve expected occupancyor debt service coverage levels.

 

*Other parties have the first right to income from andprincipal of, and control of foreclosure on, some of our revenue bondinvestments*

 

Asof December 31, 2003, a substantial portion of our investments consist ofrevenue bonds that are subordinated or that represent interests in bonds, notesor other instruments that may be junior in right of payment to other bonds,notes or instruments.  There are risksin investing in subordinated revenue bonds and other junior residual intereststhat could adversely affect our ability to make expected distributions to ourCRA shareholders or common shareholders, including:

 

•                  the risk that borrowers may not be able tomake payments on both the senior and the subordinated revenue bonds or interests,resulting in us, as a holder of the subordinated revenue bond, receiving lessthan the full and timely payments of interest and principal;

•                  the risk that short-term interest rates risesignificantly, which would increase the amounts payable to the holders of thesenior interests created through our securitizations and reduce the amountspayable to us or our subsidiaries as holders of the junior residual interests;and

•                  the possibility that the holders of the seniorrevenue bonds or senior interests created through our securitizations maycontrol the ability to enforce remedies, limiting our ability to take actionsthat might protect our interests.

 

*Our revenue bonds and mortgage loans may be consideredusurious*

 

State usury laws establish restrictions, in certain circumstances, onthe maximum rate of interest that may be charged by a lender and imposepenalties on parties making usurious loans, including monetary penalties,forfeiture of interest and unenforceability of the debt.  Although we do not intend to acquire revenuebonds secured by mortgage loans at usurious rates, there is a risk that ourrevenue bonds and mortgage loans could be found to be usurious as a result ofuncertainties in determining the maximum legal rate of interest in certainjurisdictions, especially with respect to revenue bonds that bear participatingor otherwise contingent interest. Therefore, the amount of interest to be charged and our return on ourrevenue bonds will be limited by state usury laws.  In order to minimize the risk of investing in a revenue bond at ausurious rate, we obtain an opinion of local counsel to the effect that theinterest rate of a proposed revenue bond is not usurious under applicable statelaw.  We also generally obtain an opinionof local counsel to the effect that the interest on the proposed mortgage loanis not usurious.  To obtain suchopinions, we may have to agree to defer or reduce the amount of interest thatcan be paid in any year.  Some statesmay prohibit the compounding of interest, in which case we may have to agree toforego the compounding feature of our revenue bonds originated in those states.

 

Risks related to our taxable business

 

*Revenues from our subsidiaries’ fee-generating activitiesare less predictable than our revenues from our revenue bond investments andcould result in additional taxable income to our shareholders*

 

Our formation of CM Corp., acquisition of PWF and more recentacquisition of Related has changed our business from one that invests substantiallyin revenue bonds to one that, in addition to bond investments, conductssignificant fee-generating service activities. These fee-generating activities are significantly different from ourhistorical investment business where revenue bonds are held and income is generatedprimarily through receipt of interest payments.  Although we expect that these fee-generating businesses willgenerate significant growth for us, they are inherently less predictable thanthe ownership of tax-exempt bonds and there can be no assurance that oursubsidiaries’ fee-generating activities will be profitable.  In addition, the earnings and cash generatedby the Related business has historically fluctuated between quarters due to thevariability and seasonality inherent in the timing of investing in tax creditpartnerships, which is the primary driver of the earnings and cash generated byRelated.  These fluctuations could beperceived negatively and, therefore, adversely affect the price at which ourcommon shares trade.  In addition, theportion of our distributions that represent federally tax-exempt income could decreasebased on the proportion of our future taxable business.  If the taxable dividend income distributedby CM Corp. to us grows as a percentage of our consolidated net income, if weinvest in a larger percentage of taxable investments or if we engage in othertaxable fee-generating business, the percentage of our net income distributedto our shareholders that is federally tax-exempt to them is likely to decrease.

 

*There are risks associated with Delegated Underwriter andServicer (“DUS”) lending*

 

Through PWF’s DUS program, we originate loans which are thereafterpurchased by Fannie Mae.  PWF retains afirst loss position with respect to loans that it originates and sells toFannie Mae.  PWF assumes responsibilityfor a portion of any loss that may result from borrower defaults, based on theFannie Mae loss sharing formulas, Levels I, II, or III.  As December 31, 2003, all of PWF’s loansconsisted of Level I loans.  For suchloans, PWF is responsible for the first 5% of the unpaid principal balance anda portion of any additional losses to a maximum of 20% of the originalprincipal balance.  Level II and LevelIII loans carry a higher loss sharing percentage.  Any remaining loss is sustained by Fannie Mae.

 

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Under the terms of the Master Loss Sharing Agreement between Fannie Maeand PWF, PWF is responsible for funding 100% of mortgagor delinquency(principal and interest) and servicing (taxes, insurance and foreclosure costs)advances until the amounts advanced exceed 5% of the unpaid principal balanceat the date of default.  Thereafter, forLevel I loans, PWF may request interim loss sharing adjustments which allow PWFto fund 25% of such advances until final settlement under the Master LossSharing Agreement.  No interim sharingadjustments are available for Level II and Level III loans.

 

*There are risks associated with credit enhancement andinternal rate of return guarantees*

 

ThroughCM Corp., we provide credit enhancement to third parties for a fee.  If such third parties default on their obligationson which CM Corp. provided credit enhancement, CM Corp. would be called upon tomake the related payment, which could be in an amount that is far in excess ofthe fee obtained for its credit enhancement. In addition, we usually guarantee CM Corp.’s obligations under itscredit enhancement transactions.  As ofDecember 31, 2003, our maximum risk associated with these credit enhancementtransactions was approximately $19 million. Through CM Corp., we provide internal rate of return guarantees toinvestors in partnerships designed to pass through certain tax benefits,including federal LIHTCs, to investors. In connection with such guarantees we might be required to advance fundsto ensure that the investors do not lose their expected tax benefits and, ifthe internal rate of return to investors falls below the guaranteed level, wewould be required to make a payment so that the guaranteed rate of return willbe achieved.  As of December 31, 2003,our maximum potential liability, pursuant to those guarantees, was approximately$228 million.

 

*First loss and non-investment grade subordinated interestsare subject to increased risk of loss*

 

We have investedindirectly in subordinated Commercial Mortgage Backed Securities (“CMBS”)through our ownership of a preferred membership interest in ARCap InvestorsL.L.C.  (“ARCap”).  Subordinated CMBS of the type in which ARCapinvests typically include “first loss” and non-investment grade subordinatedinterests.  A first loss security is themost subordinate class in a structure and accordingly is the first to bear theloss upon a default or restructuring or liquidation of the underlyingcollateral and the last to receive payment of interest and principal, and isoften not assigned an investment rating. Accordingly, such classes are subject to a greater risk of loss ofprincipal and non-payment of interest than more senior, rated classes.  The market values of subordinated interestsin CMBS and other subordinated securities tend to be more sensitive to changesin economic conditions than more senior, rated classes.  As a result of these and other factors,subordinated interests generally are not actively traded and are relativelyilliquid investments.  With respect toour investment in ARCap, our ability to transfer our membership interest inARCap is further limited by the terms of ARCap’s operating agreement.

 

*Elimination of, or changes to, governmental programs*

 

Asignificant portion of Related’s revenues are derived from the syndication ofpartnership interests in properties eligible for LIHTCs.  Although LIHTCs are a part of the Code,Congress could repeal or modify this legislation at any time.  If such legislation is repealed or adverselymodified, Related would no longer be able to pursue its business strategy ascurrently contemplated.

 

*The inability to maintain Related’s current recurring feearrangements and to generate new transaction fees could have a negative impacton the price of our common shares*

 

Two of our taxable revenue sources are expected to be the transactionfees generated by Related’s sponsorship of any new investment programs andrecurring fees payable by existing and future programs.  Transaction fees are generally “up-front”fees that are generated from the sponsorship of new investment programs, whilerecurring fees depend on the ongoing operation of investment programs sponsoredby Related.  The termination of one ormore of these recurring fee arrangements, or the inability to sponsor newprograms which will generate new recurring and transaction fees, couldadversely affect our results of operations and reduce the market price of ourcommon shares.  There can be noassurance that existing recurring fee arrangements will not be reduced orterminated or that we will be able to realize revenues from new investment programs.

 

*Certain agreements pursuant to which Related earns fees havefinite terms and may not be renewed*

 

Related receives fees pursuant to an advisory agreement with AmericanMortgage Acceptance Company (“AMAC”). The AMAC advisory agreement is subject to annual renewal by AMAC, whichrequires the approval of a majority of its board of trustees.  In addition, a majority of the independentmembers of AMAC’s board may terminate this agreement with Related with orwithout cause.  As a result, thisagreement may not be renewed or may be terminated with or without cause.  Related also receives fees from investmentprograms Related has sponsored and may sponsor in the future that do not providefor annual elections by investors of their management.  With respect to these investment programs,we will generally be acquiring controlling interests in the entities whichcontrol these investment programs which currently generate recurring fees.  However, these interests are subject to thefiduciary duty of the controlling entity to the investors in those investmentprograms which may affect our ability to continue to collect fees from thoseinvestment programs.  Furthermore, theorganizational documents of substantially all of these investment programsallow for the investors, at their option, to remove the entity controlled byRelated as general partner or managing member without cause.  Although the investment programs willgenerally be required to pay fair market value if they exercise this right,Related’s right to receive future fees would terminate and there can be noassurance that the payment will fully compensate us for this loss.  Finally, many of these investment programstypically have finite periods in which they are scheduled to exist, after whichthey are liquidated.  The termination ofa program will result in a termination of the fees we receive from those programs.

 

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*Related’s business is subject to competition and ourinability to compete effectively in the future for financial services businesscould reduce the revenues we expect to receive as a result of our acquisitionof Related and negatively affect the price of our shares*

 

Financial services in the multi-family affordable housing industry ishighly competitive.  Related competeswith entities that possess greater financial resources for (a) providingfinancing to multi-family developers and (b) selling LIHTC funds toinvestors.  Related also competesagainst numerous private financial service providers as well as state andfederal agencies.  Pursuant to Section42 of the Code, a fixed number of LIHTCs are allocated annually to each statebased on population.  In 2002,developers applied for approximately $5.0 billion of LIHTCs, while only $2.5billion were available nationally. Related is dependent upon the developers of LIHTC properties to applyfor and obtain LIHTCs.  Related, inturn, contracts with the local developer for the right to offer the tax creditsto equity investors through investment programs it sponsors.  These local developers include independentthird parties as well as affiliates of TRCLP. Our inability to continue to arrange for the acquisition of LIHTCopportunities from developers or the inability of developers with whom Relatedhas done business in the past to continue to obtain LIHTC allocations, mayadversely affect our ability to achieve the anticipated benefits of our acquisitionof Related.

 

*Related relies on relationships with key investors andcustomers which may not continue, which would adversely affect our ability togenerate revenue*

 

Related relies on relationships with key investors and developers.  If these relationships do not continue, orif we are unable to form new relationships, our ability to generate revenuewill be adversely affected.  In 2002,five key investors provided approximately 72% of the equity capital raised bytax credit syndication programs sponsored by Related, with two of those keyinvestors providing approximately 47% of the capital.  In addition, ten key developers provided approximately 55% of theLIHTC properties for which Related arranged equity financing in 2002.  There can be no assurance that we will beable to continue to do business with these key investors and developers or thatnew relationships will be formed.

 

General risks related to our Company

 

*Weand our subsidiaries depend on the services of Related’s senior management team*

 

We and our subsidiaries depend upon the services of four key employeesof Related (Messrs.  Boesky, Hirmes andSchnitzer and Ms. Kiley) and other individuals who comprise Related’s seniormanagement team.  All decisions with respectto the management and control of our Company and our subsidiaries, subject tothe supervision of our board of trustees (or the applicable subsidiaries boardof directors), are currently made exclusively by these four key employees andRelated’s senior management team.  Thisincludes, without limitation, the determination of how we and our subsidiarieschoose our investments.  The departureor the loss of the services of any of these key employees or a large number ofsenior management personnel and other employees could have a material adverseeffect on our ability to effectively operate our business and our futureresults of operations.

 

*Because we hold most of our investments through oursubsidiaries, our shareholders are effectively subordinated to the liabilitiesand preferred equity of our subsidiaries*

 

We hold most of our investments through our subsidiaries.  Since we own only common equity of oursubsidiaries, we, and therefore holders of our shares, are effectively subordinatedto the liabilities and preferred equity of our subsidiaries, which at December31, 2003, aggregated approximately $1.9 billion.  In particular, the holders of the preferred shares of one of oursubsidiaries, Equity Issuer, are entitled to receive preferential distributionswith respect to revenues generated by revenue bonds held directly or indirectlythrough it, which constitute a substantial portion of our assets.  Similarly, holders of senior interestscreated through our securitization programs have a superior claim to the cashflow from the revenue bonds deposited in such programs.  Accordingly, a portion of the earnings onour investments will not be available for distribution on our CRA Shares.

 

*We are subject to ongoing liabilities and business risksthat are inherent to Related’s business*

 

*Assumed Liabilities*

 

Inconnection with our acquisition of Related, we assumed and incurred liabilitiesand associated costs, including the assumption of liabilities under certainguarantees.  We also providedreplacement notes to capitalize general partner entities of investment programspreviously sponsored by Related and controlled directly by us and guaranteedthe performance by our subsidiaries of any obligations they have pursuant tothe agreements entered into in connection with our acquisition of Related.  As a guarantor, we could incur liability ifevents of default occur.

 

*New Liabilities and Business Risks*

 

Inconnection with the sponsorship of investment programs and joint ventureactivities related to the co-development of LIHTC properties, Related acts as afiduciary to the investors in its syndication programs and is often alsorequired to provide guarantees of performance. Related advances funds to acquire interests in property-owning partnershipsfor inclusion in investment programs it sponsors and at any point in time, theamount of funds advanced can be material. The warehouse line of credit utilized by Related to fund theseacquisitions has a maximum amount of $85.0 million.  Recoupment of amounts used to acquire such interests is subjectto Related’s ability to attract investors to new investment programs or, ifinvestors are not found, the sale of the partnership interests in theUnderlying Properties.  Finally, oursubsidiaries could be subject to liabilities to investors in investmentprograms and third parties as a result of serving as general partner or speciallimited partner in various investment programs.  In addition, even when we are not required to do so, we mayadvance funds to allow investment programs to meet their expenses and/orgenerate the expected tax benefits to investors.

 

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*Certain types of losses are uninsured*

 

There are certain types of losses (generally of a catastrophic nature,such as toxic mold, earthquakes, floods, terrorism and wars) which are eitheruninsurable or not economically insurable. Should a disaster of this type occur to, or cause the destruction of,one of the properties securing a revenue bond that we directly or indirectlyown, it is possible that we could lose our invested capital, anticipated futurerevenue and anticipated profit.

 

*Our investments in revenue bonds are illiquid*

 

Ourinvestments in revenue bonds lack a regular trading market.  There is no limitation in our trustagreement or otherwise as to the percentage of our investments that may beilliquid and we expect to continue to invest in assets, a substantial portionof which will be illiquid securities. If a situation arises where we would require additional cash, we couldbe forced to liquidate some or all of our investments on unfavorable terms (ifany sale is possible) that could substantially reduce the amount ofdistributions available and payments made in respect of our shares.

 

*Certain of the revenue bonds held by us and our subsidiarieshave been pledged*

 

Asignificant portion of our revenue bond portfolio has been pledged inconnection with our securitizations, credit enhancement activities andwarehouse borrowing.  The carrying valueof the pledged bonds varies from time to time. As of December 31, 2003, the carrying value of all pledged bonds is approximately$1.8 billion.  Upon the occurrence of adefault under one or more of the programs in connection with which our revenuebonds are pledged, certain of those bonds could be liquidated and the proceedsof such liquidation paid to the secured party. Such liquidation and application would reduce the amount of interestavailable for distributions to our shareholders and would also potentiallytrigger other defaults, which could lead to additional liquidations of thepledged revenue bonds.

 

*Our board of trustees can change our business policiesunilaterally*

 

Our shareholders have no control over changes in our policies, includingour business policies with respect to acquisitions, financing, growth, debt,capitalization and distributions, which are determined by our board oftrustees.  Our board of trustees mayamend or revise our business plan and certain other policies without shareholdervote.  There is a risk that changes inour business policies may not fully serve the interests of all of ourshareholders.

 

*We invest in real estate related investments and revenuebonds secured by real estate, which involves risk of liability under the environmentallaws*

 

Undervarious federal, state and local laws, ordinances and regulations, an owner oroperator of real estate is liable for the costs of removal or remediation ofcertain hazardous or toxic substances released on, above, under or in such realestate.  These laws often imposeliability without regard to whether the owner knew of, or was responsible for,the presence of such hazardous or toxic substances.  As a result, the entities we sponsor which own real estate, andthe owners of the real estate securing our investments could be required to payremoval or remediation costs.  Thesecosts of removal or remediation could be substantial and could negatively impactthe availability of property cash flow for payments on our investments.  Phase I reports have been obtained for all ofthe properties securing our investments, and in certain instances, because offindings in the Phase I reports, Phase II reports have also been obtained.  The results of such reports were that nomaterial violations of applicable regulations were found and such reportsconcluded that there has been no verifiable or apparent adverse environmentalimpact from past or present land use which has not been or will not beremediated.  Other than such Phase I andPhase II reports, no further environmental analyses have been performed withrespect to the properties securing our investments.  Other than the results of the reports described above, ourawareness of environmental problems associated with the properties securing ourinvestments is derived, for the most part, from information obtained fromowners of the properties which secure our investments, due diligence inquirieswhen our investments were financed or visual inspections of properties byindependent appraisers.  There may,however, be environmental problems associated with a property securing aninvestment not known to us and our subsidiaries.

 

*We are not registered under the Investment Company Act andwould not be able to conduct our activities as we currently conduct them if wewere to become required to be registered*

 

Neither we nor our subsidiaries are registered under the InvestmentCompany Act of 1940 and we may not be able to conduct our activities as wecurrently conduct them if we were required to register thereunder.  We at all times intend to conduct ouractivities, and those of our subsidiaries, so as not to become regulated as aninvestment company under the Investment Company Act.  Even if we are not an “investment company” under the InvestmentCompany Act, we could be subject to regulation under the Investment Company Actif a subsidiary of ours were to be deemed to be an “investment company.” Thereare a number of possible exemptions from registration under the InvestmentCompany Act that we believe apply to us and our subsidiaries and which webelieve make it possible for us not to be subject to registration under theInvestment Company Act.  For example,the Investment Company Act exempts entities that are “primarily engaged in thebusiness of purchasing or otherwise acquiring mortgages and other liens on andinterests in real estate,” which we refer to as “qualifying interests.” Undercurrent interpretations of the staff of the SEC, one of the ways in which oursubsidiaries can qualify for this exemption is to maintain at least 55% of itsassets directly in qualifying interests and the balance in real estate-typeinterests.  Under this test, unlesscertain mortgage securities represent all of the certificates issued withrespect to an underlying pool of mortgages, such mortgage securities may betreated as securities separate from the underlying mortgage loans and, thus,may not be considered qualifying interests for purposes of the 55% requirement.  We believe our subsidiaries can rely on thisexemption or another exemption from registration.  The requirement that our subsidiaries maintain 55% of assets inqualifying interests (or satisfy another exemption from registration) mayinhibit our ability to acquire certain kinds of assets or to securitizeadditional interests in the future.  Ifany of our subsidiaries fail to qualify for exemption from registration as aninvestment company, we, in turn, may be required to register as an investmentcompany under the Investment Company Act. In such event, our ability to maintain our financing strategies would besubstantially

 

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reduced, and we would be unable to conduct our business as describedherein.  Such a failure to qualify couldhave a material adverse effect upon our ability to make distributions to ourshareholders.

 

*There are possible adverse effects arising from sharesavailable for future sale*

 

Our board of trustees is permitted to offer additional CRA Shares orother equity or debt securities of our Company in exchange for money, propertyor otherwise.  Our ability to sell orexchange such securities will depend on conditions then prevailing in therelevant capital markets and our results of operations, financial condition,investment portfolio and business prospects. Subject to American Stock Exchange rules which require shareholderapproval for certain issuances of securities and as long as the issuance ismade in accordance with our trust agreement, the issuance of such additionalsecurities will not be subject to the approval of our CRA shareholders and maynegatively affect any resale price of our CRA Shares.  CRA shareholders will not have any preemptive rights inconnection with the issuance of any additional securities we or our subsidiariesmay offer, and any of our equity offerings will cause dilution of ashareholder’s investment in us.

 

*Our inability to raise capital could adversely affect ourgrowth*

 

A major aspect of our business plan includes the acquisition ofadditional revenue bonds, which requires capital.  In addition to funds generated through operations (includingsecuritizations), we raise capital by periodically offering securities issuedby us or one or more of our subsidiaries. Our ability to raise capital through securities offerings is subject torisks, including:

 

•                  conditions then prevailing in the relevantcapital markets;

•                  our results of operations, financialcondition, investment portfolio and business prospects;

•                  the timing and amount of distributions to theholders of our shares which could negatively affect the price of a commonshare; and

•                  the amount of securities that are structurallysenior to the securities being sold.

 

*Our classification as a publicly traded partnership nottaxable as a corporation is not free from doubt and could be challenged*

 

We,and the majority of our subsidiaries, operate as partnerships or aredisregarded for federal income tax purposes. This allows us to pass through our income, including our federallytax-exempt income, and deductions to our shareholders.  The listing of our common shares on theAmerican Stock Exchange causes us to be treated as a “publicly tradedpartnership” for federal income tax purposes. We, and Paul, Hastings, Janofsky & Walker LLP, our counsel (who wealso refer to as “Paul Hastings”), believe that we have been and are properlytreated as a partnership for federal income tax purposes.  However, the Internal Revenue Service(“IRS”) could challenge our partnership status and we could fail to qualify asa partnership in future years. Qualification as a partnership involves the application of highlytechnical and complex Code provisions. For example, a publicly traded partnership is generally taxable as acorporation unless 90% or more of its gross income is “qualifying” income(which includes interest, dividends, real property rents, gains from the saleor other disposition of real property, gain from the sale or other dispositionof capital assets held for the production of interest or dividends, and certainother items).  We have represented thatin all prior years of our existence at least 90% of our gross income wasqualifying income and we intend to conduct our operations in a manner such thatat least 90% of our gross income will constitute qualifying income this yearand in the future.  In the opinion ofPaul Hastings, although the issue is not free from doubt, we have been and areproperly treated as a partnership for federal income tax purposes.  In determining whether interest is treatedas qualifying income under these rules, interest income derived from a“financial business” and income and gains derived by a “dealer” in securitiesare not treated as qualifying income. We have represented that we are acting as an investor with respect toour investments and that we have not engaged in, and will not engage in, afinancial business.  There is no clearguidance on what constitutes a financial business.  We have taken the position that for purposes of determiningwhether we are in a financial business, our bond acquisition and financingactivities as well as our proposed activities would not cause us to be engagedin a financial business or to be considered a “dealer” in securities.  The IRS could assert that our activitiesconstitute a financial business.  Evenif we were considered to be engaged in a financial business, we believe that wewould satisfy the requirement that 90% or more of our income constitutesqualifying income.  If our activitiesconstitute (or as a result of increased volume constitute) a financial businessor cause us to be treated as a dealer, there is a substantial risk that morethan 10% of our gross income would not constitute qualifying income.  We could also be treated as if we wereengaged in a financial business if the activities of Related were attributed tous.  Although we are affiliated withRelated, we seek to enter into arms length arrangements with Related.  CM Corp. will be subject to income tax withrespect to amounts earned by Related. Accordingly, we believe the activities and income of Related will not beattributed to us.  In addition, indetermining whether interest is treated as qualifying income, interest incomethat is determined based upon the income or profits of any person is nottreated as qualifying income.  A portionof the interest payable on participating interest bonds owned by us and oursubsidiaries is determined based upon the income or profits of the propertiessecuring our investments.  Accordingly,if we were to receive more than 10% of our interest income in any given yearfrom such “contingent interest,” the IRS could take the position that we shouldbe treated as publicly traded partnerships, taxable as associations.  We carefully monitor the type of interestincome we receive to void such a circumstance. However, there can be no assurance that such monitoring would beeffective in all events to avoid the receipt of more than 10% contingentinterest in any given year, because circumstances outside of the control of usand our subsidiaries could cause such a result.  If for any reason less than 90% of our gross income constitutesqualifying income, items of income and deduction would not pass through to ourshareholders and our shareholders would be treated for federal income taxpurposes as stockholders in a corporation. We would be required to pay income tax at regular corporate rates on anyportion of our net income that did not constitute tax-exempt income.  In addition, a portion of our federallytax-exempt income may be included in determining our alternative minimum taxliability.  Distributions by us to ourshareholders would constitute ordinary dividend income taxable to such holdersto the extent of our earnings and profits, which would include tax-exemptincome, as well as any taxable income we might have, and the payment of thesedistributions would not be deductible by us. These consequences would have a material adverse effect on us and ourshareholders.

 

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*Our treatment of income from our residual interests asfederally tax-exempt could be challenged*

 

We hold, indirectly, residual interests in certain federally tax-exemptrevenue bonds through securitization programs, such as the Private Label TenderOption Program and P-FLOATsSM/RITESSM program, which entitle us to a share of the federallytax-exempt interest of such revenue bonds. Special tax counsel have each rendered an opinion to the effect that theissuer of the RITESSM and the issuer of the Private Label TenderOption Program residual certificates, respectively, will each be classified asa partnership for federal income tax purposes and the holders of the RITESSMand the Private Label Tender Option Program residual certificates will betreated as partners of each partnership. Consequently, as the holder of the RITESSM and the PrivateLabel Tender Option Program residual certificates, we believe we are entitledto treat our share of the federally tax-exempt income allocated and distributedto us as tax-exempt income.  However, itis possible that the IRS could disagree with those conclusions and an alternativecharacterization could adversely affect the treatment of any income we receivefrom the RITESSM and the Private Label Tender Option Programresidual certificates, as well as the pass-through of that income to ourshareholders, as ordinary taxable income.

 

*The value of our shares and our ability to makedistributions of federally tax-exempt income depends upon the application oftax laws*

 

The following discussion relates only to those investments whichgenerate federally tax-exempt income.

 

*Tax treatment of our revenuebonds*

 

Alarge portion of our business involves acquiring and holding investments thatwe believe, based upon the opinion of nationally recognized counsel deliveredon the date the investment was originally issued (or on the date on which theinvestment was considered reissued), will generate interest or distributionsexcludable from the gross income of the holders thereof for federal income taxpurposes.  Certain of the revenue bondsacquired directly or indirectly by us bear interest at rates which includeparticipating or otherwise contingent interest.  These revenue bonds are called participating interest bonds.  In the case of all participating interestbonds, the opinions of counsel include an opinion to the effect that suchparticipating interest bond would be treated as debt for federal income taxpurposes.

 

*Tax-exemption of our revenuebonds*

 

On the date of original issuance or re-issuance of each revenue bond,nationally recognized bond counsel or special tax counsel rendered its opinionto the effect that, based on the law in effect on the date of original issuanceor re-issuance, interest on such revenue bonds is excludable from gross incomefor federal income tax purposes, except with respect to any revenue bond (otherthan a revenue bond, the proceeds of which are loaned to a charitableorganization described in Section 501(c)(3) of the Code) during any period inwhich it is held by a “substantial user” of the property financed with theproceeds of such revenue bonds or a “related person” of such a “substantialuser.” In the case of participating interest bonds, such opinion assumes, incertain cases in reliance on another unqualified opinion, that such participatinginterest bond constitutes debt for federal income tax purposes.  Each opinion speaks only as of the date itwas delivered.  In addition, in the caseof revenue bonds which, subsequent to their original issuance, have beenreissued for federal tax purposes, nationally recognized bond counsel orspecial tax counsel has delivered opinions to the effect that interest on thereissued revenue bond is excludable from gross income of the holder thereof forfederal income tax purposes from the date of re-issuance or, in some cases, tothe effect that the re-issuance did not adversely affect the excludability ofinterest on the revenue bonds from the gross income of the holdersthereof.  However, an opinion of counselhas no binding effect and there is no assurance that the conclusions reachedwill not be contested by the IRS or, if contested, will be sustained by acourt.  The re-issuance of a revenuebond generally does not, in and of itself, cause the interest on such revenuebond to be includable in the gross income of the holder thereof for federalincome tax purposes.  However, if arevenue bond is treated as reissued and the appropriate federal tax informationreturn, a Form 8038, has not been timely filed or a late filing has not been acceptedby the IRS, interest on such revenue bond could be includable in the grossincome of the holder thereof for federal income tax purposes from and after there-issuance date.  In addition, if aparticipating interest revenue bond is treated as reissued, there can be noassurance that such revenue bond would continue to be characterized as debt, asdescribed below, insofar as the facts and circumstances underlying suchcharacterization may have changed. Furthermore, pursuant to regulations generally effective as of June 30,1993, if an issue of revenue bonds is treated as reissued within six months ofthe transfer of the property financed by such issue of revenue bonds by theowner of such property to an unrelated party the interest on such revenue bondscould become includable in gross income for purposes of federal incometaxation.  In addition, if a participatinginterest revenue bond is reissued after August 13, 1996, the reissued revenuebond is or would become subject to certain regulations concerning contingent payments,which could cause some or all of the interest payable on such participatinginterest revenue bond to become includable in gross income of the holderthereof for federal income tax purposes, unless such participating interestrevenue bond is modified at the time of re-issuance to comply with thecontingent payment regulations.  TheCode establishes certain requirements which must be met subsequent to the issuanceand delivery of tax-exempt revenue bonds for interest on such revenue bonds toremain excludable from gross income for federal income tax purposes.  Among these continuing requirements arerestrictions on the investment and use of the revenue bond proceeds and, forrevenue bonds the proceeds of which are loaned to a charitable organization describedin Section 501(c)(3) of the Code, the continued exempt status of suchborrower.  In addition, the continuingrequirements include tenant income restrictions, regulatory agreementcompliance and compliance with rules pertaining to arbitrage.  Each issuer of the revenue bonds, as well aseach of the underlying borrowers, has covenanted to comply with certainprocedures and guidelines designed to ensure satisfaction of the continuingrequirements of the Code.  Failure tocomply with these continuing requirements of the Code may cause the interest onsuch bonds to be includable in gross income for federal income tax purposesretroactively to the date of issuance, regardless of when such noncomplianceoccurs.  Greenberg Traurig, LLP (alsoreferred to as “Greenberg Traurig”) as our bond counsel, and Paul Hastings, asour securities counsel (Greenberg Traurig and Paul Hastings are collectivelyreferred to herein as our “Counsel”), have not, in connection with the offeringof the Series A Convertible CRA Shares pursuant to this prospectus supplement,passed upon and do not assume any responsibility for, but rather have assumedthe continuing correctness of, the opinions of bond counsel or special taxcounsel (including opinions rendered by Greenberg Traurig) relating to theexclusion from gross income for federal income tax purposes of interest on therevenue bonds and have not independently verified whether any events orcircumstances have occurred since the date such opinions were rendered thatwould adversely affect the conclusions set forth herein.  However, as of the date of this prospectussupplement, neither we, nor our subsidiaries, our affiliates or our Counselhave knowledge of

 

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any events that might adversely affect the federally tax-exempt statusof our revenue bonds, including any notice that the IRS considers interest onany of our revenue bonds to be includable in gross income for federal incometax purposes.

 

*Treatment of revenue bondsas equity*

 

Payment of a portion of the interest accruing on each participatinginterest bond depends in part upon the cash flow from, and proceeds upon saleof, the property securing our investment financed by such revenue bond.  An issue may arise as to whether therelationship between us and the respective obligors is that of debtor andcreditor or whether we are engaged in a partnership or joint venture with the respectiveobligors.  If the IRS were to determinethat one or more of the participating interest bonds represented or containedan equity investment in the respective property securing our investment becauseof this feature, all or part of the interest on such participating interestbond could be viewed as a taxable return on such investment and would notqualify as tax-exempt interest for federal income tax purposes.  To our knowledge, neither thecharacterization of the participating interest bonds as debt, nor thecharacterization of the interest thereon as interest excludable from grossincome for federal income tax purposes of the holders thereof, has been challengedby the IRS in any judicial or regulatory proceeding.  In certain instances, opinions rendered by bond counsel providedthat the characterization of the bonds as debt was not free from doubt and thatall or a portion of the interest on such bonds, including “contingent interest”and “deferred interest,” may not be treated as interest for state and federallaw but that it is more likely than not that such interest is interest forstate and federal law purpose or otherwise similarly limited.  We or our predecessors received opinions ofcounsel from Willkie, Farr & Gallagher LLP and other counsel retained by usor our predecessor respecting each of our participating interest bonds to theeffect that, based upon assumptions described in such opinions, whichassumptions included the fair market value of the respective properties uponcompletion and economic projections and guarantees, the participating interestbonds “would” be treated for federal tax purposes as representing debt.  The implicit corollary of these opinions isthat the participating interest bonds do not constitute the following: (i) anequity interest in the underlying borrower; (ii) an equity interest in aventure between the underlying borrower and us; or (iii) an ownership interestin the properties securing our investments. Although we assume the continuing correctness of these opinions, andwill treat all interest received with respect to these bonds as tax-exemptincome, there can be no assurance that such assumptions are correct, suchtreatment would not be challenged by the IRS, or that intervening facts andcircumstances have changed the assumptions and basis for providing suchopinions.  Most of the opinionsdescribed in the preceding paragraph were not rendered by Greenberg Traurig,which has not passed on or assumed any responsibility for the opinions of othercounsel on this issue, nor made any independent determination as to whether anyevents or circumstances have occurred or intervened since the original issuanceof the “debt” opinions that would adversely affect such opinions.  In addition, the opinions discussed abovespeak only as of their respective delivery dates, and our Counsel has notpassed upon or assumed any responsibility for reviewing any events that mayhave occurred subsequent to the delivery of such opinions which could adverselyaffect the conclusions contained therein.

 

*“Substantial User”Limitation*

 

Interest on a revenue bond owned by us or our subsidiaries, other than abond the proceeds of which are loaned to a charitable organization described inSection 501(c)(3) of the Code, will not be excluded from gross income duringany period in which we or our subsidiaries are a “substantial user” of the propertiesfinanced with the proceeds of such revenue bond or a “related person” to a“substantial user.” We have received advice from our counsel with respect toour revenue bonds to the effect that we are not a “substantial user” of anyproperties financed with the proceeds of such bonds or a “related person”thereto.  A “substantial user” generallyincludes any underlying borrower and any person or entity who uses the financedproperties on other than a de minimis basis. We would be a “related person” to a “substantial user” for this purposeif, among other things, (i) the same person or entity owned more than a 50%interest in both us and in the properties financed with the proceeds of a bondowned by us or one of our subsidiaries, or (ii) if we owned a partnership orsimilar equity interest in the owner of a property financed with the proceedsof a bond.  Additionally, adetermination that we are a partner or a joint venturer with a mortgagorinvolving an equity interest, as described above under “Treatment of revenuebonds as equity,” could cause us to be treated as a “substantial user” of theproperties securing our investments.  Inthe event that the entity which owns a property securing our investment financedwith the proceeds of a revenue bond owned by us were to acquire any of ourshares, the IRS, if it became aware of such ownership, could take the positionthat the substantial user and related person rules require that the interestincome on such revenue bond allocable to all of our investors, including theholders of the shares, including the CRA Shares, be included in gross incomefor federal income tax purposes. Greenberg Traurig has advised us that in its opinion such a result isnot supported by the Code and treasury regulations; however, there can be noassurance that the IRS would not take such a position.  Related and its affiliates owned a portionof our outstanding common shares.  Suchownership of the obligors of certain of our revenue bonds and our common shareswere considered when we received advice that we are not a “substantial user” ofthe properties financed by such revenue bonds or a “related party” to a“substantial user.” The selling principals of Related and its affiliates alsoown SCUs in CCC.  Greenberg Traurig hasreviewed the revenue bonds owned by us and our subsidiaries, the ownership ofthe obligors of our revenue bonds and the ownership of our shares and oursubsidiaries’ shares, and concurs in the conclusion that we and oursubsidiaries are not “substantial users” of the properties financed with theproceeds of the revenue bonds or related parties thereto.  There can be no assurance, however, that theIRS would not challenge such conclusion. If such challenge were successful, the interest received on any bondrespecting which we or our subsidiaries were treated as a “substantial user” ora “related party thereto” would be includable in gross income for federalincome tax purposes.  In addition, priorto our acquisition of Related, it owned, directly and indirectly, partnershipinterests in many partnerships owning multi-family properties financed with theproceeds of revenue bonds in our revenue bond portfolio, which could havecaused us to be treated as a “substantial user” of these entities or a “relatedparty” to a “substantial user” upon our acquisition of Related.  Accordingly, prior to our acquisition ofRelated, we modified the structure of the ownership interests in such entitiesand our operation of CCC’s investment programs so that we will not be treatedas a “substantial user” of any properties financed with the proceeds of revenuebonds in our revenue bond portfolio or a “related party” thereto.  Under our new structure, designated seniorexecutives will acquire and hold 51% of the equity interests in certain entitiesand we or our affiliates own a 49% interest and serve as the non-equity manageror general partner.  It is not expectedthat such entities will have significant economic value.  Paul Hastings and Greenberg Traurig havereviewed the structure of our acquisition of Related, the modifications to theownership interests in such entities and the structure we use to operate thereal estate investment programs of CCC and they have advised us that, with suchmodifications, we and our subsidiaries should not be “substantial users” of theproperties financed with the proceeds of the revenue bonds or “related parties”thereto.  There can be no assurance,however, that the IRS would not challenge such a conclusion.  If such challenge were successful, the interestreceived on any revenue

 

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bond during the time period when we or our subsidiaries were treated asa substantial user or a “related party” thereto would be includable in grossincome for federal income tax purposes.

 

*Revenue bonds May Go IntoDefault From Time To Time*

 

Properties underlying our revenue bonds may experience financialdifficulties from time to time, which could cause certain of our revenue bondsto go into default.  Were that to occur,we might take remedial action such as, among other things, entering into awork-out or forbearance agreement with the owner of the property or exercisingour rights with respect to the collateral securing such revenue bond, includingthe commencement of mortgage foreclosure proceedings.  The execution and delivery of a forbearance agreement could,under certain circumstances, result in a significant modification (i.e.,“re-issuance”) of the revenue bond for federal income tax purposes.  In such event, the issuer of the revenuebond would be required to file a form 8038 in order to preserve the exclusionfrom gross income of interest on such modified revenue bond.  In addition, in the event that we weresuccessfully to foreclose the mortgage on the property underlying a defaultedrevenue bond, it is likely that, during the period that we or an affiliateowned both the property and the defaulted revenue bond, we, as holder of thedefaulted revenue bond, would be deemed to be a related party to a substantialuser of the property underlying such bond. As a result, during such period, the interest we receive on such revenuebond would be includable in gross income for purposes of federal incometaxation.

 

*Section 761 Election andRevenue Procedure 2003-84*

 

Many of the senior interests in our securitization programs are held bytax-exempt money-market funds.  Becauseour securitization programs must be structured as partnerships for federalincome tax purposes, which allocate income, gain or loss at the end of eachpartnership year, the senior interests will only be held by the tax-exemptmoney-market funds if the securitization partnerships have made an electionunder Section 761 of the Code to opt out of the provisions of subchapter K ofthe Code.  Each of the partnerships,through which we securitize our revenue bonds and sell senior floating rateinterests to tax-exempt money-market funds, has made such an election.  On November 5, 2003, the IRS releasedRevenue Procedure 2003-84, which states, among other things, that partnerships,such as the ones used by us to securitize our bonds, do not meet therequirements of Section 761 of the Code. However, the Revenue Procedure also states that, for partnerships withstart-up dates prior to January 1, 2004 that have made a Section 761 election,the IRS will not challenge a partnership’s or a partner’s tax treatment thathas been consistent with such an election, provided that the partnerships meetcertain requirements.  We have been advisedby our counsel, Greenberg Traurig, that the partnerships we use in oursecuritizations currently meet such requirements.  It is our intention to continue to meet those requirements, whichinclude an income test and an expense test, on an ongoing basis.  There can be no assurance, however, thatunforeseen circumstances might cause one or more of our securitizationpartnerships to fail either the income test or the expense test, which wouldcause our securitization partnerships to have to comply with all of therequirements of subchapter K of the Code, including any reportingrequirements.  In addition, there is noassurance that the IRS would not challenge our position that the securitizationpartnerships we use meet the requirements necessary to be able to continue torely upon Section 761 elections.  In theevent one or more of our securitization partnerships was forced to comply withthe provisions of subchapter K of the Code, it is likely that all of thetax-exempt money market funds which hold the senior interests in thosesecuritizations would tender their positions and the remarketing agent wouldhave to try to locate new purchasers, which were not tax-exempt money marketfunds, for those tendered senior interests. This would probably result in an increase in the distributions to theholders of the senior interests, which would reduce, dollar for dollar, thedistributions on the residual interests in the securitizations, which are ownedby us through our subsidiaries.

 

*Structure of our acquisitionof Related*

 

Our acquisition of Related was structured to prevent us from realizingactive income from the Related business and effectively receive a tax deductionfor payments made to the selling principals of Related.  It is possible that the IRS could challengethis structure, with material adverse consequences to our Company.  First, the IRS could assert that we are theowner of the Related business, in which case we would realize an amount ofactive income from the Related business that would require us to be treated asa corporation instead of a publicly traded partnership for income taxpurposes.  If the IRS prevailed, wewould be required to pay taxes on our income, thereby reducing the amountavailable to us to make distributions. As a result, it is possible that the value of our shares woulddecline.  Second, the IRS might assertthat the SCUs in CCC held by the selling principals of Related are actuallyshares of our Company.  If this positionprevailed, the distributions payable on the SCUs would not result in taxdeductions for CM Corp. In such event, CM Corp. would be subject to increasedtax, which could reduce our net after-tax income and our distributions, whichcould also result in a decrease in the portion of our distributions that isexcluded from gross income for federal income tax purposes.

 

*Taxable income*

 

Weprimarily invest in investments that produce only tax-exempt income.  However, the IRS may seek to re-characterizea portion of our tax-exempt income as taxable income as described above.  If the IRS were successful, a shareholder’sdistributive share of such income will be taxable to the shareholder,regardless of whether an amount of cash equal to such distributive share isactually distributed.  Any taxable incomewill be allocated pro rata between our CRA Shares and our common shares.  We may also have taxable income in the formof market discount or gain on the sale or other disposition of our investments,and we expect to own investments and engage in certain fee generatingactivities that will generate taxable income.

 

*Impact of recent and futuretax legislation*

 

Recent and future tax legislation could also adversely impact the valueof our investments and the market price of our shares.  On May 28, 2003, President Bush signed intolaw the Jobs and Growth Tax Relief Act.  This law amends the Code to reduce federal income tax rates forindividuals on long-term capital gains and dividend income and acceleratescertain previously enacted income tax rate reductions for individuals for taxyears ending on or after May 6, 2003.  This tax legislation reduces the importance of a primary advantageof investing in municipal bonds—that the

 

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interest received on these bonds is federally tax-exempt, while otherincome is subject to federal income tax at higher rates.  It is likely that these tax law changes, andany similar future tax law changes, could increase the cost of tax-exemptfinancings, as interest rates offered by municipal issuers would rise tocompensate investors for the loss of the tax advantage.  This could lead to a decrease in tax-exemptmulti-family rental housing bond issuances, which would reduce our opportunitiesto purchase revenue bonds.  If theinterest received on the revenue bonds remains federally tax-exempt under theCode, the allocations of such federally tax exempt interest by us to ourinvestors will also remain excludable from gross income for federal income taxpurposes.  However, the Jobs and GrowthTax Relief Act could cause the after-tax returns available from other investmentsto increase, and cause shares in other companies to become more attractiverelative to our shares.  These changescould also reduce the value of our existing investments, because federallytax-exempt municipal bond income would not enjoy the same relative taxadvantage as provided under prior law.

 

*No assurance can be given that our shareholders will beentitled to the same limitation on personal liability as stockholders ofprivate corporations for profit*

 

Weare governed by the laws of the State of Delaware.  Under our trust agreement and the Delaware Statutory Trust Act,as amended (“Delaware Act”), our shareholders will be entitled to the samelimitation of personal liability extended to stockholders of private corporationsfor profit organized under the General Corporation Law of the State ofDelaware.  In general, stockholders ofDelaware corporations are not personally liable for the payment of corporationdebts and obligations, and are liable only to the extent of their investment inthe Delaware corporation.  However, ashareholder may be obligated to make certain payments provided for in our trustagreement and bylaws.  The propertiessecuring our investments are dispersed in numerous states and the District ofColumbia.  In jurisdictions which havenot adopted legislative provisions regarding statutory trusts similar to thoseof the Delaware Act, questions exist as to whether such jurisdictions wouldrecognize a statutory trust, absent a state statute, and whether a court insuch jurisdiction would recognize the Delaware Act as controlling.  If not, a court in such jurisdiction couldhold that our shareholders are not entitled to the limitation of liability setforth in our trust agreement and the Delaware Act and, as a result, are personallyliable for our debts and obligations.

 

*Our anti-takeover provisions may discourage third-partyproposals*

 

Certain provisions of our trust agreement may have the effect ofdiscouraging a third party from making an acquisition proposal for ourCompany.  This could inhibit a change incontrol of our Company under circumstances that could give our shareholders theopportunity to realize a premium over then-prevailing market prices.  Such provisions include the following:

 

*Additional Classes andSeries of Shares*

 

Our trust agreement permits our board of trustees to issue additionalclasses or series of beneficial interests and to establish the preferences andrights of any such securities.  Thus,our board of trustees could authorize the issuance of beneficial interests withterms and conditions which could have the effect of discouraging a takeover orother transaction in which holders of some, or a majority, of our shares mightreceive a premium for their shares over then-prevailing market price of suchshares.

 

*Staggered Board*

 

Ourboard of trustees has three classes of managing trustees.  The terms of the first, second and thirdclasses will expire in 2004, 2005 and 2006, respectively.  Managing trustees for each class will bechosen for a three-year term upon the expiration of the current class’term.  The use of a staggered boardmakes it more difficult for a third-party to acquire control over us.

 

*The interests of the selling principals of Related may be inconflict with the interests of our shareholders*

 

Becausethe selling principals of Related serve, along with others, as our managingtrustees, there are ongoing conflicts of interests when we are required todetermine whether or not to take actions to enforce our rights under the variousagreements entered into in connection with our acquisition of Related.  While any material decisions involving theselling principals of Related are subject to the vote of a majority of ourindependent trustees, such decisions may create conflicts between us and theseselling principals who are our managing trustees.  In addition, we have some obligations to the selling principalsof Related which will require us to make choices with respect to how we operateour business which may affect those obligations.  For example, we have agreed to guarantee the payment to theselling principals of Related of all but $5 million of the distributions theywould otherwise be entitled to receive under the operating agreement ofCCC.  In addition, we have agreed toshare cash flow from investment programs so that we and the selling principalsof Related can receive payment of deferred fees.  In addition, TRCLP and its affiliates currently engage inbusinesses which compete with Related. The non-competition covenants contained in a future relations agreemententered into by TRCLP and its affiliates in connection with our acquisition ofRelated prohibit TRCLP and its affiliates from competing with any businesscurrently engaged in by Related and our Company other than in specified areas,including providing (a) credit enhancement on debt products secured byso-called “80/20” multi-family housing properties and (b) mezzanine financingto multi-family housing properties other than so-called “tax creditproperties.” There can be no assurance that we and TRCLP and its affiliateswould not directly compete for similar products and opportunities in theseareas in the future.

 

*The selling principals of Related have significant votingpower on matters submitted to a vote of our shareholders*

 

In connection with our acquisition of Related, each of the sellingprincipals of Related were issued one special preferred voting share for eachspecial common unit they received.  Thespecial preferred voting shares entitle each holder thereof to vote on allmatters subject to a vote of the holders of our common shares.  The selling principals of Related, all ofwhom, except TRCLP, are now employees of Related, received special preferredvoting shares that in the aggregate represent approximately 8.1% of our votingpower.  TRCLP and Mr.  Ross control approximately 17.5% of ourvoting power.  As such, Mr.  Ross and, if they vote as a block, the otherselling principals of Related will have significant voting

 

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power on all matters submitted to a vote of our commonshareholders.  These individuals couldhave significant influence over any shareholder vote as a result of theissuance of the special preferred voting shares.

 

*The integration of the management services of Related couldadversely affect our results of operations*

 

In connection with our acquisition of Related, we terminated ourexternal management agreements with Related. Related employs certain selling principals of Related and substantiallyall of the personnel that provided services to us prior to our acquisition ofRelated to perform internally those functions formerly provided by itexternally.  There can be no assurancethat costs or other factors associated with the integration of Related and ourCompany will not adversely affect our future combined results of operations orthat the expected benefits will occur.

 

*Sales in the public market of our common shares issuable inexchange for the SCUs issued in connection with our acquisition of Relatedcould adversely affect prevailing market prices of our shares*

 

Futuresales of substantial amounts of our common shares in the public market couldadversely affect prevailing market prices of our shares.  Approximately 16,071,785 common shares areissuable in exchange for the SCUs issued to the selling principals and certainemployees of Related in connection with our acquisition of Related.  In addition, we also granted approximately778,420 restricted common shares to the employees of Related at the closing ofour acquisition of Related.  Followingthe effectiveness of a registration statement relating to the common sharesissuable upon exchange of SCUs and the expiration of any lock-up agreements towhich the common shares and restricted common shares are subject, the sale inthe public market of these common shares and restricted common shares could,and depending upon the number of common shares and restricted common sharesinvolved, likely would, adversely affect prevailing market prices of ourshares.  TRCLP and Mr.  Ross own 10,194,400 SCUs and 246,493 commonshares which, subject to some exceptions, are not subject to a lock-upagreement.  Sales in the public marketcould reduce the market price of our common shares and our ability to raise additionalcapital through equity markets.

 

Additional Information

 

Additional information about us is also available atwww.chartermac.com.  We have madeavailable, free of charge on or through our website, our annual report on Form10-K, our quarterly reports in Form 10-Q, current reports of Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after such materialwas electronically filed with, or furnished to the Securities and ExchangeCommission (“SEC”).  Materials we filedwith the SEC may be read and copies at the SEC’s Public Reference Room at 450Fifth Street, NY, Washington D.C. 20549.  This information may alsobe obtained by calling the SEC at 1-800-SEC-0300.  The SEC also maintains an Internet website that contains reports,proxy and information statements and other information regarding issuers thatfile electronically with the SEC at www.sec.gov.  We will provide a copy of any of the foregoing documents upon request.  None of the information on our website thatis not otherwise expressly set forth or incorporated by reference in the Form10-K is a part of this Form 10-K.

 

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Item 2. Properties

 

Our headquarters is located at 625 Madison Avenue, NewYork, New York.

 

We also lease office space in other location asfollows (See Note 16 – Commitments and Contingencies of Item 8.  Financial Statements and SupplementaryData):

 

Mineola, New York. In 1997, PWF entered into a 10 year, 2 month lease for an officefacility.  The lease expires in  2007.

 

Bernardsville, New Jersey.  In 1999, PWF entered into a 5 year lease for an officefacility.  The lease expires in 2004.

 

Dallas, Texas. In 2000, PWF entered into a 5 year lease for an office facility.  The lease expires in 2005.

 

We and Related believe that these facilities aresuitable for current requirements and contemplated future operations.

 

Item 3.  Legal Proceedings

 

Weare subject to routine litigation and administrative proceedings arising in theordinary course of business.  Managementdoes not believe that such matters will have a material adverse impact on ourfinancial position, results of operations or cash flows.

 

On October 24,2003, the New York Supreme Court for Nassau County issued a final judgmentapproving the stipulation of compromise and settlement of the class andderivative action entitled Dulitz v. Hirmes, which had challenged certain aspects of our acquisition ofRelated.  Pursuant to that settlement,certain terms of the acquisition will be modified, as fully detailed in ourproxy statement that was previously mailed to shareholders and filed with theSEC on September 5, 2003, together with the Notice of Pendency of Class andDerivative Action.

 

Although the defendants in the action denied all wrongdoing and believethey had meritorious defenses, the settlement eliminates the cloud oflitigation over the acquisition in connection with Dulitz and provides us andour shareholders with certain benefits described in the proxy statement andNotice.  The Court also approved anaward pursuant to the settlement of $400,000 for attorney’s fees and expensespayable by us to the plaintiff’s attorneys.

 

Item 4.  Submission of Matters to a Vote ofShareholders

 

By Notice of Annual Meeting Dated September 5, 2003,the Annual Meeting of Shareholders was scheduled for October 29, 2003 toconsider the following proposals: (i) the issuance of securities in connectionwith our acquisition of Related Capital, (ii) the amendment of our TrustAgreement in connection with our acquisition of Related Capital, (iii) theexpansion of our Incentive Share Plan, (iv) the re-election of StuartJ. Boesky and Stephen M. Ross to our board of trustees, (v) the amendment ofour Trust Agreement to clarify the definition of financing or leverage and (vi)the adjournment of the Annual Meeting to permit further solicitation of proxiesif there were not sufficient votes at the time of the Annual Meeting to approvethe proposals.

 

On October 29, 2003, the Annual Meeting was convenedand the polls were opened.  The pollswere then closed only on the proposal to adjourn the Annual Meeting to permitfurther solicitation of proxies if there were not sufficient votes at the timeof the Annual Meeting to approve the proposals, with shareholders voting toadjourn the meeting with respect to all other proposals.  The meeting was rescheduled for November 17,2003 at 10:00 am.

 

On November 17, 2003, the Annual Meeting reconvenedand the polls were opened.  Shareholdersof record voted to approve (i) the issuance of securities in connection withthe acquisition of Related Capital, (ii) the amendment of our Trust Agreementin connection with the acquisition of Related Capital, (iii) the re-election ofStuart J. Boesky and Stephen M. Ross to our board of trustees, and (iv) theamendment of our Trust Agreement to clarify the definition of financing orleverage.  The remaining proposal toapprove the expansion of our incentive share option plan did not yet receive amajority vote at the meeting. Therefore, the polls were closed on all of the other proposals and, pursuantto a shareholder proposal adopted on the original meeting date, adjourned themeeting, keeping the polls open on the incentive share option plan proposal toenable us to solicit votes from all remaining shareholders who have notvoted.  The adjourned meeting withrespect to the proposal to expand our incentive share option plan was rescheduledfor November 26, 2003, at 10:00 a.m.

 

On November 26, 2003, the adjourned meetingconvened and the poll with respect to the vote on the expansion of ourincentive share option plan was opened. At the meeting, the proposal to expand our Company’s incentive shareoption plan was approved by a majority of the votes entitled to be cast.

 

The following are the tallies from the three meetings:

 

On Oct. 29, the vote for proposal #VI to adjourn the meeting was asfollows:

 

| For:     |   | 33,177,561 |   | (80 | )% |
|----------|--------|------------|--------|-----|----|
| Against: |   | 4,635,880  |   | (11 | )% |
| Abstain: |   | 812,667    |   | (2  | )% |

 

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There were 41,295,272 shares issued, outstanding and eligible to voteas of the record date of August 1, 2003 . The transfer agent tabulated proxiesrepresenting 38,615,588 shares or 94 percent of the eligible voting shares.

 

On November 17, 2003, the vote for the proposals were as follows:

 

*Acquisitionof RCC- Securities*

 

| For:     |   | 22,843,337 |   | (55 | )% |
|----------|--------|------------|--------|-----|----|
| Against: |   | 1,822,199  |   | (4  | )% |
| Abstain: |   | 1,121,552  |   | (3  | )% |
| No Vote: |   | 14,327,315 |   | (35 | )% |

 

# Proposal II

 

*Amend & Restating the TrustAgreement*

 

| For:     |   | 22,722,925 |   | (55 | )% |
|----------|--------|------------|--------|-----|----|
| Against: |   | 1,941,848  |   | (5  | )% |
| Abstain: |   | 1,122,315  |   | (2  | )% |
| No Vote: |   | 14,327,314 |   | (35 | )% |

 

Proposal IV

 

*Director Proposal*

 

| For:        |   | 36,165,046 |   | (90 | )% |
|-------------|--------|------------|--------|-----|----|
| Against:    |   | 3,750,076  |   | (9  | )% |
| Instructed: |   | 199,281    |   | (1  | )% |

 

Proposal V

 

*Amendment to the Trust Agreement*

 

| For:     |   | 20,885,183 |   | (51 | )% |
|----------|--------|------------|--------|-----|----|
| Against: |   | 3,548,333  |   | (9  | )% |
| Abstain: |   | 1,353,569  |   | (3  | )% |
| No Vote: |   | 14,327,317 |   | (34 | )% |

 

The transfer agent certifies that the number of shares issued,outstanding and eligible to vote as of the record date of August 1, 2003 were41,295,272, and they tabulated proxies representing 40,114,403.7282 shares or97 percent of the eligible voting shares.

 

On November 26, 2003, the vote for Proposal #3 to amend the stock optionplan was as follows:

 

| For:     |   | 20,804,046 |   | (50.4 | )% |
|----------|--------|------------|--------|-------|----|
| Against: |   | 5,260,706  |   | (12.7 | )% |
| Abstain: |   | 1,455,954  |   | (3.5  | )% |
| No Vote: |   | 12,131,940 |   | (29.4 | )% |

 

The transfer agent certified that the number of shares issued,outstanding and eligible to vote as of the record date of August 1, 2003 were41,295,272, and they tabulated proxies representing 39,652,647.5471 shares or96 percent of the eligible voting shares.

 

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PART II

 

Item 5.  Market for the Registrant’sCommon Equity and Related Shareholder Matters

 

As of March 12, 2004, there were 3,299 registeredshareholders owning 44,468,778 common shares. Our Company’s common shares have been listed on the American StockExchange since October 1, 1997 under the symbol “CHC”.  Prior to October 1, 1997, there was no establishedpublic trading market for our common shares.

 

The high and low prices for each quarterly period of the last two yearsduring which our common shares were traded are as follows:

 
|              |   | **2003** |   | **2002** |   |
|-------------------|--------|----------|--------|----------|--------|
| **Quarter Ended** |   | **Low**  |   | **High** |   | **Low** |   | **High** |   |
|              |   |     |   |     |   |   |   |   |   |
| March 31          |   | $        | 16.51  |     | $      | 18.34 |   | $ | 15.45 |   | $ | 16.79 |   |
| June 30           |   | $        | 17.50  |     | $      | 19.79 |   | $ | 15.53 |   | $ | 18.20 |   |
| September 30      |   | $        | 16.68  |     | $      | 19.62 |   | $ | 14.75 |   | $ | 18.19 |   |
| December 31       |   | $        | 18.35  |     | $      | 21.86 |   | $ | 15.01 |   | $ | 18.44 |   |

 

The last reportedsale price of common shares on the American Stock Exchange on March 10, 2004was $21.55.

 

The following table provides information related toour incentive Share Option Plan as of December 31, 2003:

 

Equity Compensation Plan Information

 
|                                                      |   | **(a)**                                                                                      |   | **(b)**                                                                            |   | **(c)**                                                                                                                                            |      |
|-----------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                      |   | **Number of securities  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 security holders    |   | 270,779                                                                                      |   | $                                                                                  | 18.19  |                                                                                                                                               | 4,670,929 | (1) |
| Equity compensation plans notapproved by security holders |   | —                                                                                       |   | —                                                                             |   | —                                                                                                                                             |      |
|                                                      |   |                                                                                         |   |                                                                               |   |                                                                                                                                               |      |
| Totals                                                    |   | 270,779                                                                                      |   | $                                                                                  | 18.19  |                                                                                                                                               | 4,670,929 | (1) |

 

Notes:

 

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(1)        The Incentive Share Option Plan authorizes the issuance of options equal to 10% of the common shares outstanding as of the December 31 preceding the issuance of new grants or options.

 

Common share Repurchase Plan

 

On October 9, 1998, the board of trustees authorized the implementationof a common share repurchase plan, enabling us to repurchase, from time totime, up to 1,500,000 of our common shares. The repurchases, if any, are to be made in the open market and thetiming is dependent on the availability of common shares and other marketconditions.  As of December 31, 2003, wehave acquired 22,632 of our common shares for an aggregate purchase price of$378,464 (including commissions and service charges).  Repurchased common shares are accounted for as treasury commonshares of beneficial interest.

 

Other

 

Through November 17, 2003, two of our independent trustees are entitledto receive annual compensation for serving as trustees in the aggregate amountof $17,500 payable in cash (maximum of $7,500 per year) and/or common sharesvalued at their fair market value on the date of issuance.  The third independent trustee is entitled toreceive annual compensation in the aggregate amount of $30,000 payable in cash(maximum of $20,000 per year) and/or common shares.  As of December 31, 2003 and 2002, 1,728 and 1,830 common shares,respectively, having an aggregate value on the date of issuance of $30,000 eachyear, were issued to the independent trustees as compensation for servicesrendered during the years ended December 31, 2002 and 2001.  The independent trustees also received anaggregate of 5,535 shares, worth $97,500 at the time of issuance, as paymentfor their work on the special committee analyzing the proposed acquisition of Related.  After the acquisition of Related, the

 

25

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five new independent trustees received $18,750 as compensation fortheir services rendered during the year ended December 31, 2003.  In 2004, all eight of the independenttrustees will receive annual compensation of $30,000 payable in cash (maximumof $15,000 per year) and/or common shares valued at their fair market value onthe date of issuance.

 

DistributionInformation

 

*DistributionsPer Share*

 

Our earnings are allocated pro rata among the commonshares and the Convertible CRA Shares (collectively, “Shares”), and theConvertible CRA Shares rank on parity with the common shares with respect torights upon liquidation, dissolution or winding up of our Company.  Quarterly cash distributions per share forthe years ended December 31, 2003 and 2002 were as follows:

 

|                                     |   | **Shareholders  of the Company** |   |
|------------------------------------------|--------|----------------------------------|--------|
| **Cash Distribution for  Quarter Ended** |   | **Date  Paid**                   |   | **Per  Share** |   | **Total  Amount  Distributed** |   |
| March 31, 2003                           |   | 5/15/03                          |   | $ | 0.32 |   | $ | 14,642,921 |   |
| June 30, 2003                            |   | 8/14/03                          |   | 0.32 |   | 14,667,339 |   |
| September 30,  2003                      |   | 11/14/03                         |   | 0.35 |   | 16,200,691 |   |
| December 31,  2003                       |   | 2/14/04                          |   | 0.37 |   | 18,551,350 |   |
| Total for 2003                           |   |                             |   | $ | 1.36 |   | $ | 64,062,301 |   |
|                                     |   |                             |   |   |   |   |   |
| March 31, 2002                           |   | 5/15/02                          |   | $ | 0.31 |   | $ | 13,340,885 |   |
| June 30, 2002                            |   | 8/14/02                          |   | 0.31 |   | 13,342,358 |   |
| September 30,  2002                      |   | 11/14/02                         |   | 0.32 |   | 14,139,587 |   |
| December 31,  2002                       |   | 2/14/03                          |   | 0.32 |   | 14,296,126 |   |
| Total for 2002                           |   |                             |   | $ | 1.26 |   | $ | 55,118,956 |   |

 

In addition to the distributions set forth in thetable above, we paid Related Charter, as our manager prior to our acquisitionof Related, a special distribution (equal to .375% per annum of the totalinvested assets of the Company), which amounted to approximately $5.3 millionfor the period January 1, 2003 to November 17, 2003, and $4.9 million for theyear ended December 31, 2002.

 

There are no material legal restrictions upon ourpresent or future ability to make distributions in accordance with the provisionsof our Amended and Restated Trust Agreement. We do not believe that the financial covenants contained in our and oursubsidiaries’ secured indebtedness or in the terms of the preferred sharesissued by Equity Issuer will have any adverse impact on our ability to makedistributions in the normal course of business to our common and ConvertibleCRA Shareholders.  Future distributionspaid by us will be at the discretion of the trustees based upon evaluation ofour actual cash flow, our financial condition, capital requirements and suchother factors as the trustees deem relevant.

 

26

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Item 6. Selected Financial Data

 

The information set forth below presents our selectedfinancial data.  Additional financialinformation is set forth in the audited consolidated financial statements andnotes thereto contained in “Item 8. Financial Statements and Supplementary Data”.

 
|                                                                      |   | **For the  Year Ended December 31, ($000s except for share data)** |       |
|---------------------------------------------------------------------------|--------|--------------------------------------------------------------------|------------|
|                                                                      |   | **2003**                                                           |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **OPERATIONS**                                                            |   |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenues                                                            |   | $                                                                  | 152,210    |   | $ | 116,413 |   | $ | 74,625 |   | $ | 59,091 |   | $ | 40,437 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Operating  expenses                                                       |   | (52,871                                                            | )          | (33,397 | ) | (6,074 | ) | (4,563 | ) | (3,151 | ) |
| Interest expense  and financing costs                                     |   | (33,335                                                            | )          | (19,004 | ) | (16,132 | ) | (16,488 | ) | (8,768 | ) |
| Other-than-temporary  impairments related to investments in revenue bonds |   | (1,759                                                             | )          | (920 | ) | (400 | ) | — |   | (1,859 | ) |
| Equity in  earnings of ARCap                                              |   | 2,219                                                              |       | 2,219 |   | 456 |   | — |   | — |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Gain/(Loss) on  repayment of revenue bonds and sales of loans             |   | 7,483                                                              |       | 14,568 |   | (912 | ) | 645 |   | (463 | ) |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Income before  allocation to preferred shareholders and minority interest |   | 73,947                                                             |       | 79,879 |   | 51,563 |   | 38,685 |   | 26,196 |   |
| Income allocated  to preferred shareholders of subsidiary                 |   | (9,449                                                             | )          | (17,266 | ) | (12,578 | ) | (8,594 | ) | (3,014 | ) |
| Income allocated  to SCUs                                                 |   | (4,038                                                             | )          | — |   | — |   | — |   | — |   |
| Income allocated  to minority interest                                    |   | 54                                                                 |       | (496 | ) | — |   | — |   | — |   |
| Income before  provision for income taxes                                 |   | 60,514                                                             |       | 62,117 |   | 38,985 |   | 30,091 |   | 23,182 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Benefit  (provision) for income taxes                                     |   | 6,072                                                              |       | (1,284 | ) | — |   | — |   | — |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Net income                                                                |   | $                                                                  | 66,586     |   | $ | 60,833 |   | $ | 38,985 |   | $ | 30,091 |   | $ | 23,182 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Net income  applicable to Shareholders (2)                                |   | $                                                                  | 61,248     |   | $ | 55,905 |   | $ | 35,010 |   | $ | 27,074 |   | $ | 20,951 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Net income per  Share (2)                                                 |   |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | $                                                                  | 1.31       |   | $ | 1.31 |   | $ | 1.14 |   | $ | 1.22 |   | $ | 1.02 |   |
| Diluted                                                                   |   | $                                                                  | 1.31       |   | $ | 1.31 |   | $ | 1.14 |   | $ | 1.22 |   | $ | 1.02 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average  Shares outstanding                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | 46,653,270                                                         |       | 42,697,195 |   | 30,782,161 |   | 22,140,576 |   | 20,580,756 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Diluted                                                                   |   | 46,735,232                                                         |       | 42,768,139 |   | 30,837,340 |   | 22,152,239 |   | 20,580,756 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| FINANCIAL  POSITION                                                       |   |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Total assets                                                              |   | $                                                                  | 2,583,273  |   | $ | 1,852,868 |   | $ | 1,421,059 |   | $ | 925,236 |   | $ | 673,791 |   |
| Financing  arrangements                                                   |   | $                                                                  | 900,008    |   | $ | 671,659 |   | $ | 541,796 |   | $ | 385,026 |   | $ | 257,770 |   |
| Notes payable                                                             |   | $                                                                  | 153,350    |   | $ | 68,556 |   | $ | 56,586 |   | $ | — |   | $ | — |   |
| Total  liabilities                                                        |   | $                                                                  | 1,473,416  |   | $ | 821,031 |   | $ | 663,659 |   | $ | 399,222 |   | $ | 268,239 |   |
| Preferred shares  of subsidiary (subject to mandatory repurchase)         |   | $                                                                  | 273,500    |   | $ | 273,500 |   | $ | 218,500 |   | $ | 169,000 |   | $ | 90,000 |   |
| Total  shareholders’ equity/partners’ capital                   |   | $                                                                  | 817,657    |   | $ | 753,515 |   | $ | 535,248 |   | $ | 357,014 |   | $ | 315,552 |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| DISTRIBUTIONS                                                             |   |                                                               |       |   |   |   |   |   |   |   |   |
|                                                                      |   |                                                               |       |   |   |   |   |   |   |   |   |
| Distributions to  Series A preferred shareholders                         |   | $                                                                  | 5,962,500  |   | $ | 5,962,500 |   | $ | 5,962,500 |   | $ | 5,962,500 |   | $ | 3,014,375 |   |
| Distributions to  Series A-1 preferred shareholders                       |   | $                                                                  | 1,704,000  |   | $ | 1,704,000 |   | $ | 1,704,000 |   | $ | 762,067 |   | N/A |   |
| Distributions to  Series B preferred shareholders                         |   | $                                                                  | 4,180,000  |   | $ | 4,180,000 |   | $ | 4,180,000 |   | $ | 1,869,389 |   | N/A |   |
| Distributions to  Series A-2 preferred shareholders                       |   | $                                                                  | 1,953,000  |   | $ | 1,953,000 |   | $ | 444,850 |   | N/A |   | N/A |   |
| Distributions to  Series B-1 preferred shareholders                       |   | $                                                                  | 1,258,000  |   | $ | 1,258,000 |   | $ | 286,544 |   | N/A |   | N/A |   |
| Distributions to  Series A-3 preferred shareholders                       |   | $                                                                  | 2,040,000  |   | $ | 1,173,000 |   | N/A |   | N/A |   | N/A |   |
| Distributions to  Series B-2 preferred shareholders                       |   | $                                                                  | 1,800,000  |   | $ | 1,035,000 |   | N/A |   | N/A |   | N/A |   |
| Distributions to  Shareholders (2)                                        |   | $                                                                  | 64,062,301 |   | $ | 55,118,956 |   | $ | 36,607,592 |   | $ | 23,973,872 |   | $ | 20,478,112 |   |
| Distributions  per share (1)                                              |   | $                                                                  | 1.37       |   | $ | 1.26 |   | $ | 1.14 |   | $ | 1.07 |   | $ | 1.00 |   |

 

27

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OtherData

 

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(1)   Distributionsper share are the same for both common shares and Convertible CRA Shares.

 

(2)   Includescommon shareholders and Convertible CRA Shareholders.

 

Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

Forward-LookingStatements

 

Certain statements made in this report may constitute“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Suchforward-looking statements include statements regarding the intent, belief orcurrent expectations of us and our management and involve known and unknownrisks, uncertainties and other factors which may cause our actual results,performance or achievements to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Such factors include, amongother things, the following: general economic and business conditions, whichwill, among other things, affect the availability and creditworthiness ofprospective tenants, lease rents and the terms and availability of financing forproperties financed by revenue bonds owned by us; adverse changes in the realestate markets including, among other things, competition with other companies;risks of real estate development and acquisition; government actions andinitiatives; and environment/safety requirements.  Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof.

 

Overview

 

We are one of the nation’s leadingfull-service multi-family finance companies. We focus on providing both capital solutions to developers and owners ofmulti-family rental housing throughout the country, as well as qualityinvestment products to institutional and retail investors.  Collectively, we and our subsidiaries offerfinancing for every part of a multi-family property’s capital structure.

 

We are a Delaware statutory trust. Our subsidiaries which hold the tax-exempt revenue bonds are eithertreated as partnerships or disregarded for federal income tax purposes, andtherefore we pay no federal income taxes on this portion of our income.  This tax-exempt income is passed along, inthe form of distributions, to our shareholders.

 

Conversely, our mortgage banking, fund management and creditenhancement activities are conducted in subsidiaries organized as corporations,and generate taxable income, which is also passed along, in the form ofdistributions, to our shareholders.

 

*Portfolio Investing and Low IncomeHousing Tax Credits*

 

A large portion of our business, as it currently structured, focuses onproviding debt financing to developers of affordable, multi-family housing,which we accomplish by investing in tax-exempt revenue bonds issued by stateand local governments or their agencies to finance affordable multi-familyhousing.  These tax-exempt revenue bondshave tax credits attached to them, which are passed along to investors.  Typically, the investors acquire a direct limitedpartnership interest in an upper-tier, or investment partnership.  The investment partnership, in turn, investsas a limited partner in one or more lower-tier, or operating partnerships, thatown and operate the housing projects.

 

The tax credits are allocated on astate-by-state basis for investments in qualifying affordable housingproperties. The tax credit rate is set by the Internal Revenue Service and isearned over a ten year period starting at the point the construction orrehabilitation is completed.  Theproperty must continue to qualify as an affordable housing property for anadditional 5 years, or a portion of the tax credits can be recaptured.

 

Limited partners in the investmentpartnerships are most often corporations who are able to utilize the taxbenefits and, in most cases, derive no economic benefit from the investmentother than the expected tax credits and tax losses from the operations. In somecases, in conjunction with the final disposition of the property, there may besome additional return to the limited partners. Investors, however, anticipatethat the partnership will generate housing credits and tax losses, includingdepreciation and interest expense, over the life of the property, which will bealmost entirely allocated to the limited partners.

 

We also guarantee third party mortgage loans and tax credit specifiedreturns to investors in tax credit equity funds, for which we receive a fee.

 

28

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The table below shows selected information regarding our portfolioinvesting activities:

 

|                                                     |   | **For the  Year ended December 31,** |    |
|----------------------------------------------------------|--------|--------------------------------------|---------|
| **(In thousands)**                                       |   | **2003**                             |    | **2002** |   | **2001** |   |
|                                                     |   |                                 |    |   |   |   |   |
| Acquisitions                                             |   | $                                    | 432,195 |   | $ | 457,060 |   | $ | 295,962 |   |
| Weighted average interest net of revenue bonds  acquired |   | 6.33                                 | %       | 6.98 | % | 7.53 | % |
| Revenue bonds repaid                                     |   | $                                    | 84,631  |   | $ | 118,000 |   | $ | 24,030 |   |
|                                                     |   |                                 |    |   |   |   |   |
| Revenue bond interest income                             |   | $                                    | 113,665 |   | $ | 92,681 |   | $ | 71,500 |   |
| Interest expense and securitizations fees                |   | $                                    | 33,335  |   | $ | 19,004 |   | $ | 16,132 |   |
| Loss on impairment of revenue bonds                      |   | $                                    | 1,759   |   | $ | 920 |   | $ | 400 |   |
| Gain (loss) on repayments of revenue bonds               |   | $                                    | 1,951   |   | $ | 3,885 |   | $ | (912 | ) |

 

The fair value and grossunrealized losses of our revenue bonds aggregated by length of time thatindividual bonds have been in a continuous unrealized loss position, atDecember 31, 2003, is summarized in the table below:

 

| **(In  thousands)**   |   | **Less than********12 Months** |    | **12 Months********or More** |   | **Total** |   |
|-----------------------|--------|--------------------------------|---------|------------------------------|--------|-----------|--------|
| Fair value            |   | $                              | 216,743 |                         | $      | 36,660    |   | $ | 253,403 |   |
| Gross unrealized loss |   | $                              | (5,789  | )                            | $      | (2,777    | )      | $ | (8,565 | ) |

 

Our ability to find attractive investments have been strong and weexpect it to continue to be so.  Ourintent is to diversify our revenue bond holdings, both in terms of geographicregions and relationships with developers. We intend to maintain our current market share in states where wealready have a strong presence and identify regions where we can increase ourpresence.

 

The low interest rate environment was extremely favorable for us in2003.  BMA, the short-term tax-exemptindex, continues to be at historic lows, having averaged only 1.03% for theyear ended December 31, 2003 and remaining under 1% since the beginning of2004.  Our weighted average cost of debtat December 31, 2003 was approximately 2.5%, taking into effect our currenthedging. We continue to recognize healthy spreads between our cost of borrowingand the interest rates on our revenue bonds. The interest rates on our tax exempt first mortgage bonds for 2003 had aweighted average permanent interest rate of 6.5% and our entire tax-exemptfirst mortgage bond portfolio had a weighted average interest rate of 6.8% atyear end.

 

Based upon recent comments by the Federal Reserve Board, we believeshort term rates will remain relatively low throughout most of 2004.  Therefore, we have decided to focus ourhedging activity on 2005 and beyond. We have entered into six different TBMAswap transactions with an aggregate notional amount of $450 million, all whichprovide protection beginning in 2005. These swaps have a weighted average term of 4 years.

 

We face increasing levels of competition both in terms of newcompetitors and new competing products. Some of our competitions have substantially greater financial andoperational resources than we do. However, we believe we are able to effectively compete based on our longstanding relationships with developers, our “Direct Purchase Program” and ourbroad array of product offerings.  Wecontinually seek to develop new products that will compete not only with othertax-exempt lending products, but with the expansive number of taxable productsthat exist in the market place.

 

*MortgageBanking*

 

Through PWF, we are also a mortgage banker, originating and servicingmulti-family mortgage loans on behalf of government sponsored entities (GSEs),including, among others, Fannie Mae, Freddie Mac, and FHA.  PWF originates third party mortgage loans,for which it receives origination fees. PWF initially funds the loans, which are subsequently purchased by theGSEs.  PWF retains the mortgageservicing rights (MSRs) on mortgages that it originates and receives fees forproviding that service.  We haveexposure to loss related to the MSRs PWF retains in connection with the loansoriginated for Fannie Mae, pursuant to the terms of a master loss sharingagreement with Fannie Mae.

 

Thetable below shows selected information regarding PWF’s mortgage bankingactivities:

 

|                      |   | **For the  Year Ended December 31,** |      |
|---------------------------|--------|--------------------------------------|-----------|
| **(In  thousands)**       |   | **2003**                             |      | **2002** |   |
|                      |   |                                 |      |   |   |
| Originations              |   | $                                    | 604,579   |   | $ | 698,893 |   |
| Total loans serviced      |   | $                                    | 4,114,293 |   | $ | 3,237,197 |   |
| Mortgage servicing rights |   | $                                    | 33,350    |   | $ | 35,595 |   |
|                      |   |                                 |      |   |   |
| Mortgage servicing fees   |   | $                                    | 4,683     |   | $ | 7,971 |   |
| Mortgage origination fees |   | $                                    | 9,029     |   | $ | 5,710 |   |

 

While PWF’s loan originations declined in 2003 compared to 2002, of theloans closed in 2003, nearly three-quarters were new loans rather thanportfolio refinancings, which add valuable new servicing to the portfolio.

 

We are committed to aggressively growing PWF’s market share as anagency lender and have begun to make strides to do so.  Last year, PWF was selected as one of 4 Freddie Mac Program Plus Seller/Servicersapproved to originate targeted affordable loans for Freddie Mac on a nationalbasis, as part of Freddie Mac’s push to increase their presence in theaffordable housing market.  We believethat this designation should increase the amount of our Freddie Mac deal flow.

 

29

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In November, PWF opened an office in Kansas City, which should increaseour presence in the Midwest.  Thisindividual will be focusing on managing our Company’s market-rate multifamilyproduct lines.

 

Wecontinue to offer a wide array of competitive products to multi-familydevelopers, but are continually working with Fannie Mae, Freddie Mac, FHA andGinnie Mae to develop new, attractive products and to participate in newlending programs they may initiate.

 

*FundManagement*

 

Throughour acquisition on November 17, 2003, of Related, we now provide managementservices to real estate equity investment funds we sponsor and a publiclytraded real estate investment trust that originates and acquires a variety oftaxable construction, permanent, bridge, mezzanine and participating mortgagedebt for multi-family housing.  Thefunds we sponsor are the upper tier investment funds, discussed above, thatprovide low-income housing tax credits for investors.

 

Thisis a new line of business for us, which we expect will generate significantrevenues.  Related’s fund managementactivities generate origination and acquisition fees associated withoriginating real estate equities investment funds and acquiring the assets thatwill be included in these funds. Related also receives asset management fees and partnership managementfees for the services we perform for the funds we sponsor once they areoperating.

 

Relatedhad a record year in 2003.  WhileRelated’s efforts from January 1 to November 17 did not impact us directly,Related raised over $890.4 million in tax credit equity from institutionalinvestors for its investment funds, which is a 14% increase over 2002.  This represents an approximate 15% market sharefor all tax credit equity raised in 2003, which clearly makes Related one ofthe leading tax credit fund managers.

 

Ouracquisition of Related has enabled us to accomplish many of our goals. First,we are now internally managed, which has eliminated any perceived conflicts ofinterest in the market place and should broaden our access to capital.  Internalizing management has also created amore effective cost structure for a Company of our size.  Second, the acquisition diversifies ourrevenue streams. Similar to our mortgage banking subsidiary, PWF, Relatedderives its revenue from fee income, which is much less interest rate sensitiveand much less capital intensive than our core portfolio investing business.

 

Weface many competitors, some of whom have substantially greater financial andoperational resources than we do. However, we feel we can effectively compete due to our on-goingrelationships with certain developers.

 

Tothe extent the economy softens in certain markets, we may not be able to findsufficient investments that meet our investment criteria.  Additionally continued consolidationespecially within the banking industry may decrease our investor pool.

 

Results of Operations

 

The following is a summary of our operations for the years ended December31, 2003, 2002 and 2001.  Net income forthe years ended December 31, 2003, 2002 and 2001 was approximately $66.6million, $60.8 million and $39.0 million, respectively.

 

*Revenues*

 
|                         |   | **For the Year Ended December 31,** |    |
|------------------------------|--------|-------------------------------------|---------|
| **(In thousands)**           |   | **2003**                            |    | **2002** |   | **% Change** |   | **2001** |   | **% Change** |   |
| Revenue bond interest income |   | $                                   | 113,655 |   | $ | 92,681 |   | 22.6 | % | $ | 71,500 |   | 29.6 | % |
| Fee income                   |   |                                |    |   |   |   |   |   |   |   |   |
| Mortgage banking  fees       |   | 13,712                              |    | 13,681 |   | .2 | % | N/A |   | N/A |   |
| Fund management  fees        |   | 12,643                              |    | N/A |   | N/A |   | N/A |   | N/A |   |
| Other income                 |   | 12,200                              |    | 10,051 |   | 21.4 | % | 3,125 |   | 221.6 | % |
|                         |   |                                |    |   |   |   |   |   |   |   |   |
| Total revenues               |   | $                                   | 152,210 |   | $ | 116,413 |   | 30.8 | % | $ | 74,625 |   | 56.0 | % |

 

Totalrevenues for the year ended December 31, 2003, increased by approximately 30.8%or $35.8 million over 2002, primarily due to increases in revenue bond interestincome of approximately 22.6% or $21.0 million and $12.6 million in fundmanagement fees.

 

The increase in revenue bond interest income is primarily due to newbonds acquired during the fourth quarter of 2002 and during 2003.  The increase in fund management feesrepresents the fee income earned by Related for the period from November 18,2003 to December 31, 2003.

 

Total revenues for the year ended December 31, 2002, increased byapproximately 56.0%, or $41.8 million over 2001, primarily due to increases inrevenue bond interest income of approximately 29.6% or $21.2 million and $13.7million in mortgage banking fees.

 

The increase in revenue bond interest income is primarily due to newbonds acquired during the fourth quarter of 2001 and during 2002.  The increase in mortgage banking feesrepresents PWF’s fees subsequent to our acquisition of PWF in December 2001.

 

30

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*Expenses*

 
|                                                                          |   | **For the Year Ended December 31,** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                                            |   | **2003**                            |   | **2002** |   | **% Change** |   | **2001** |   | **% Change** |   |
|                                                                          |   |                                |   |   |   |   |   |   |   |   |   |
| Interest expense                                                              |   | $                                   | 19,859 |   | $ | 15,823 |   | 25.5 | % | $ | 13,641 |   | 16.0 | % |
| Interest expense – distribution to preferred  shareholders of subsidiary |   | 9,448                               |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Recurring fees – securitizations                                         |   | 4,028                               |   | 3,181 |   | 26.6 | % | 2,491 |   | 27.7 | % |
| General and administrative                                                    |   | 40,945                              |   | 24,506 |   | 67.1 | % | 5,209 |   | 370.5 | % |
| Depreciation and amortization                                                 |   | 11,926                              |   | 8,891 |   | 34.1 | % | 865 |   | 927.9 | % |
| Loss on impairment of assets                                                  |   | 1,759                               |   | 920 |   | 91.2 | % | 400 |   | 130.0 | % |
|                                                                          |   |                                |   |   |   |   |   |   |   |   |   |
| Total expenses                                                                |   | $                                   | 87,965 |   | $ | 53,321 |   | 65.0 | % | $ | 22,606 |   | 135.9 | % |

 

Totalexpenses increased approximately 65.0% or $34.6 million for the year endedDecember 31, 2003 versus 2002, primarily due to increases of 67.1%, or $16.4million in General and Administrative expenses and $9.4 million in interestexpense represented by distributions to our preferred shareholders.

 

The increase in General and Administrative expenses is predominantlydue to our acquisition of Related and the associated recognition ofapproximately $12.6 million in expenses for the period from November 18, 2003through December 31, 2003.  The largestcomponents of Related’s General and Administrative expenses are approximately$6.4 million in salaries and benefits and approximately $4.3 million inorigination and offering (“O&O”) costs. We initially record all O&O costs associated with the set up of newinvestment partnerships as receivables and immediately charge the total toexpense, due to the fact we are not able to reliably quantify the amount ofO&O expenses the investments will reimburse to us.  To the extent these costs are reimbursed bythe investment funds, we reverse the expense.

 

The increase in interest expense – distribution to preferredshareholders of subsidiary when compared to the 2002 reclassified amount ofincome allocated to preferred shareholders is approximately $1.6 million,attributable to the preferred offering consummated on June 4, 2002.

 

Total expenses increased approximately 135.9%, or $30.7 million for theyear ended December 31, 2002 versus 2001, primarily due to increases ofapproximately $19.3 million in General and Administrative expenses and $8.0million in depreciation and amortization.

 

The increase in General and Administrative expenses was primarily dueto our acquisition of PWF and the growth of our Company.  Depreciation and amortization increased in2002 from 2001 primarily due to the amortization of PWF’s mortgage servicingrights.

 

*Other Items*

 
|                                                      |   | **For the  Year Ended December 31,** |   |
|-----------------------------------------------------------|--------|--------------------------------------|--------|
| **(In thousands)**                                        |   | **2003**                             |   | **2002** |   | **% Change** |   | **2001** |   | **% Change** |   |
|                                                      |   |                                 |   |   |   |   |   |   |   |   |   |
| Equity in earnings of ARCap                               |   | $                                    | 2,219  |   | $ | 2,219 |   | — |   | $ | 456 |   | 386.6 | % |
| Gain on sale of loans                                     |   | 5,532                                |   | 10,683 |   | (48.2 | )% | — |   | N/A |   |
| Gain(loss) on repayment of revenue bonds                  |   | 1,951                                |   | 3,885 |   | (49.8 | )% | (912 | ) | N/A |   |
| Income allocated to preferred shareholders  of subsidiary |   | (9,449                               | )      | (17,266 | ) | (45.3 | )% | (12,578 | ) | 37.2 | % |
| Income allocated to special common units                  |   | (4,038                               | )      | — |   | — |   | — |   | — |   |
| Loss(income) allocated to minority interest               |   | 54                                   |   | (496 | ) | N/A |   | — |   | — |   |
| Benefit(provision) for income taxes                       |   | 6,072                                |   | (1,284 | ) | N/A |   | — |   | — |   |
|                                                           |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |

 

Gains on sales of loans decreased approximately 48.2% or $5.2 millionfor the year ended December 31, 2003 versus 2002, due to the decrease in PWF’sloan origination activity in 2003 versus 2002.

 

The total income allocated topreferred shareholders of subsidiary for the year ended December 31, 2003,including the portion reclassified to interest expense, increased approximately$1.6 million as compared to 2002, attributable to the preferred offeringconsummated on June 4, 2002.

 

The income allocated to special common units represents thedistributions payable to the holders of the SCUs for the period from November18, 2003 to December 31, 2003.

 

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The change in the benefit (provision) for incometaxes results from the receipt of guarantee fee, construction service fees,asset management and partnership management fees which are recognized currentlyfor income tax purpose but earned over the time such services are preformed.

 

During the year ended December 31, 2002, we recordeda gain on repayment of revenue bonds of approximately $3.9 million versus aloss of approximately $912,000 in 2001, due to differences in the number andsize of revenue bonds repaid.

 

Income allocated to preferred shareholders ofsubsidiary increased 49.8% or $4.7 million due to preferred offeringsconsummated on October 9, 2001 and June 4, 2002.

 

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Liquidity and CapitalResources

 

Short-termliquidity provided by operations comes primarily from interest income fromrevenue bonds and promissory notes in excess of the related financing costs,mortgage origination and servicing fees, and fund management fees.  For the year ended December 31, 2003, we hadnet cash from operations of approximately $112.1 million.  Additionally, we have entered into threerevolving warehouse facilities, one, in the amount of $100 million, used byPWF, another, in the amount of $75 million, used by us to fund mortgage loansand investments in revenue bonds on a short term basis and the third in theamount of $85 million used by Related to acquire equity interests in propertyownership entities prior to the inclusion of these equity interests intoinvestment funds.  The PWF facility isrenewable annually, the CharterMac facility matures March 31, 2005, with a oneyear extension at our option, and the Related facility matures on October 29,2004.

 

OnNovember 17, 2003, CM Corp. entered into $50 million and $10 millionacquisition bridge loan facilities with Wachovia Bank in order to fund the cashportion, fees and expenses of our acquisition of Related.  These bridge loan facilities have anine-month term with two 90-day extension options.  We have pledged our common ownership interest in Equity Issuer assecurity under these facilities.  Thefacilities are pre-payable at any time and bear interest at LIBOR plus 1.5% and2.4%, respectively.

 

Ourlong term liquidity needs are met using primarily two sources of capital:collateralized debt securitization and various types of equity offerings.  We believe that our financing capacity andcash flow from current operations are adequate to meet our current andprojected liquidity requirements. Management is not aware of any trends or events, commitments oruncertainties, which have not otherwise been disclosed that will or are likelyto impact liquidity in a material way.

 

The following table summarizes, on a grossbasis, our and our subsidiaries’ capital raising activities.

 
|                          |   | **Amount of  Capital Raised During (in $000’s):** |     |
|-------------------------------|--------|--------------------------------------------------------|----------|
| **Capital Source**            |   | **2003**                                               |     | **2002** |   | **2001 and  prior** |   |
|                          |   |                                                   |     |   |   |   |   |
| Equity:                       |   |                                                   |     |   |   |   |   |
|                          |   |                                                   |     |   |   |   |   |
| Preferred                     |   |                                                   |     |   |   |   |   |
| Series A                      |   | $                                                      | —   |   | $ | 30,000 |   | $ | 145,000 |   |
| Series B                      |   | —                                                 |     | 25,000 |   | 73,500 |   |
| Convertible CRA               |   | 103,197                                                |     | 34,000 |   | 35,596 |   |
| Total                         |   | $                                                      | 103,197  |   | $ | 89,000 |   | $ | 254,096 |   |
|                          |   |                                                   |     |   |   |   |   |
| Common                        |   | $                                                      | —   |   | $ | 92,835 |   | $ | 177,823 |   |
|                          |   |                                                   |     |   |   |   |   |
| Securitizations:              |   |                                                   |     |   |   |   |   |
|                          |   |                                                   |     |   |   |   |   |
| MBIA                          |   |                                                   |     |   |   |   |   |
|                          |   |                                                   |     |   |   |   |   |
| Floater Certificates          |   | $                                                      | (73,000) | *(1)* | $ | 106,500 |   | $ | 350,000 |   |
| Auction Rate                  |   | 100,000                                                |     | — |   | —- |   |
| P-Floats/RITES                |   | 101,348                                                |     | 23,272 |   | 191,887 |   |
| Fixed Rate                    |   | 100,000                                                |     | — |   | — |   |
| Total                         |   | $                                                      | 228,348  |   | $ | 129,772 |   | $ | 541,887 |   |
|                          |   |                                                   |     |   |   |   |   |
| Other Debt:                   |   |                                                   |     |   |   |   |   |
|                          |   |                                                   |     |   |   |   |   |
| PW Acquisition Facility       |   | $                                                      | (2,044)  | *(2)* | $ | — |   | $ | 27,261 |   |
| Related Warehouse Line        |   | 24,532                                                 |     | — |   | —- |   |
| PW Warehouse Line             |   | (19,424)                                               | *(3)*    | 11,969 |   | 29,325 |   |
| Fleet Line of Credit          |   | 21,730                                                 |     | — |   | —- |   |
| Wachovia Bank Loan            |   | 60,000                                                 |     | — |   | — |   |
| Total                         |   | $                                                      | 84,794   |   | $ | 11,969 |   | $ | 56,586 |   |
|                          |   |                                                   |     |   |   |   |   |
| Total of all capital activity |   | $                                                      | 416,339  |   | $ | 323,576 |   | $ | 1,030,392 |   |

 

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*(1) *Negative amount is dueto the restructuring of the MBIA program.

*(2) *Negative amount is dueto the principal pay down of the PW Acquisition Facility.

*(3) *Negativeamount is due to the principal pay down of the PW Warehouse Line.

 

*Convertible Community Reinvestment Act Preferred ShareOfferings*

 

We first issued Convertible CRA Shares during2000.  Since then the program has becomeincreasingly popular with a broad range of banks that invest in our shares toboth make an investment in us and to make a qualifying Community ReinvestmentAct investment.  At December 31, 2003 26different banks had invested in our Convertible CRA Shares.

 

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During2003 we issued 5,738,053 Convertible CRA Shares raising gross proceeds ofapproximately $103.2 million.  AtDecember 31, 2003, we had 8,179,761 shares outstanding, of which 1,351,636shares are convertible at the holders’ options into 1,275,512 commonshares.  The remaining 6,828,125 sharesare convertible on a one-to-one basis. Our Convertible CRA Shares continue to be a viable method to raisecapital, which we intend to continue to use in the future.

 

*Securitizations and Debt Financings*

 

We use floating ratesecuritization programs to leverage our portfolio of revenue bonds to generatecapital for the acquisition of additional revenue bonds.  In each of our securitization programs, wecontribute revenue bonds into trusts, which are generally credit enhanced byinvestment grade rated third party entities and then floating rate certificatesare sold out of the trust.  We retain aresidual interest in each of the trusts.

 

We use two primary securitization programs: MBIA securitizations andP-Floats/Rites (“P-Float”) program.

 

Under our MBIA securitizations, pools of bonds are contributed intotrusts, which are credit enhanced by MBIA, a large financial insurer, and thenlow-floater certificates are sold.  Thelow-floater certificates sold have an interest rate that is reset weekly(“floating rate”) or an interest rate that is reset periodically based on adutch auction process (“auction rate securitizations”).  MBIA has agreed to provide us with up to$650 million in credit enhancement through 2011.  Using the MBIA credit enhancement we can complete up to $425million of floating rate securitizations and $225 million of auction ratesecuritization.  At December 31, 2003,we had $383.5 million of floating rate securitization and $100.0 million ofauction rate securitizations outstanding.

 

Inthe P-Floats program, Merrill Lynch deposits individual revenue bonds into aspecial purpose trust and provides a credit enhancement guarantee enabling thetrust to sell a weekly reset floating rate security.  We are required to post additional bonds with Merrill Lynch ascollateral for the credit enhancement provided.  At December 31, 2003, we had approximately $316.5 millionoutstanding revenue bonds under the P-Floats program

 

During 2003, we completed an new fixed rate securitization, whereby wesold $100 million of two-year certificates with a fixed rate of 3.25%collateralized by $196.8 million bonds and requiring no credit enhancement.

 

Our continued ability to raise capital through the use ofsecuritization programs is dependent on the following factors: (i) theavailability of seasoned bonds to be used in securitizations or as excesscollateral; (ii)  the depth of themarket of buyers for tax-exempt floating rate investments and (iii) our abilityto maintain and expand our relationships with credit enhancers.

 

We continue to actively manage our balance sheet and our relationshipsto mitigate the impact of the factors listed above and to continue to diversifyour sources of capital.

 

We believe that our current financing capacity and cash flow fromcurrent operations are adequate to meet our current and projected liquidity requirements.

 

Application of Critical Accounting Policies

 

Our consolidated financial statements arebased on the selection and application of accounting principles generallyaccepted in the United States of America, which require us to make estimatesand assumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  These estimates andassumptions sometimes involve future events which cannot be determined withabsolute certainty.  Therefore, ourdetermination of estimates requires that we exercise our judgment.  While we have used our best estimates basedon the facts and circumstances available to us at the time, different resultsmay actually occur and any such differences could be material to our financialstatements.

 

We believe the following policies may involvea higher degree of judgment and complexity and represent the criticalaccounting policies used in the preparation of our financial statements.

 

*Investment in revenue bonds*

 

We account for ourinvestments in revenue bonds as available-for-sale debt securities under theprovisions of Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“SFAS 115”) due to aprovision in most of our revenue bonds under which we have a right to requireredemption of the revenue bonds prior to their maturity, although we can andmay elect to hold them up to their maturity dates unless otherwisemodified.  As such, SFAS 115 requires usto classify these investments as “available-for-sale.”  Accordingly, investments in revenue bondsare carried at their estimated fair values, with unrealized gains and lossesreported in accumulated other comprehensive income.  Unrealized gains or losses do not affect the cash flow generatedfrom property operations, distributions to shareholders, the characterizationof the tax-exempt income stream or the financial obligations under the revenuebonds.

 

If, in our judgment, it is determined probable that we will not receiveall contractual payments required, when they are due, the revenue bond isdeemed impaired and is written down to its then estimated fair value, with theamount of the write-down accounted for as a realized loss.

 

Becauserevenue bonds have a limited market, we estimate the fair value for each bondas the present value of its expected cash flows using a discount rate forcomparable tax-exempt investments.  Thisprocess is based upon projections of future economic events affecting the realestate collateralizing the bonds, such as property occupancy rates, rentalrates, operating cost inflation, market capitalization rates and an appropriatemarket rate of interest, all of which are based on good faith estimates andassumptions developed by us.  Changes inmarket conditions and 

 

34

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circumstancesmay occur which would cause these estimates and assumptions to change;therefore, actual results may vary from the estimates and the variance may bematerial.

 

For certain revenue bonds, we believe that certain factors have impactedthe near-term fair value.  In theseinstances, the revenue bonds are valued at either the outstanding face amountof the bond or management’s estimate of the fair value, whichever is lower.

 

*Mortgage Banking Activities*

 

PWF is an approved seller/servicer ofmulti-family mortgage loans for Fannie Mae, Freddie Mac and Ginnie Mae.  For Fannie Mae, PWF is approved under theDUS program.  Under DUS, upon obtaininga commitment from Fannie Mae with regard to a particular loan, Fannie Maecommits to acquire the mortgage loan based upon PWF’s underwriting and PWFagrees to bear a portion of the risk of potential losses in the event of adefault.  Fannie Mae commitments may bemade to acquire the mortgage loan for cash or in exchange for a mortgage-backedsecurity backed by the mortgage loan. As a Program Plus lender for Freddie Mac, Freddie Mac agrees to acquirefor cash from PWF loans for which PWF has issued commitments.  Ginnie Mae agrees to exchange FHA-insuredmortgages originated by PWF for Ginnie Mae securities.

 

Mortgage loans originated for Fannie Mae, Freddie Mac or Ginnie Mae areclosed in the name of PWF, which uses corporate cash obtained by borrowing froma warehouse lender to fund the loans. Approximately a week to a month following closing of a loan, loandocumentation and an assignment are delivered to Fannie Mae, Freddie Mac,Ginnie Mae, or a document custodian on its behalf and the cash purchase priceor mortgage-backed security is delivered to PWF.  PWF uses the cash it receives to repay its warehouse loans andthe mortgage-backed securities are sold pursuant to prior agreements for cash,which is also used to repay warehouse loans. PWF also underwrites and originates multi-family and commercialmortgages for insurance companies and banks.

 

PWF receives origination fees which are included in mortgage bankingfees in the consolidated statements of income. Neither we nor PWF retains any interest in any of the mortgage loans,except for mortgage servicing rights (“MSRs”) and certain liabilities under theloss-sharing arrangement with Fannie Mae.

 

*Mortgage Servicing Rights*

 

PWF recognizes as assets the rights to service mortgage loans forothers, whether the MSRs are acquired through a separate purchase or throughloan origination, by allocating total costs incurred between the loan and theMSRs retained based on their relative fair value.  MSRs are being carried at their adjusted cost basis.  MSRs are amortized in proportion to, andover the period of, estimated net servicing income.

 

We have two areas of loss exposure related to PWF’s lendingactivities.  First, while a loan isrecorded on the balance sheet, there is exposure to potential loss if a loanbecomes impaired and defaults.  Second,we have exposure to loss due to the retention of a portion of credit riskwithin PWF’s servicing contract under the Fannie Mae DUS program.

 

Whena loan is owned by PWF and recorded on the balance sheet, PWF identifies loansthat are impaired and evaluates the allowance for loss on a specific loan basisfor losses believed to currently exist in the recorded loan portfolio.  An impaired loan is defined, as noted withinaccounting guidance, when PWF determine it is probable that not all requiredcontractual payments will be made when due. PWF’s primary tool for determining which loans are likely to currentlyhave a loss associated with them is to evaluate the debt service coverage ratiobased on PWF’s historical experience of similar properties and the frequency ofsuch losses.  Loans that are impairedand specific loans that are not impaired but have debt service coverage ratiosbelow a certain threshold, which indicates a high likelihood of future foreclosureand currently have an existing loss, are evaluated.  The estimate of currently existing loss includes the estimatedseverity of the loss which would include any advances made or existing propertyloss.  Property maintenance costs (whenforeclosure occurs) are expensed when incurred and not included in the lossestimate.  However, as most loans aresold very quickly after origination, there typically is not a significantamount of loan loss allowance recorded.

 

We have exposure to lossdue to PWF’s retention of a portion of credit risk within PWF’s servicingcontract under the Fannie Mae DUS program. For loans which have been sold as commercial mortgage-backed securitiesfor which PWF retains the servicing under Fannie Mae’s DUS program, PWF’s shareof loss is associated with the servicing contract and determined in accordancewith the loss sharing provisions under the program.  Prior to the issuance of Interpretation No. 45, “Guarantors’Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”), because the loss sharing onthese serviced loans was associated with the servicing contract, they werevalued within the servicing right and the anticipated cash flows that are associatedwith such servicing activities.  We havedetermined that these potential losses are guarantees under the definition ofFIN 45 and therefore, record an asset and a corresponding liability based onour estimate of the portion of the servicing cash flows deemed to representcompensation for our guarantee for loans originated on/or after January 1,2003.  On an ongoing basis, we willaccount for the asset by offsetting cash received for the guarantee against theasset and crediting interest income for the change in asset due to the passageof time.  The portion of the liabilityrepresenting an accrual for probable losses under SFAS No. 5, “Accounting forContingencies” (“FAS 5”) is adjusted as loss estimates change; the portionrepresenting our willingness to stand by as guarantor will be amortized overthe expected life of the guarantee.

 

*Revenue Recognition*

 

We derive revenues from a variety of investments and guarantees,summarized as follows:

 

**Revenue Bond Interest Income -**Interest income is recognized at the statedrate as it accrues and when collectibility of future amounts is reasonablyassured.  Participating interest isrecognized when received.  Interestincome from revenue bonds with modified terms or where the collectibility offuture amounts is uncertain is recognized based upon expected cashreceipts.  Certain construction revenuebonds carry

 

35

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different interest rates during the construction and permanent financingperiods.  In these cases, we calculatethe effective yield on the revenue bond and use that rate to recognize interestincome over the life of the bond.

 

**Mortgage Banking Fees**

 

*Mortgage Banking Fees*- PWF fees earned for arranging financingsunder the Fannie Mae DUS product line or on behalf of Freddie Mac, insurancecompanies and banks or other lenders are recorded at the point the financingcommitment is accepted or the mortgagor and the interest rate of the mortgageloan is fixed.

 

*Mortgage Servicing Fees* - PWF receives fees for servicing the loansit has originated or purchased.  Thisincome is recognized on an accrual basis over the estimated life of the loansbeing serviced.

 

**Fund Management Fees**

 

*OriginationFees* –Origination fees include both property acquisition fees and partnershipmanagement fees which are received by Related from the proceeds raised atformation of the investment funds. Property acquisition fees (generally 2% to 4% of equity raised) are forservices performed in connection with the acquisition of interests inproperty-owning partnerships and are recognized when the earnings process iscomplete and collectibility is reasonably assured, which is defined as the datethe investor equity is raised and the properties have been acquired by theinvestment fund.  Partnership managementfees (generally 1% of equity raised) are for services to be performed byRelated for (i) maintaining the books and records of the investment fund,including requisite investor reporting, and (ii) monitoring the acquiredproperty interests to ensure that their development, leasing and operationscomply with low income housing or other tax credit requirements.  Related recognizes these fees when suchservices are rendered, which, per the partnership agreements, are contractuallyover five years following the initial closing of the investment fund, using thestraight-line method.

 

*AcquisitionFees* –Acquisition fees are earned upon acquisition of investments by publicly-heldentities for which Related acts as the advisor.  These fees are calculated as a percentage of the purchase priceof investments acquired, up to 1%.

 

*DevelopmentFees* –Development fees are earned from properties co-developed by Related withunaffiliated developers and sold to investment funds.  Recognition of development fees is based on completion andstabilization of properties, after guarantees of completion and deficits are nolonger deemed to require funding.  Theguarantees are issued by another one of our subsidiaries on behalf of Relatedand as required by the investment fund.

 

A*ssetManagement Fees* - Related earns asset management fees from itsinvestment funds on an annual basis calculated based on a percentage of eachinvestment fund’s invested assets, generally 0.5%.  These fees are paid from the investment fund’s available workingcapital balances, and are earned by Related for managing the UnderlyingProperty assets of the investment fund. These fees are recorded monthly as earned, but only when the managementof Related determines that collection is reasonably assured based on theinvestment funds’ working capital balance. Amounts not recorded as revenues, due to inadequate working capital atthe investment fund level, are due upon sale or refinancing of the fund’sproperties; receipt of such amounts is highly uncertain.  The alternative accounting would be toaccrue the full amount of the fees and then reserve for the portion thatmanagement estimates will not be paid until there is a sale or refinancing ofthe Underlying Properties in the investment fund.  Related believes that the assessment of collectibility is anintegral part of revenue recognition; if this factor was not considered, netincome and assets could be materially overstated.  The investment funds are separate legal entities that are subjectto factors and market conditions that are beyond the control of Related, andmay not generate adequate cash to pay all fees due to Related.

 

**Other Income**

 

*Interest Income from Promissory Notes and MortgagesReceivable* - Intereston mortgage loans and notes receivable is recognized on the accrual basis as itbecomes due.  Deferred loan originationcosts and fees are amortized over the life of the applicable loan as an adjustmentto interest income, using the interest method. Interest which was accrued is reversed out of income if deemed to beuncollectible.

 

*Other Interest Income* - Interest income from temporary investments,such as cash in banks and short-term instruments, is recognized on the accrualbasis as it becomes due.

 

*Construction Service Fees***-**CM Corp. receives fees, in advance, fromborrowers for servicing revenue bonds during the construction period.  These fees are deferred and amortized intoother income over the anticipated construction period.

 

*Credit Enhancement and Guarantee Fees***-**CM Corp. and Related receive fees forproviding credit enhancement and for backing up primary guarantors’ obligationsto guarantee agreed upon internal rates of return to the investors in programssponsored by Related.  The creditenhancement fees are received monthly and recognized in other income whenreceived.  The guarantee fees are deferredand recognized in other income on a prorata basis over the guarantee periods.

 

*Equity in Earnings of ARCap -*****Our equity in the earnings of ARCap is accruedat the preferred dividend rate of 12% on the preferred shares we hold, unless ARCapdoes not have earnings and cash flows adequate to meet this dividendrequirement.

 

*Financial Risk Managementand Derivatives*

 

We have entered into several derivative instruments, including aninterest rate cap, forward commitments and interest rate swaps, all of whichare accounted for under the Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities”

 

36

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(“SFAS 133”), as amended and interpreted.  We have designated the interest rate swaps as cash flow hedges onthe variable interest payments on our floating rate securitizations.  Two of the interest rate swaps do not becomeeffective until 2005.  The two interestrate swaps that are currently in place, are recorded at their respective fairmarket value each accounting period, with changes in market value beingrecorded in accumulated other comprehensive income to the extent the hedges areeffective in achieving offsetting cash flows. These hedges have been perfectly effective, so have generated no ineffectivenessthat needs to be included in earnings. The effectiveness of the other two swaps is being measured using thehypothetical swap method, until they go into effect in 2005.  For the year ended December 31, 2003, therewas no ineffectiveness related to these two swaps.  Had there been any ineffectiveness or should there be anyineffectiveness in the future, the amount would have flowed or will flowthrough our consolidated statements of income. The interest rate cap, although designed to mitigate our exposure torising interest rates, was not designated as a hedging derivative; therefore,any change in fair market value flows through the consolidated statements ofincome, where it is included in interest income.  The forward commitments create derivative instruments under SFAS133, which have been designated as cash flow hedges of the anticipated fundingof the Revenue Bonds, and, as such, are recorded at fair value, with changes infair value recorded in accumulated other comprehensive income until the revenuebonds are funded.

 

# *Income Taxes*

 

Effective July 1, 2001, we began operation of a new wholly owned, taxable subsidiary, CM Corp., whichconducts most of our taxable business, including any mortgage servicingactivities and fund management activities in which we may engage.  We provide for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes” (“FAS 109”).  FAS 109requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the financialstatement carrying amounts and the tax basis of assets and liabilities.

 

*ShareOptions and Share Awards*

 

We have issued options to employees for our commonshares.  We have issued restrictedcommon shares to non-employees and employees, some of which vested immediatelyupon issuance and some of which vest over various periods ranging from ninemonths to four years.  Additionally, wehave issued SCUs of CCC to some employees, which vest in 2006 and 2007.

 

We account for our share options in accordance withthe provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”  Accordingly, compensation cost is accruedbased on the estimated fair value of the options issued, and amortized over thevesting period.  Because vesting of theoptions is contingent upon the recipient continuing to provide services to usuntil the vesting date, we estimate the fair value of the share options at eachperiod-end up to the vesting date, and adjust the expense accordingly.  The fair value of each option grant isestimated using the Black-Scholes option-pricing model.

 

Our share awards have been recorded as a separatedeferred compensation line in the equity section of our consolidated financialstatements.  The amount of the deferredcompensation expense was calculated as the number of shares awarded at theaverage of the high and low price of our common shares at the date of award,which was $19.33.  Individuals holdingthose awards are entitled to dividends on their shares, even if the shares havenot yet vested.  Any such payments willbe recorded directly to Beneficial Owner’s Equity – other commonshareholders.  However, if any individualshould forfeit their awards, any amounts previously recorded directly toBeneficial Owner’s Equity, would be reversed and charged to compensationexpense.  The amount of the deferredcompensation will be charged to compensation expense on a pro rata basis overthe relevant vesting period.

 

# *Goodwill and Intangible Assets*

 

In connection with our acquisition of Related, we have recordedgoodwill in the amount of approximately $210.3 million and identifiableintangible assets in the aggregate amount of $183.3 million.  The intangible assets were recorded at thisfair value as verified by an independent third party valuation firm and areamortized over their estimated useful lives. The goodwill is the excess of the purchase price we paid over the fairvalue of the assets and liabilities acquired including deferred taxliabilities, and is not being amortized. We have adopted FAS No. 141 and 142 which required us to test thegoodwill for impairment at least annually and more often if circumstancesindicate there may be reason to believe goodwill has been impaired.  Any such impairment would be charged toexpense in the period in which it is determined.  Additionally, the useful lives of the identifiable intangibleassets may need to be reassessed and amortization accelerated, or suchintangible assets could be deemed impaired. Any such amounts could have a material impact on our consolidated financialstatements.

 

# Commitmentsand Contingencies

 

*Mortgage Banking Activities*

 

Through PWF, we originate and service multi-family mortgage loans forFannie Mae, Freddie Mac and FHA.  PWF’smortgage lending business is subject to various governmental andquasi-governmental regulations.  PWF islicensed or approved to service and/or originate and sell loans under FannieMae, Freddie Mac, Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies of the Federal government and Fannie Maeand Freddie Mac are federally-chartered investor-owned corporations.  These agencies require PWF and itssubsidiaries to meet minimum net worth and capital requirements and to complywith other requirements.  Mortgage loansmade under these programs are also required to meet the requirements of theseprograms.  In addition, under FannieMae’s DUS program, PWF has the authority to originate loans without a priorreview by Fannie Mae and is required to share in the losses on loans originatedunder this program.

 

The DUS program is Fannie Mae’s principal loan program.  Under the Fannie Mae DUS Product Line, PWForiginates, underwrites and services mortgage loans on multi-family residentialproperties and sells the project loans directly to Fannie Mae.  PWF assumes responsibility for a portion

 

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of any loss that may result from borrower defaults, based on the FannieMae loss sharing formulas, Levels I, II or III.  At December 31, 2003, all of PWF’s loans consisted of Level Iloans.  For such loans, PWF isresponsible for the first 5% of the unpaid principal balance and a portion ofany additional losses to a maximum of 20% of the original principal balance.  Level II and Level III loans carry a higherloss sharing percentage.  Fannie Maebears any remaining loss.

 

Under the terms of the Master Loss Sharing Agreement between Fannie Maeand PWF, PWF is responsible for funding 100% of mortgagor delinquency(principal and interest) and servicing (taxes, insurance and foreclosure costs)advances until the amounts advanced exceed 5% of the unpaid principal balanceat the date of default.  Thereafter, forLevel I loans, we may request interim loss sharing adjustments which allow usto fund 25% of such advances until final settlement under the Master LossSharing Agreement.  No interim losssharing adjustments are available for Level II and Level III loans.

 

We maintain an accrued liability for probable losses under FAS 5 forloans originated under the Fannie Mae DUS product line at a level that, inmanagement’s judgment, is adequate to provide for estimated losses.  At December 31, 2003, that liability wasapproximately $6.7 million, which we believe represents its probable liabilityat this time.  Unlike loans originatedfor Fannie Mae, PWF does not share the risk of loss for loans PWF originatesfor Freddie Mac or FHA.

 

In connection with the PWF warehouse line, both our Company and CM Corp.have entered into guarantees for the benefit of Fleet National Bank (“Fleet”),guaranteeing the total advances drawn under the line, up to the maximum of $100million, together with interest, fees, costs, and charges related to the PWFwarehouse line.

 

PWF maintains, as of December 31, 2003, treasury notes of approximately$4.7 million and a money market account of approximately $1.3 million, which isincluded in cash and cash equivalents-restricted in the consolidated balancesheet, to satisfy the Fannie Mae collateral requirements of $6.0 million.

 

Due to the nature of PWF’s mortgage banking activities, PWF is subjectto supervision by certain regulatory agencies. Among other things, these agencies require PWF to meet certain minimumnet worth requirements, as defined.  PWFmet these requirements for all agencies, as applicable, as of December 31,2003.

 

At December 31, 2003, PWF had commitments of approximately $49.8 millionto five borrowers.

 

Off Balance SheetArrangements

* *

*Credit Enhancement Transaction*

 

InDecember 2001, CM Corp. completed a credit enhancement transaction with MerrillLynch Capital Services, Inc. (“MLCS”).  Pursuant to the termsof the transaction, CM Corp. assumed MLCS’s $46.9 million first loss positionon a $351.9 million pool of tax-exempt weekly variable rate multi-familymortgage loans.  TRCLP, has provided CMCorp. with an indemnity covering 50% of any losses that are incurred by CMCorp. as part of this transaction.  Asthe loans mature or prepay, the first loss exposure and the fees paid to CMCorp. will both be reduced.  The latest maturitydate on any loan in the portfolio occurs in 2009.  The remainder of the real estate exposure after the $46.9 millionfirst loss position has been assumed by Fannie Mae and Freddie Mac.  In connection with the transaction, we haveguaranteed the obligations of CM Corp., and have met its obligation to postcollateral, in an amount equal to 40% of the first loss amount.  Our maximum exposure under the terms of thistransaction is approximately $23.5 million. During 2003, two of thetax-exempt weekly variable rate multi-family mortgage loans were repaid in theamount of $8.9 million.  Theserepayments reduced the first loss position to $38 million and the pool ofmulti-family mortgage loans to $288.6 million. This reduced our maximum exposure under the terms of the transaction toapproximately $19 million.

 

CM Corp. performed due diligence on each property in the pool, includingan examination of loan-to-value and debt service coverage both on a current and“stressed” basis.  CM Corp. analyzed theportfolio on a “stressed” basis by increasing capitalization rates and assumingan increase in the low floater bond rate. As of December 31, 2003, the credit enhanced pool of properties areperforming according to their contractual obligations and we do not anticipateany losses to be incurred on its guaranty. Should the Company’s analysis of risk of loss change in the future, aprovision for probable loss might be required; such provision could be material.

 

*Yield Guarantee Transaction*s

 

CM Corp. has entered into six agreements with Merrill Lynch (the“Primary Guarantor”) to guarantee agreed-upon rates of return for three poolsof multi-family properties each owned by a local partnership which in turn, ismajority-owned by affiliates of Related for which CM Corp. has or will receiveguarantee fees.

 

Each transaction was structured as two separate guarantees, oneprimarily guaranteeing the returns through the lease-up phase of the propertiesand the other guaranteeing the returns through the operating phase of theproperties.  CM Corp. receives a fee foreach guarantee up front at the start of each guarantee period.  These fees will be recognized in income on astraight line basis over the period of the respective guarantees.  Total potential exposure pursuant to theseguarantees is approximately $228.0 million. We have analyzed the expected operations of the Underlying Propertiesand believe there is no risk of loss at this time.  Should our analysis of risk of loss change in the future, aprovision for possible losses might be required; such provision could bematerial.  We account for theseguarantees under the FIN 45.  We havedetermined that the fees received represent the fair value of the respectiveliabilities and accordingly have recorded such fees as a liability included indeferred income on our consolidated balance sheets.

 

Some of the local partnerships have financed their properties with theproceeds of our revenue bonds.  In thesecases, the Primary Guarantor has required that those revenue bonds be depositedinto a trust pursuant to which the revenue bonds were divided into senior andsubordinated interests

 

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with approximately 50% of each revenue bond being subordinated.  We have financed the senior trust interestas part of the Merrill Lynch P-FloatsSM/RitesSM program.  The subordinate trust interests are beingused as collateral in other of our Company’s financing programs.

 

In connection with these transactions, we have posted $159.0 million ascollateral with the Primary Guarantor in the form of either cash or revenuebonds.

 

*Revenue Bond Forward Transactions*

 

We have entered into six transactions to purchase revenue bonds pursuantto agreements which require us, at the earlier of stabilization or conversionto permanent financing to acquire Series A and Series B revenue bonds at apredetermined price and interest rates. We are obligated to purchase the revenue bonds only if construction iscompleted.  We are obligated to buy theSeries B revenue bonds only if, at the date the Series A bonds are stabilized,the property’s cash flow is sufficient to provide debt service coverage of1.15x for both the Series A and B bonds. An unrelated third party lender will advance funds to the developer, asneeded during the construction period, at a floating rate.  These forward commitments create derivativeinstruments under SFAS No. 133, which have been designated as a cash flow hedgeof the anticipated funding of the revenue bonds, and are recorded at fair value,with changes in fair value recorded in other accumulated comprehensive incomeuntil the revenue bonds are funded.  Thetotal potential amount we could possibly be required to fund is $84.4 million.

 

*Other Guarantees*

 

We have entered into three transactions related to three properties,Coventry Place, Canyon Springs and Arbor Ridge.  Pursuant to the terms of these transactions, we will providecredit support to the construction lender for project completion and Fannie Maepermanent loan conversion and acquire subordinated bonds to the extent theconstruction period bonds do not fully convert.  Up until the point of completion, we will reimburse theconstruction lender for any draw on its construction letter of credit up to 40%of the stated amount of the letter of credit. Following completion, up until the project loan converts to permanentloan status, we will, should the need arise, reimburse the full amount of theletter of credit.  We closely monitorthese two properties, and believes there is no need currently, to provide forany potential loss.  Should our analysisof risk of loss change in the future, a provision for loss might be required;such provision could be material.  Thedeveloper has also issued several guarantees to the construction lender, eachof which would be called upon before our guarantees, and each of which would beassigned to us should its guarantees be called.  Once the construction loans convert to permanent loans, we areobligated to acquire subordinated loans for the amount by which eachconstruction loan exceeds the corresponding permanent loan, if any.  The subordinated bonds will bear interest at10%.  Under Fannie Mae guidelines, thesize of the subordinated bonds will be limited to a 1.0x debt service coveragebased on 75% of the cash flow after the senior debt.

 

Our maximum exposure, related to these two transactions, is 40% of thestated amount of the letter of credit of approximately $27 million.

 

The following table reflects our maximum exposure and carrying amountfor guarantees we and our subsidiaries have entered into:

 

| **(In thousands)**            |   | **Maximum  Exposure** |    | **Carrying  Amount** |   |
|-------------------------------|--------|-----------------------|---------|----------------------|--------|
|                          |   |                  |    |                 |   |
| Payment guarantees            |   | $                     | 17,933  |                 | $      | — |   |
| Insured tax credits guarantee |   | 15,000                |    | —               |   |
| Completion guarantees         |   | 53,236                |    | —               |   |
| Operating deficit guarantees  |   | 614                   |    | —               |   |
| CMC credit enhancement        |   | 19,000                |    | —               |   |
| LIHTC guarantees              |   | 228,000               |    | 5,850                |   |
|                          |   |                  |    |                 |   |
|                          |   | $                     | 333,783 |                 | $      | 5,850 |   |

 

*Contractual Obligations*

 

Thefollowing table provides our commitments as of December 31, 2003 to make futurepayments under our debt agreements and other contractual obligations.

 
|                        |   | **Payments  due by Period** |    |
|-----------------------------|--------|-----------------------------|---------|
| **(In thousands)**          |   | **Total**                   |    | **Less than  1  year** |   | **1-3 years** |   | **3-5 years** |   | **More than  5 years** |   |
|                        |   |                        |    |   |   |   |   |   |   |   |   |
| Notes payable               |   | $                           | 153,350 |   | $ | 109,128 |   | $ | 27,182 |   | $ | 17,040 |   | $ | — |   |
| Operating lease obligations |   | 1,376                       |    | 545 |   | 831 |   | — |   | — |   |
| Unfunded loan commitments   |   | 178,930                     |    | 49,750 |   | 129,180 |   | — |   | — |   |
| Fixed rate securitization   |   | 100,000                     |    | — |   | 100,000 |   | — |   | — |   |
| Employee contracts          |   | 6,000                       |    | 2,000 |   | 4,000 |   | — |   | — |   |
|                        |   |                        |    |   |   |   |   |   |   |   |   |
| Total                       |   | $                           | 439,656 |   | $ | 161,423 |   | $ | 261,193 |   | $ | 17,040 |   | $ | — |   |

 

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Income Taxes

 

Weare organized as a Delaware statutory trust and, for tax purposes, areclassified as a partnership.  Almost allof our recurring income is tax-exempt. From time to time we may sell or securitize various assets which mayresult in capital gains and losses. This tax structure allows us to have the pass-through income characteristicsof a partnership for both taxable and tax-exempt income.  We do not pay tax at the partnershiplevel.  Instead, the distributive shareof our income, deductions and credits is reported to each shareholder forinclusion on their respective income tax return.  The tax-exempt income derived from most of our revenue bondsremains tax-exempt as it is passed through to shareholders.  Any cash dividends received by us fromsubsidiaries, organized as corporations, will be recorded as dividend incomefor tax purposes.  For suchsubsidiaries, created in 2001, there were no dividends distributed for taxpurposes.

 

We provide for income taxes in accordance withStatement of Financial Accounting Standards No. 109, “Accounting for IncomeTaxes” (“FAS 109”).  FAS 109 requiresthe recognition of deferred tax assets and liabilities for the expected futuretax consequences of temporary differences between the financial statement carryingamounts and the tax basis of assets and liabilities.

 

Wederive a substantial portion of our income from ownership of first mortgage“Private Activity Bonds.”  The interestfrom these bonds is generally tax-exempt from regular Federal income tax.  However, the Tax Reform Act of 1986classifies the interest earned on Private Activity Bonds issued after August 7,1986 as a tax preference item for alternative minimum tax purposes(“AMT”).  The percentage of ourtax-exempt interest income subject to AMT for the years ended December 31,2002, 2001 and 2000 was approximately 85%, 79% and 88% respectively.  AMT is a mechanism within the InternalRevenue Code to ensure that all taxpayers pay at least a minimum amount oftaxes.  All taxpayers are subject to theAMT calculation requirements although the vast majority of taxpayers will notactually pay AMT.  As a result of AMT,the percentage of our income that is exempt from federal income tax may bedifferent for each shareholder depending on that shareholder’s individual taxsituation.

 

RecentlyIssued Accounting Standards

 

In November 2002, the FASB issued FIN 45.  FIN 45 elaborates on the disclosures to be made by a guarantor inits financial statements about its obligations under certain guarantees that ithas issued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  This Interpretation does notprescribe a specific approach for subsequently measuring the guarantor’srecognized liability over the term of the related guarantee.  The initial recognition and initialmeasurement provisions of this FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  CM Corp. entered into one credit enhancementtransaction and two yield guarantee transactions prior to December 31,2002.  The fee for the creditenhancement transaction is received monthly and recognized as income whendue.  The fees for the yield guaranteetransactions, received in advance, were deferred and amortized over theguarantee periods.  During 2003, CMCorp. entered into four more yield guarantee transactions.  We believe the fees received for theseguarantees approximates the fair value of the obligations undertaken in issuingthe guarantees and have recorded liabilities included in deferred income equal to the fair values of theobligations.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure,” an amendment of FASBstatement No. 123.  This statementamends SFAS No. 123, “Accounting for Stock-Based Compensation” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employer compensation.  Because we account for our share optionsusing the fair value method, implementation of this statement did not have animpact on our consolidated financial statements.  We have adopted the provisions of SFAS No. 123 for our shareoptions issued to non-employees.  Accordingly,compensation cost is accrued based on the estimated fair value of the optionsissued, and amortized over the vesting period. Because vesting of the options is contingent upon the recipient continuingto provide services to us until the vesting date, we estimate the fair value ofthe non-employee options at each period-end up to the vesting date, and adjustexpensed amounts accordingly.  The fairvalue of each option grant is estimated using the Black-Scholes option-pricingmodel.  In connection with the purchaseof Related, we issued 778,420 restricted common shares to employees, of which52,863 vested immediately.  The balanceof 725,557 shares vest over two, three or four years depending on the number ofshares granted to each employee.  Wehave adopted the provisions of SFAS No. 123 for these employee grants.  Accordingly, we recognized compensationexpense for the vested shares at the market price for the shares on the grantdate and deferred compensation expense for the non-vested shares also at themarket price on the grant date.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable Interest Entities”(“FIN 46”).  In December 2003, the FASBissued FIN 46R, which revises FIN 46, codifying certain FASB Staff positionsand extending the implementation date. FIN 46, as revised by FIN 46R, clarifies the application of existingaccounting pronouncements to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  Prior to the issuance of FIN 46R, we had not applied FIN 46 toany entities; accordingly, the provisions of FIN 46R are effective for usbeginning March 31, 2004.

 

FIN 46R is a complexstandard that requires significant analysis and judgment. We are still in theprocess of evaluating its impact on our financial statements, particularly asit applies to the investment fund sponsorship business we acquired bypurchasing Related in November of 2003. In that acquisition, and in subsequentfund originations, we, through our ownership of Related, became the generalpartner or equivalent in over 70 investment funds, all of which may representvariable interest entities under FIN 46R. As the general partner, and, in somecases, the guarantor of the underlying fund returns, we may be deemed to be theprimary beneficiary of some or all of such entities, even though we have noequity investment in the investment partnerships. If we determine that we arerequired to consolidate all of our investment partnerships under FIN 46R, ourtotal assets would increase by approximately $2.5 billion.  The investment partnerships do not carrydebt, so minority partners’ interest of approximately $2.5 billion would berecorded between liabilities and equity on our balance sheet.

 

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In recording our acquisitionof Related, we ascribed approximately $5 million of the purchase price to theestimated future cash flows to be received from general partner interests ininvestment partnerships in which we maintain a non-equity controllingpartner.  However, from time to time thegeneral partner of the investment funds, may be called upon to fund investmentfund operations which we would advance on behalf of the general partner andwould be repaid to us out of future operating cash flow or sale or refinancingproceeds received by the investment fund, so our maximum exposure to losscannot be quantified.  We also haveexposure to losses under guarantees of returns on certain funds, as describedin Note 16.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  This statement requires thatcertain financial instruments that have the characteristics of debt and equitybe classified as debt.  SFAS No. 150 waseffective for financial instruments entered into or modified after May 31,2003, and otherwise was effective at the beginning of the first interim periodbeginning after June 15, 2003.  Pursuantto SFAS No. 150, on July 1, 2003 we have reclassed $273.5 million previouslyshown in the “mezzanine” (between liabilities and equity) in the consolidatedbalance sheets as “preferred shares of subsidiary subject to mandatoryredemption” into the liability section, and the dividends paid on such shares(approximately $9.4 million for the year ended December 31, 2003) has beenclassified as interest expense; dividends related to prior periods continue tobe classified as income allocated to preferred shareholders of subsidiary.

 

The followingrecent pronouncements had no material impact on our consolidated financialstatements:

 

•                  SFAS No. 145 “Rescission of FASB Statements No. 4, 44and 64, Amendment of FASB Statement No. 13 and Technical Corrections”.

 

•                  SFASNo. 146 “Accounting for Costs Associated with Exit or Disposal Activities”.

 

•                  SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities”.

 

Inflation

 

Inflation did not have a material effect on our results for the periodspresented.

 

Item 7A.  Quantitative andQualitative Disclosures About Market Risk

 

We invest in certain financial instruments, primarily revenue bonds andother bond related investments that are subject to various forms of marketrisk, including real estate risk, interest rate risk, credit and liquidity riskand prepayment risk.  We seek toprudently and actively manage such risks to earn sufficient compensation tojustify the undertaking of such risks and to maintain capital levels which arecommensurate with the risks we undertake.

 

*Real Estate Risk*

 

We derive income by investing in revenue bonds secured by multi-familyaffordable residential properties. Investing in such revenue bonds collateralized by such propertiessubjects us to various types and degrees of risk that could adversely affectthe value of our assets and our ability to generate revenue.  The factors that may reduce our revenues,net income and cash available for distributions to shareholders include thefollowing: the property securing a revenue bond may not generate incomesufficient to meet its operating expenses and debt service on its related revenuebond; economic conditions, either local, regional or national, may limit theamount of rent that can be charged for rental units at the properties, and mayresult in a reduction in timely rent payments or a reduction in occupancylevels; occupancy and rent levels may be affected by construction of additionalhousing units and national, regional and local politics, including current orfuture rent stabilization and rent control laws and agreements; federal LIHTCand city, state and federal housing subsidy or similar programs which apply tomany of the properties, could impose rent limitations and adversely affect theability to increase rents to maintain the properties in proper condition duringperiods of rapid inflation or declining market value of such properties; and,if a revenue bond defaults, the value of the property securing such revenue bond(plus, for properties that have availed themselves of the federal LIHTC, thevalue of such credit) may be less than the face amount of such revenue bond.

 

All of these conditions and events may increase the possibility that aproperty owner may be unable to meet its obligations to us under its mortgagerevenue bond.  This could affect our netincome and cash available for distribution to shareholders.  We manage these risks through diligent andcomprehensive underwriting, asset management and ongoing monitoring of loanperformance.

 

We may be adversely affected by periods of economic or real estatedownturns that result in declining property performance or propertyvalues.  Any material decline inproperty values used as collateral for our revenue bonds increases thepossibility of a loss in the event of default. Additionally, some of our income may come from additional interest receivedfrom the participation of a portion of the cash flow, sale or refinancingproceeds on Underlying Properties.  Thecollection of such additional interest may decrease in periods of economicslowdown due to lower cash flows or values available from the properties.  In a few instances, the revenue bonds aresubordinated to the claims of other senior interest and uncertainties may existas to a borrower’s ability to meet principal and interest payments.  Because of these economic factors, debtservice on the revenue bonds, and therefore net income and cash available fordistribution to shareholders is dependent on the performance of the UnderlyingProperties.

 

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*Interest Rate Risk*

 

The nature of our investments and the instruments used to raise capitalfor their acquisition expose us to income and expense volatility due to fluctuationsin market interest rates.  Marketinterest rates are highly sensitive to many factors, including governmentalpolicies, domestic and international economic and political considerations andother factors beyond our control.

 

The revenue bonds generally bear interest at fixed rates, or payinterest according to the cash flows of the Underlying Properties, which do notfluctuate with changes in market interest rates.  In contrast, payments required under our floating ratsecuritization programs vary based on market interest rates based on TBMA indexand are re-set weekly.

 

In addition, we have floating rate debt related to our acquisitionfinancing of PWF and Related and our warehouse facilities.  PWF has loans receivable and short termborrowings related to its mortgage origination operations which are notexpected to subject PWF to significant interest rate risk.  PWF typically provides mortgages toborrowers (mortgages receivable) by borrowing from third parties (short-term borrowings).  Since PWF’s mortgages receivable aretypically subject to a take-out commitment by Fannie Mae, Freddie Mac or FHA,the related borrowings to finance such mortgages are typically short-term.  The interest income or expense that representsthe difference between the interest charged to borrowers and the interest paidto PWF’s lender during the warehousing period will be earned by PWF.

 

Other long-term sources of capital, such as Equity Issuer’s variousseries of Cumulative Preferred Shares, carry a fixed dividend rate and as such,are not impacted by changes in market interest rates.

 

A rising interest rate environment could reduce the demand formulti-family tax-exempt and taxable financing, which could limit our ability toinvest in revenue bonds or to structure transactions.  Conversely, falling interest rates may prompt historical rentersto become homebuyers, in turn potentially reducing the demand for multi-familyhousing.

 

An effective interest rate management strategy can be complex and nostrategy can insulate us from all potential risks associated with interest ratechanges.  Various financial vehiclesexist which would allow us to mitigate the impact of interest rate fluctuationson our cash flows and earnings. Beginning in 2001, based upon management’s analysis of the interest rateenvironment and the costs and risks of such strategies, we entered intointerest rate swaps in order to hedge a portion of the risk of rising interestrates and the impact of such a rise on our MBIA and P-Floats programs.

 

On January 5, 2001, we entered into a five-year interest swap thatfixes BMA index to 3.98% on a notional amount of $50 million.  On February 5, 2001, we entered into athree-year interest swap that fixes the BMA index to 3.64% on a notional amountof an additional $100 million.  We havedesignated both of these swaps on hedging derivatives and FAS No. 133.

 

During January 2002, concurrent with our acquisition of PWF andpursuant to the financing put in place to complete the acquisition, we enteredinto an interest rate cap agreement with Fleet Bank, with a cap of 8% on anotional amount of $30 million. Although this transaction is designed to mitigate our exposure to risinginterest rates, we have not designated this interest rate cap as a hedgingderivative under FAS 133.

 

On December 17, 2003, we entered into a three-year interest rate swapthat fixes TBMA at 2.56%, beginning January 2005, on a notional amount of $100million.  On December 30, 2003, weentered into a three-year interest rate swap that fixes TBMA at 2.00%, 2.78%and 3.27% for the twelve months beginning January 3, 2005, January 3, 2006 andJanuary 3, 2007, respectively, on a notional amount of $50 million.

 

Interest rate swap agreements are subject to risk of early terminationby us or the counterparty, possibly at times unfavorable to us and, dependingon market conditions at the time, may result in the recognition of asignificant gain or loss from changes in the market value of the hedginginstrument.  There can be no assurancethat we will be able to acquire hedging instruments at favorable prices, or atall, when the existing arrangements expire or are terminated which would thenfully expose us to interest rate risk to the extent of the balance of debtsubject to such hedges.  In addition,there is no assurance that the counterparty to these hedges will have thecapacity to pay or perform under the stated terms of the interest rate swapagreement; however, we seek to enter into such agreements with reputable andinvestment grade rated counterparties.

 

We adopted statement of Financial Accounting Standards No. 133, asamended and interpreted, on January 1, 2001. Accordingly, we have documented and established our policy for riskmanagement and the related objectives and strategies for the use of derivativeinstruments to potentially mitigate such risks.  Currently, our strategy is intended to reduce interest rate riskthrough the use of interest rate swaps. At inception, we designated these interest rate swaps as cash flowhedges on the variable interest payments on its floating rate financing.  Accordingly, the interest rate swaps arerecorded at their fair market values each accounting period, with changes inmarket values being recorded in accumulated other comprehensive income to theextent that the hedge is effective in achieving offsetting cash flows.  We assess, both at the inception of thehedge and on an ongoing basis, whether the swap agreements are highly effectivein offsetting changes in the cash flows of the hedged financing.  Any ineffectiveness in the hedgingrelationship is recorded in earnings. There was no ineffectiveness in the hedging relationship during 2001,2002 or 2003, and we expect that these hedging relationships will be highlyeffective in achieving offsetting changes in cash flow throughout theirterms.  Net amounts payable orreceivable under the swap agreements are recorded as adjustments to interest expense.

 

At December 31, 2003, the combined fair market value of the twointerest rate swaps we entered in 2001 was a liability of approximately $2.4million, included in accounts payable, accrued expenses and other liabilitieson the consolidated balance sheets. Interest paid or payable under the terms of the swaps of approximately $4.1million and $3.5 million, is included in interest expense for the years endedDecember 31, 2003 and 2002, respectively. The combined fair market value of the two new interest rate swaps weentered into in 2003 was an asset of approximately $1.78 million, included inthe other assets on the consolidated balance sheets.

 

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At December 31, 2003, the interest rate cap was recorded as an assetwith a fair market value of $34,004 included in other assets on theconsolidated balance sheets.  Because wehave not designated this derivative as a hedge, the change in fair market valueflows through the consolidated statements of income, where it is included ininterest income.

 

With respect to the portion of our floating rate financing programswhich are not hedged, a change in TBMA rate would result in increased ordecreased payments under these financing programs, without a correspondingchange in cash flows from the investments in revenue bonds.  For example, based on the un-hedged $803million ($953 million outstanding under these financing programs at December31, 2003, less the $150 million notional amount subsequently hedged andassuming a perfect hedge correlation), we estimate that an increase of 1.0% inTBMA rate would decrease our annual net income by approximately $8.0million.  Conversely, a decrease inmarket interest rates would generally benefit us in the same amount describedabove, as a result of decreased allocations to the minority interest and interestexpense without corresponding decreases in interest received on revenue bonds.

 

Changes in market interest rates would also impact the estimated fairvalue of our portfolio of revenue bonds. We estimate the fair value for each revenue bond as the present value ofits expected cash flows, using a discount rate for comparable tax-exempt investments.  Therefore, as market interest rates fortax-exempt investments increase, the estimated fair value of our revenue bondswill generally decline, and a decline in interest rates would be expected toresult in an increase in their estimated fair values.  For example, we estimate, using the same methodology used toestimate the portfolio fair market value under FAS 115, that a 1% increase inmarket rates for tax-exempt investments would decrease the estimated fair valueof our portfolio of revenue bonds from its December 31, 2003 value of approximately$1,871,009,000 to approximately $1,708,894,753.  A 1% decline in interest rates would increase the value of theDecember 31, 2003 portfolio to approximately $1,955,110,897.  Changes in the estimated fair value of therevenue bonds do not impact our reported net income, earnings per share,distributions or cash flows, but are reported as components of otheraccumulated comprehensive income and affect reported shareholders’ equity.

 

Changes in interest rates would also affect the PWF acquisition loanwith Fleet, the PWF warehouse lines and the Related acquisition facility.  A 1% change in the underlying interest rateswould affect our annual net income by approximately $931,000 (based on theoutstanding balances at December 31, 2003 of approximately $25.2 million forthe PWF acquisition loan, $21.9 million for the PWF warehouse line and $24.5million for the Related acquisition facility).

 

The assumptions related to the foregoing discussion of market riskinvolve judgments involving future economic market conditions, future corporatedecisions and other interrelating factors, many of which are beyond our controland all of which are difficult or impossible to predict with accuracy.  Although we believe that the assumptionsunderlying the forward-looking information are reasonable, any of the assumptionscould be inaccurate and, therefore, there can be no assurance that theforward-looking information included herein will prove to be accurate.  Due to the significant uncertaintiesinherent in forward-looking information, the inclusion of such informationshould not be regarded as our representation that our objectives and planswould be achieved.

 

*Liquidity Risk*

 

Our investments generally lack a regular trading market, particularlyduring turbulent market conditions or if any of our tax-exempt revenue bondsbecome taxable or are in default.  Thereis no limitation as to the percentage of investments that may be illiquid andwe do not expect to invest a substantial portion of its assets in liquidinvestments.  There is a risk involvedin investing in illiquid investments, particularly in the event that we needadditional cash.  In a situationrequiring additional cash, we could be forced to liquidate some of itsinvestments on unfavorable terms that could substantially impact ourconsolidated balance sheet and reduce the amount of distributions available andpayments made in respect of our shares.

 

*Risk Associated withSecuritization*

 

Through securitizations, we seek to enhance our overall return on ourinvestments and to generate proceeds that, along with equity offering proceeds,facilitate the acquisition of additional investments.  In our debt securitizations, an investment bank and/or creditenhancer generally provides liquidity to the underlying trust and creditenhancement to the bonds, which enables the senior interests to be sold tocertain accredited third party investors seeking investments rated “AA” or better.  The liquidity facilities are generally forone-year terms and are renewable annually. To the extent that the credit enhancer is downgraded below “AA”, eitheran alternative credit enhancement provider would be substituted to reinstatethe desired investment rating or the senior interests would be marketed toother accredited investors.  In eithercase, it is anticipated that the return on the residual interests woulddecrease, which would negatively impact our income.  If we are unable to renew the liquidity or credit enhancementfacilities, we would be forced to find alternative liquidity or creditenhancement facilities, repurchase the underlying bonds or liquidate the underlyingbonds and its investment in the residual interests.  If we are forced to liquidate our investment, we would recognizegains or losses on the liquidation, which may be significant depending onmarket conditions.  As of December 31,2003, $483.5 million of senior interest is credit enhanced by an eight-yearterm facility through MBIA.  Of this$438.5 million, $383.5 million is subject to annual “rollover” renewal forliquidity.  Merrill Lynch providescredit enhancement and liquidity for an additional $316.5 million of seniorinterest.  We do not maintain an ongoingcommitment with Merrill Lynch and the senior interest is subject to a weeklyre-set schedule.  We continue to reviewalternatives that would reduce and diversify risks associated withsecuritization.

 

43

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Item 8.    Financial Statements and Supplementary Data.

 
| (a) 1. | Financial Statements                                                                                                  |   |
|--------|-----------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                  |   |
|   | Independent Auditors’ Report                                                                                     |   |
|   |                                                                                                                  |   |
|   | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                          |   |
|   |                                                                                                                  |   |
|   | Consolidated Statements of Income for the  years ended December 31, 2003, 2002 and 2001                               |   |
|   |                                                                                                                  |   |
|   | Consolidated Statements of Changes in  Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001 |   |
|   |                                                                                                                  |   |
|   | Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                           |   |
|   |                                                                                                                  |   |
|   | Notes to Consolidated Financial Statements                                                                            |   |

 

44

----

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Trustees

And Shareholders of

CharterMac

New York, New York

 

We have audited the accompanying consolidated balance sheets ofCharterMac and subsidiaries (the “Company”) as of December 31, 2003 and 2002,and the related consolidated statements of income, changes in shareholders’equity and cash flows for each of the three years in the period ended December31, 2003.  Our audits also included thefinancial statement schedule listed in Item 15(a)2.  These financial statements and the financial statement scheduleare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements and the financial statement schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of CharterMac and subsidiariesas of December 31, 2003 and 2002, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2003 inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

 

DELOITTE & TOUCHE LLP

New York, New York

 

March 15, 2004

 

45

----

 

CHARTERMAC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 
|                                                                                                                                                                                                                        |   | **December  31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                                                                                                                                                        |   | **2003**          |      | **2002** |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| ASSETS                                                                                                                                                                                                                      |   |              |      |   |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Revenue bonds-at fair value                                                                                                                                                                                                 |   | $                 | 1,871,009 |   | $ | 1,579,590 |   |
| Mortgage servicing rights                                                                                                                                                                                                   |   | 33,351            |      | 35,595 |   |
| Cash and cash equivalents                                                                                                                                                                                                   |   | 58,257            |      | 13,699 |   |
| Cash and cash equivalents-restricted                                                                                                                                                                                        |   | 26,636            |      | 46,785 |   |
| Investments in partnerships                                                                                                                                                                                                 |   | 26,638            |      | — |   |
| Deferred costs - net of amortization of $13,463 and $8,451                                                                                                                                                                  |   | 58,408            |      | 48,693 |   |
| Goodwill                                                                                                                                                                                                                    |   | 214,744           |      | 4,793 |   |
| Other intangible assets - net of amortization of $4,163 and $1,750                                                                                                                                                          |   | 194,203           |      | 11,316 |   |
| Other assets                                                                                                                                                                                                                |   | 100,027           |      | 112,397 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Total assets                                                                                                                                                                                                                |   | $                 | 2,583,273 |   | $ | 1,852,868 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                  |   |              |      |   |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Liabilities:                                                                                                                                                                                                                |   |              |      |   |   |
| Financing arrangements                                                                                                                                                                                                      |   | $                 | 900,008   |   | $ | 671,659 |   |
| Preferred shares of subsidiary (subject to mandatory repurchase)                                                                                                                                                            |   | 273,500           |      | — |   |
| Notes payable                                                                                                                                                                                                               |   | 153,350           |      | 68,556 |   |
| Accounts payable, accrued expenses and other liabilities                                                                                                                                                                    |   | 34,886            |      | 42,008 |   |
| Deferred income                                                                                                                                                                                                             |   | 23,691            |      | 8,998 |   |
| Deferred tax liability                                                                                                                                                                                                      |   | 60,370            |      | 10,790 |   |
| Distributions payable                                                                                                                                                                                                       |   | 27,612            |      | 19,020 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Total liabilities                                                                                                                                                                                                           |   | 1,473,417         |      | 821,031 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Preferred shares of subsidiary (subject to mandatory repurchase)                                                                                                                                                            |   | —            |      | 273,500 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Minority interest in consolidated subsidiary – SCUs                                                                                                                                                                    |   | 288,006           |      | — |   |
| Minority interest in consolidated subsidiary - PWF                                                                                                                                                                          |   | 4,193             |      | 4,822 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Commitments and contingencies                                                                                                                                                                                               |   |              |      |   |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Shareholders’ equity                                                                                                                                                                                                   |   |              |      |   |   |
| Beneficial owners equity - convertible CRA share-holders (8,179,761  and 3,835,002 shares issued and                                                                                                                        |   |              |      |   |   |
| outstanding in 2003 and 2002, respectively)                                                                                                                                                                                 |   | 160,618           |      | 58,174 |   |
| Beneficial owners equity - manager                                                                                                                                                                                          |   | —            |      | 1,126 |   |
| Beneficial owners equity - special preferred voting shares  (16,164,905 shares authorized and issued at par $.01)                                                                                                           |   | 161               |      | — |   |
| Beneficial owners equity - other common shareholders (100,000,000  shares authorized; 42,726,232 issued and 42,703,600 outstanding and 41,168,618  shares issued and 41,160,218 outstanding in 2003 and 2002, respectively) |   | 622,771           |      | 604,496 |   |
| Deferred compensation                                                                                                                                                                                                       |   | (19,385           | )         | — |   |
| Treasury shares of beneficial interest (22,632 and 8,400 shares in  2003 and 2002, respectively)                                                                                                                            |   | (378              | )         | (103 | ) |
| Accumulated other comprehensive income                                                                                                                                                                                      |   | 53,870            |      | 89,822 |   |
| Total shareholders’ equity                                                                                                                                                                                             |   | 817,657           |      | 753,515 |   |
|                                                                                                                                                                                                                        |   |              |      |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                             |   | $                 | 2,583,273 |   | $ | 1,852,868 |   |

 

 See accompanying notes toconsolidated financial statements

 

46

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CHARTERMAC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

 
|                                                                                                    |   | **Years  Ended December 31,** |    |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                    |   | **2003**                      |    | **2002** |   | **2001** |   |
| Revenues:                                                                                               |   |                          |    |   |   |   |   |
| Revenue bonds interest income                                                                           |   | $                             | 113,655 |   | $ | 92,681 |   | $ | 71,500 |   |
| Fee income:                                                                                             |   |                          |    |   |   |   |   |
| Mortgage banking fees                                                                                   |   | 13,712                        |    | 13,681 |   | — |   |
| Fund management                                                                                         |   | 12,643                        |    | — |   | — |   |
| Other income                                                                                            |   | 12,200                        |    | 10,051 |   | 3,125 |   |
| Total revenues                                                                                          |   | 152,210                       |    | 116,413 |   | 74,625 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Expenses:                                                                                               |   |                          |    |   |   |   |   |
| Interest expense                                                                                        |   | 19,859                        |    | 15,823 |   | 13,641 |   |
| Interest expense-distributions to preferred shareholders of  subsidiary                                 |   | 9,448                         |    | — |   | — |   |
| Recurring fees - securitizations                                                                        |   | 4,028                         |    | 3,181 |   | 2,491 |   |
| General and administrative                                                                              |   | 40,945                        |    | 24,506 |   | 5,209 |   |
| Depreciation and amortization                                                                           |   | 11,926                        |    | 8,891 |   | 865 |   |
| Loss on impairment of assets                                                                            |   | 1,759                         |    | 920 |   | 400 |   |
| Total expenses                                                                                          |   | 87,965                        |    | 53,321 |   | 22,606 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Income before gain (loss) on repayment of revenue bonds, sale of  loans and equity in earnings of ARCap |   | 64,245                        |    | 63,092 |   | 52,019 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Equity in earnings of ARCap                                                                             |   | 2,219                         |    | 2,219 |   | 456 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Gain on sale of loans                                                                                   |   | 5,532                         |    | 10,683 |   | — |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Gain (loss) on repayment of revenue bonds                                                               |   | 1,951                         |    | 3,885 |   | (912 | ) |
|                                                                                                    |   |                          |    |   |   |   |   |
| Income before allocation to preferred shareholders of subsidiary and  minority interest                 |   | 73,947                        |    | 79,879 |   | 51,563 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Income allocated to preferred shareholders of subsidiary                                                |   | (9,449                        | )       | (17,266 | ) | (12,578 | ) |
|                                                                                                    |   |                          |    |   |   |   |   |
| Income allocated to SCUs                                                                                |   | (4,038                        | )       | — |   | — |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| (Income) loss allocated to minority interest                                                            |   | 54                            |    | (496 | ) | — |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Income before benefit (provision) for income taxes                                                      |   | 60,514                        |    | 62,117 |   | 38,985 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Benefit (provision) for income taxes                                                                    |   | 6,072                         |    | (1,284 | ) | — |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Net income                                                                                              |   | $                             | 66,586  |   | $ | 60,833 |   | $ | 38,985 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Allocation of net income to:                                                                            |   |                          |    |   |   |   |   |
| Special distribution to Manager                                                                         |   | $                             | 5,332   |   | $ | 4,872 |   | $ | 3,621 |   |
| Manager                                                                                                 |   | $                             | 6       |   | $ | 56 |   | $ | 354 |   |
| Common shareholders                                                                                     |   | $                             | 54,608  |   | $ | 52,516 |   | $ | 32,558 |   |
| Convertible CRA shareholders                                                                            |   | 6,640                         |    | 3,389 |   | 2,452 |   |
| Total for shareholders                                                                                  |   | $                             | 61,248  |   | $ | 55,905 |   | $ | 35,010 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Net income per share                                                                                    |   |                          |    |   |   |   |   |
| Basic                                                                                                   |   | $                             | 1.31    |   | $ | 1.31 |   | $ | 1.14 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Diluted                                                                                                 |   | $                             | 1.31    |   | $ | 1.31 |   | $ | 1.14 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Weighted average shares outstanding:                                                                    |   |                          |    |   |   |   |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Basic                                                                                                   |   | 46,653,270                    |    | 42,697,195 |   | 30,782,161 |   |
|                                                                                                    |   |                          |    |   |   |   |   |
| Diluted                                                                                                 |   | 46,735,232                    |    | 42,768,139 |   | 30,837,340 |   |

 

See accompanying notes to consolidated financial statements

 

47

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CHARTERMAC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in thousands)

 
|                                                                  |   | **Beneficial  Owners’ Equity-  Convertible  CRA Shareholders** |   | **Beneficial  Owner’s Equity-  Manager** |   | **Beneficial  Owner’s Equity-  Other Shareholders** |   | **Beneficial  Owners’ Equity-  Special Preferred  Voting Shares** |    | **Treasury  Shares of  Beneficial  Interest** |   | **Deferred  Compensation** |   | **Comprehensive  Income** |    | **Accumulated  Other  Comprehensive  (Loss)** |   | **Total** |   |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------------------|--------|------------------------------------------------------------------------|---------|-----------------------------------------------|--------|----------------------------|--------|---------------------------|---------|-----------------------------------------------|--------|-----------|--------|
|                                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Balance at January 1, 2001                                            |   | $                                                                   | 34,397 |                                          | $      | 716                                                      |   | $                                                                      | 344,871 |                                          | $      | —                     |   | $                         | (103    | )                                             | $      | —    |   |   |   | $ | (22,867 | ) | $ | 357,014 |   |
|                                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Comprehensive income:                                                 |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Net income                                                            |   | 2,452                                                               |   | 3,975                                         |   | 32,558                                                   |   |                                                                   |    |                                          |   |                       |   | $                         | 38,985  |                                          |   |      | 38,985 |   |
| Other comprehensive (gain) loss:                                      |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Net unrealized loss interest rate swaps                               |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (2,958                    | )       |                                          |   |      |   |
| Net unrealized loss on Revenue Bonds:                                 |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Net unrealized holding loss arising during the period                 |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | 26,225                    |    |                                          |   |      |   |
| Add: Reclassification adjustment for net gain included in net income  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (3,097                    | )       |                                          |   |      |   |
| Total other comprehensive gain                                        |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | $                         | 20,170  |                                          | 20,170 |      | 20,170 |   |
| Comprehensive income                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | $                         | 59,155  |                                          |   |      |   |   |
| Retirement of convertible CRA shares                                  |   | (8,986                                                              | )      |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | (8,986    | )      |
| Issuance of Common shares                                             |   |                                                                |   |                                          |   | 168,294                                                  |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | 168,294   |   |
| Distributions                                                         |   | (2,341                                                              | )      | (3,621                                        | )      | (34,267                                                  | )      |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | (40,229   | )      |
|                                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Balance at December 31, 2001                                          |   | $                                                                   | 25,522 |                                          | $      | 1,070                                                    |   | $                                                                      | 511,456 |                                          |   |                       | $      | (103                      | )       |                                          |   |      |   | $ | (2,697 | ) | $ | 535,248 |   |
|                                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Comprehensive income:                                                 |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Net income                                                            |   | 3,389                                                               |   | 4,928                                         |   | 52,516                                                   |   |                                                                   |    |                                          |   |                       |   | $                         | 60,833  |                                          |   |      | 60,833 |   |
| Other comprehensive (gain) loss:                                      |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Net unrealized loss on interest rate derivatives                      |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (2,607                    | )       |                                          |   |      |   |
| Net unrealized gain on Revenue Bonds:                                 |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   |      |   |
| Unrealized holding gain arising during the period                     |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | 99,011                    |    |                                          |   |      |   |
| Less: Reclassification adjustment for net gain included in net income |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (3,885                    | )       |                                          |   |      |   |
| Total other comprehensive gain                                        |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | $                         | 92,519  |                                          | 92,519 |      | 92,519 |   |
| Comprehensive income                                                  |   |                                                                |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | $                         | 153,352 |                                          |   |      |   |   |
| Issuance of Convertible CRA shares                                    |   | 32,523                                                              |   |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | 32,523    |   |
| Issuance of Common shares                                             |   | —                                                              |   | —                                        |   | 92,383                                                   |   |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | 92,383    |   |
| Distributions                                                         |   | (3,260                                                              | )      | (4,872                                        | )      | (51,859                                                  | )      |                                                                   |    |                                          |   |                       |   |                      |    |                                          |   | (59,991   | )      |
|                                                                       |        |                                                                     |        |                                               |        |                                                          |        |                                                                        |         |                                               |        |                            |        |                           |         |                                               |        |           |        |  |  |  |  |  |  |  |  |  |

 

48

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|                                                                  |   | **Beneficial  Owners’ Equity-  Convertible  CRA Shareholders** |    | **Beneficial  Owner’s Equity-  Manager** |   | **Beneficial  Owner’s Equity-  Other Shareholders** |   | **Beneficial  Owners’ Equity-  Special Preferred  Voting Shares** |    | **Treasury  Shares of  Beneficial  Interest** |   | **Deferred  Compensation** |   | **Comprehensive  Income** |   | **Accumulated  Other  Comprehensive  (Loss)** |   | **Total** |   |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------------------|---------|-----------------------------------------------|--------|----------------------------------------------------------|--------|------------------------------------------------------------------------|---------|-----------------------------------------------|--------|----------------------------|--------|---------------------------|--------|-----------------------------------------------|--------|-----------|--------|
|                                                                  |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Balance at December 31, 2002                                          |   | $                                                                   | 58,174  |                                          | $      | 1,126                                                    |   | $                                                                      | 604,496 |                                          | $      | —                     |   | $                         | (103   | )                                             |   |      |   |   | $ | 89,822 |   | $ | 753,515 |   |
|                                                                  |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Comprehensive income:                                                 |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Net income                                                            |   | 6,640                                                               |    | 5,338                                         |   | 54,608                                                   |   |                                                                   |    |                                          |   |                       |   | 66,586                    |   |                                          |   | 66,586    |   |
| Other comprehensive gain (loss):                                      |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Net unrealized gain on interest rate derivatives                      |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | 2,607                     |   |                                          |   |      |   |
| Net unrealized loss on revenue bonds:                                 |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Unrealized holding loss arising during the period                     |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (36,608                   | )      |                                          |   |      |   |
| Less: Reclassification adjustment for net gain included in net income |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (1,951                    | )      |                                          |   |      |   |
| Other comprehensive loss:                                             |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | (35,952                   | )      | (35,952                                       | )      | (35,952   | )      |
| Comprehensive income                                                  |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   | $                         | 30,634 |                                          |   |      |   |   |
| Deferred Compensation                                                 |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   | (19,385                    | )      |                      |   |                                          |   | (19,385   | )      |
| Decrease in manager interest                                          |   |                                                                |    | (1,132                                        | )      |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   | (1,132    | )      |
| Issuance of special preferred voting shares                           |   |                                                                |    |                                          |   |                                                     |   | 161                                                                    |    |                                          |   |                       |   |                      |   |                                          |   | 161       |   |
| Issuance of convertible CRA shares                                    |   | 102,532                                                             |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   | 102,532   |   |
| Issuance of common shares                                             |   |                                                                |    |                                          |   | 21,282                                                   |   |                                                                   |    | (275                                          | )      |                       |   |                      |   |                                          |   | 21,007    |   |
| Distributions                                                         |   | (6,728                                                              | )       | (5,332                                        | )      | (57,615                                                  | )      |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   | (69,675   | )      |
|                                                                  |   |                                                                |    |                                          |   |                                                     |   |                                                                   |    |                                          |   |                       |   |                      |   |                                          |   |      |   |
| Balance at December 31, 2003                                          |   | $                                                                   | 160,618 |                                          | $      | —                                                   |   | $                                                                      | 622,771 |                                          | $      | 161                        |   | $                         | (378   | )                                             | $      | (19,385   | )      |   |   | $ | 53,870 |   | $ | 817,657 |   |
|                                                                       |        |                                                                     |         |                                               |        |                                                          |        |                                                                        |         |                                               |        |                            |        |                           |        |                                               |        |           |        |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements

 

49

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CHARTERMAC AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands)

 
|                                                                               |   | **Years  Ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                               |   |                          |   |   |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                          |   |   |   |   |   |
| Net income                                                                         |   | $                             | 66,586 |   | $ | 60,833 |   | $ | 38,985 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                          |   |   |   |   |   |
| (Gain) loss on repayment of revenue bonds                                          |   | (1,951                        | )      | (3,885 | ) | 912 |   |
| Loss on impairment of revenue bonds                                                |   | 1,759                         |   | 920 |   | 400 |   |
| Depreciation and amortization                                                      |   | 13,318                        |   | 13,839 |   | 4,924 |   |
| Income allocated to preferred shareholders of subsidiary                           |   | 18,897                        |   | 17,266 |   | 12,578 |   |
| Equity in earnings of ARCap, in excess of distributions received                   |   | —                        |   | (104 | ) | (456 | ) |
| Increase in mortgage servicing rights                                              |   | (4,015                        | )      | (9,500 | ) | (35,646 | ) |
| Increase in provision for loss under FNMA DUS product line                         |   | —                        |   | — |   | 1,937 |   |
| Income allocated to minority interest - SCUs                                       |   | 4,038                         |   | — |   | — |   |
| Repayment of project advances                                                      |   | 8,786                         |   | — |   | — |   |
| Income (loss) allocated to minority interest                                       |   | 2,250                         |   | 496 |   | 3,652 |   |
| Issuance of shares of subsidiary - compensation expenses                           |   | —                        |   | 674 |   | — |   |
| Changes in operating assets and liabilities:                                       |   |                          |   |   |   |   |   |
| Accounts and interest receivable                                                   |   | (1,864                        | )      | (2,562 | ) | (1,255 | ) |
| Other assets                                                                       |   | (8,682                        | )      | (2,513 | ) | (20,443 | ) |
| Increase in deferred Income                                                        |   | 13,913                        |   | 3,511 |   | — |   |
| Accounts payable, accrued expenses and other liabilities                           |   | 14,593                        |   | 122 |   | 29,594 |   |
| Deferred tax liability                                                             |   | (12,326                       | )      | 539 |   | 10,251 |   |
| Due to/from affiliates                                                             |   | (4,223                        | )      | — |   | — |   |
| Derivitive assets & liabilities                                                |   | (2,324                        | )      | — |   | — |   |
| Net cash provided by operating activities                                          |   | 108,289                       |   | 79,636 |   | 45,433 |   |
|                                                                               |   |                          |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                          |   |   |   |   |   |
| Proceeds from revenue bonds and notes                                              |   | 113,242                       |   | 122,738 |   | 28,605 |   |
| Revenue bond acquisitions                                                          |   | (444,185                      | )      | (467,762 | ) | (305,062 | ) |
| Investment in preferred shares of ARCap                                            |   | —                        |   | — |   | (18,494 | ) |
| Increase in temporary investments                                                  |   | (10,205                       | )      | (5,400 | ) | — |   |
| (Decrease) increase in promissory notes and notes receivable                       |   | 19,015                        |   | (17,378 | ) | (26,785 | ) |
| Increase in goodwill                                                               |   | —                        |   | (3,590 | ) | (9,842 | ) |
| Acquisition of Related Capital Company                                             |   | (56,261                       | )      | — |   | — |   |
| Decrease (increase) in cash and cash equivalents - restricted                      |   | 20,149                        |   | (42,115 | ) | (4,670 | ) |
| Loans made to properties                                                           |   | (1,314                        | )      | — |   | (11,122 | ) |
| Net cash used in investing activities                                              |   | (359,559                      | )      | (413,507 | ) | (347,370 | ) |
|                                                                                    |        |                               |        |  |  |  |  |  |  |  |

 

50

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|                                                               |   | **Years  Ended December 31,** |   |
|--------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                               |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                               |   |                          |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                              |   |                          |   |   |   |   |   |
|                                                               |   |                          |   |   |   |   |   |
| Distributions to shareholders                                      |   | (69,132                       | )      | (56,441 | ) | (35,790 | ) |
| Distributions paid to preferred shareholders of subsidiary         |   | (18,897                       | )      | (16,234 | ) | (11,847 | ) |
| Proceeds from financing arrangements                               |   | 581,415                       |   | 208,224 |   | 309,310 |   |
| Principal repayments of financing arrangements                     |   | (297,224                      | )      | (67,313 | ) | (96,826 | ) |
| Issuance of  common and  convertible CRA shares of subsidiary |   | 104,315                       |   | 124,876 |   | 168,264 |   |
| Retirement of convertible CRA shares                               |   | —                        |   | — |   | (8,987 | ) |
| Increase in treasury stock                                         |   | —                        |   | — |   | — |   |
| Increase in preferred shares of subsidiaries                       |   | —                        |   | 52,932 |   | 47,614 |   |
| Increase in other deferred costs                                   |   | (4,649                        | )      | (3,838 | ) | (553 | ) |
|                                                               |   |                          |   |   |   |   |   |
| Net cash provided by financing activities                          |   | 295,828                       |   | 242,206 |   | 371,185 |   |
|                                                               |   |                          |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents               |   | 44,558                        |   | (91,665 | ) | 69,248 |   |
|                                                               |   |                          |   |   |   |   |   |
| Cash and cash equivalents at the beginning of the period           |   | 13,699                        |   | 105,364 |   | 36,116 |   |
|                                                               |   |                          |   |   |   |   |   |
| Cash and cash equivalents at the end of the period                 |   | $                             | 58,257 |   | $ | 13,699 |   | $ | 105,364 |   |
|                                                               |   |                          |   |   |   |   |   |
| SUPPLEMENTAL INFORMATION:                                          |   |                          |   |   |   |   |   |
| Interest paid                                                      |   | $                             | 19,412 |   | $ | 12,703 |   | $ | 4,493 |   |
|                                                               |   |                          |   |   |   |   |   |
| Reclassification of goodwill to intangible assets:                 |   |                          |   |   |   |   |   |
|                                                               |   |                          |   |   |   |   |   |
| Decrease in goodwill                                               |   |                          |   | (8,639 | ) |   |   |
| Increase in Intangible assets                                      |   |                          |   | 8,639 |   |   |   |
|                                                               |   |                          |   |   |   |   |   |
| Issuance of restricted shares of stock                             |   | 19,385                        |   |   |   |   |   |
|                                                                    |        |                               |        |  |  |  |  |  |  |  |  |  |

 

51

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|                                                                  |   | **Years  Ended December 31,** |    |
|-----------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                  |   | **2003**                      |    | **2002** |   | **2001** |   |
|                                                                  |   |                          |    |   |   |   |   |
| Supplemental disclosure of noncash  activities:                       |   |                          |    |   |   |   |   |
|                                                                  |   |                          |    |   |   |   |   |
| Acquisition of PW Funding Inc.                                        |   |                          |    |   |   |   |   |
|                                                                  |   |                          |    |   |   |   |   |
| Increase in guaranteed investment contracts                           |   |                          |    |   |   | $ | (18,406 | ) |
| Increase in mortgage servicing rights                                 |   |                          |    |   |   | (35,646 | ) |
| Increase in promissory notes receivable                               |   |                          |    |   |   | (29,325 | ) |
| Increase in other assets                                              |   |                          |    |   |   | (2,500 | ) |
| Increase in notes payable                                             |   |                          |    |   |   | 29,325 |   |
| Increase in due to FNMA                                               |   |                          |    |   |   | 18,406 |   |
| Increase in accounts payable, accrued  expenses and other liabilities |   |                          |    |   |   | 9,807 |   |
| Increase in reserves for possible DUS  losses                         |   |                          |    |   |   | 1,938 |   |
| Increase in minority interest in subsidiary                           |   |                          |    |   |   | 3,652 |   |
| Increase in deferred tax liability                                    |   |                          |    |   |   | 10,251 |   |
| Increase in goodwill                                                  |   |                          |    |   |   | (9,842 | ) |
| Acquisition of PWF, net of cash acquired                              |   |                          |    |   |   | $ | (22,340 | ) |
|                                                                  |   |                          |    |   |   |   |   |
| Acquisition of Related                                                |   |                          |    |   |   |   |   |
|                                                                  |   |                          |    |   |   |   |   |
| Increase in investment in and advance to partnerships                 |   | $                             | (35,424 | ) |   |   |   |   |
| Increase in intangible assets                                         |   | (185,300                      | )       |   |   |   |   |
| Increase in goodwill                                                  |   | (210,294                      | )       |   |   |   |   |
| Increase in other assets and liabilities                              |   | (1,272                        | )       |   |   |   |   |
| Issuance of special common units concluded                            |   | 288,006                       |    |   |   |   |   |
| Increase in notes payable                                             |   | 28,952                        |    |   |   |   |   |
| Increase in deferred tax liability                                    |   | 59,071                        |    |   |   |   |   |
| Acquisition of Related, net of cash acquired                          |   | $                             | (56,261 | ) |   |   |   |   |
|                                                                       |        |                               |         |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to consolidated financial statements

 

52

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CHARTERMAC AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS

 

NOTE1 - Organization and Significant Accounting Policies

 

CharterMac,which we refer to herein as “we”, “us”, “our”, and “our Company”, is a Delawarestatutory trust, which commenced operations in October 1997.  We and our subsidiaries are in the business of (i)portfolio investing, which includes acquiring and holding (directly andindirectly through our subsidiaries) federally tax-exempt multi-family housingrevenue bonds issued by various state or local governments, agencies orauthorities and other investments designed to produce federally tax-exemptincome;  (ii) mortgage banking, whichincludes originating and servicing mortgage loans on behalf of third partiessuch as the Federal National Mortgage Association (“Fannie Mae”), the FederalHome Loan Mortgage Corporation (“Freddie Mac”) and the Federal Housing Authority(“FHA”); (iii) credit enhancement, which includes guaranteeing tax creditequity returns and mortgage loans; and (iv) fund management, which includessponsoring investment programs for a fee.

 

Weand a majority of our subsidiaries, are each either treated as partnerships ordisregarded for federal income tax purposes. Therefore, we pass through to our shareholders, in the form ofdistributions, income (including federally tax-exempt income) derived from ourinvestments without paying federal income tax on that income.  We intend to operate so that a substantialportion of our ordinary income will be excluded from gross income for federalincome tax purposes.  Other income, suchas capital gains and taxable interest income, as well as any dividend incomefrom CharterMac Corporation (“CM Corp.”) our wholly owned subsidiary, generallywill be subject to tax.

 

In1999, we formed CharterMac Equity Issuer Trust, a wholly owned subsidiary,(collectively, with its subsidiaries, “Equity Issuer”) which holds asubstantial portion of our revenue bonds. From time to time, Equity Issuer may issue Series A and Series BCumulative Preferred Shares (cumulatively, “Preferred Shares”) to institutionalinvestors.  The Preferred Shares have asenior claim to the tax-exempt income derived from the investments owned byEquity Issuer.  Any income in EquityIssuer after the payment of the cumulative distributions on its PreferredShares, and after the fulfillment of certain covenants, may then be allocatedto CharterMac.  The assets of EquityIssuer, while included in our consolidated financial statements, are legallyowned by Equity Issuer and are not available to any creditors of our Companyoutside of Equity Issuer.

 

InJuly 2001, we formed CM Corp. as a wholly owned, consolidated taxablesubsidiary to help us more efficiently manage our taxable businesses.  CM Corp. and its subsidiaries conduct mostof our taxable business, including many of the fee-generating activities inwhich we may engage.  CM Corp. isolatesa substantial portion of the taxable income and expenses of our Company.  Unlike CharterMac, CM Corp. is a corporationwhich is subject to both Federal and State income tax.

 

InDecember 2001, our Company, through CM Corp. acquired 80% of the outstandingcapital stock of PW Funding, Inc.  andits subsidiaries (“PWF”).  Under theacquisition agreement, the stockholders of PWF were granted the right to puttheir remaining 20% stock interest to CM Corp. after an initial period of 24 to36 months.  The agreement also grants CMCorp. the right to call the remaining 20% stock interest of PWF from PWF’sstockholders after the same initial period of 24 to 36 months.  Subsequent to the initial purchase of 80% ofPWF’s outstanding stock, and pursuant to terms of individual employee stockpurchase agreements, we have purchased additional PWF stock.  At December 31, 2003, we own approximately87% of the outstanding shares of PWF stock.

 

On November 17, 2003, weacquired 100% of the ownership interests in and substantially all of thebusinesses operated by Related Capital Company (“Related”) (other than specificexcluded interests).  Related had previouslyacted as our external manager (“Manager”). The acquisition was structured so that the selling principals of Relatedcontributed their ownership interests in Related to CharterMac Capital Company,LLC, a newly formed subsidiary of CM Corp. which we refer to as “CCC”, inexchange for 15,854,505 special common units (“SCUs”) in CCC.  The special common units are exchangeablefor cash or, at our option, common shares on a one-for-one basis.  All of the selling principals were alsoissued one special preferred voting share of our Company for each specialcommon unit they received.  The specialpreferred voting shares have no economic interest, but entitle the holder toone vote per special preferred voting share on all matters subject to a vote ofthe holders of our common shares.  Oneof the selling principals also received $50 million in cash.  The selling principals of Related includedits four executive managing partners (Stuart J. Boesky, Alan P. Hirmes, Marc D.Schnitzer and Denise L. Kiley), all of whom are members of our board oftrustees, and an affiliate of The Related Companies, L.P., a New York limitedpartnership (“TRCLP”) with a majority of its equity controlled by Stephen M.Ross, who is also the non-executive Chairman of our board of trustees.  As a result of the acquisition, the economicinterest in our Company of (i) TRCLP equals approximately 15.4% and (ii) ourmanagement and employees equals approximately 7.1%.  We conduct our fund management business through Related.

 

Weare governed by a board of trustees comprised of eight independent managingtrustees and seven managing trustees who are affiliated with Related.

 

*Basis of Presentation*

 

Our consolidated financial statements areprepared on the accrual basis of accounting in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  The preparation of financial statements inconformity with GAAP requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements as well as thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Significant estimates in thefinancial statements include the valuation of our investments in revenue bondsand interest rate swap agreements.

 

The consolidated financial statements include theaccounts of CharterMac and its majority owned subsidiary business trusts andcorporations which it controls.  We alsoown approximately 87% of PWF and 100% of Related through our wholly ownedsubsidiary, CM Corp. All intercompany

 

53

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accounts and transactions have been eliminated inconsolidation.  Unless otherwiseindicated, the “Company”, as hereinafter used, refers to CharterMac and itsconsolidated subsidiaries.

 

*Reclassifications*

 

Certainamounts from prior years have been reclassified to conform to the 2003presentation.

 

*SignificantAccounting Policies*

 

*Investment in revenue bonds*

 

We account for ourinvestments in revenue bonds as available-for-sale debt securities under theprovisions of Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“SFAS 115”) due to aprovision in most of its revenue bonds under which we have a right to requireredemption of the revenue bonds prior to their maturity, although we can andmay elect to hold them up to their maturity dates unless otherwisemodified.  As such, SFAS 115 requires usto classify these investments as “available-for-sale.”  Accordingly, investments in revenue bondsare carried at their estimated fair values, with unrealized gains and lossesreported in accumulated other comprehensive income.  Unrealized gains or losses do not affect the cash flow generatedfrom property operations, distributions to shareholders, the characterizationof the tax-exempt income stream or the financial obligations under the revenuebonds.

 

If in our judgment, we determine it is probable that we will not receiveall contractual payments required, when they are due, the revenue bond isdeemed impaired and is written down to its then estimated fair value, with theamount of the write-down accounted for as a realized loss.

 

Because revenue bonds have a limited market, we estimate fair value for each bond as thepresent value of its expected cash flows using a discount rate for comparabletax-exempt investments.  This process isbased upon projections of future economic events affecting the real estatecollateralizing the bonds, such as property occupancy rates, rental rates,operating cost inflation, market capitalization rates and an appropriate marketrate of interest, all of which are based on good faith estimates andassumptions we develop.  Changes inmarket conditions and circumstances may occur which would cause these estimatesand assumptions to change; therefore, actual results may vary from the estimatesand the variance may be material.

 

Forcertain revenue bonds,management believes that certain factors have impacted the near-term fairvalue.  In these instances, the revenuebonds are valued at either theoutstanding face amount of the bond or management’s estimate of the fair value,whichever is lower.

 

### *Equity Investments*

 

Equity investments in other assets on the consolidated balance sheetsinclude the following:

 

**Investment in ARCap***-* Our preferred equity investment in ARCapInvestors, L.L.C.  (“ARCap”) isaccounted for using the equity method because we have the ability to exercisesignificant influence, but not control, over ARCap’s operating and financialpolicies.

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents includes cash in banks and investments in short-terminstruments with an original maturity of three months or less.  Certain amounts of cash and cash equivalentsare restricted and serve as additional collateral for borrowings within ourexisting securitization programs.

 

*Mortgage Banking Activities*

 

PWF is an approved seller/servicer of multi-family mortgage loans forFannie Mae, Freddie Mac, FHA and the Government National Mortgage Association(“Ginnie Mae”).  For Fannie Mae, PWF isapproved under the Delegated Underwriting and Servicing (“DUS”) program.  Under DUS, upon obtaining a commitment fromFannie Mae with regard to a particular loan, Fannie Mae commits to acquire themortgage loan based upon PWF’s underwriting and PWF agrees to bear a portion ofthe risk of potential losses in the event of a default.  Fannie Mae commitments may be made toacquire the mortgage loan for cash or in exchange for a mortgage-backedsecurity backed by the mortgage loan. As a Program Plus lender for Freddie Mac, Freddie Mac agrees to acquirefor cash from PWF loans for which PWF has issued commitments.  Ginnie Mae agrees to exchange FHA-insuredmortgages originated by PWF for Ginnie Mae securities.

 

Mortgage loans originated for Fannie Mae,Freddie Mac or Ginnie Mae are closed in the name of PWF, which uses corporatecash obtained by borrowing from a warehouse lender to fund the loans.  Approximately a week to a month followingclosing of a loan, loan documentation and an assignment are delivered to FannieMae, Freddie Mac, Ginnie Mae, or a document custodian on its behalf and thecash purchase price or mortgage-backed security is delivered to PWF.  PWF uses the cash it receives to repay itswarehouse loans and the mortgage-backed securities are sold pursuant to prioragreements for cash, which is also used to repay warehouse loans.  PWF also underwrites and originatesmulti-family and commercial mortgages for insurance companies and banks.

 

54

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PWF receives origination fees which are included in mortgage bankingfees in the consolidated statements of income. Neither we nor PWF retain any interest in any of the mortgage loans,except for mortgage servicing rights (“MSRs”) and certain liabilities under theloss-sharing arrangement with Fannie Mae.

 

*Mortgage Servicing Rights*

 

PWF recognizes as assets the rights to service mortgage loans forothers, whether the MSRs are acquired through a separate purchase or throughloan origination, by allocating total costs incurred between the loan and theMSRs retained based on their relative fair value.  MSRs are being carried at their adjusted cost basis.  MSRs are amortized in proportion to, andover the period of, estimated net servicing income.

 

We have two areas of loss exposure related to its lendingactivities.  First, while a loan isrecorded on the balance sheet, there is exposure to potential loss if a loanbecomes impaired and defaults.  Second,we have exposure to loss due to the retention of a portion of credit riskwithin PWF’s servicing contract under the Fannie Mae DUS program.

 

For loans on our balance sheet, we identify loans that are impaired andevaluate the allowance for loss on a specific loan basis for losses believed tocurrently exist.

 

We account for exposureto loss under our servicing contract with Fannie Mae, as guarantees under FIN 45,by recording an asset equal to our estimate of the portion of the servicingcash flows deemed to represent compensation for our guarantee for loansoriginated on/or after January 1, 2003. On an ongoing basis, we will account for the asset by offsetting cashreceived for the guarantee against the asset and crediting interest income forthe change in asset due to the passage of time.  The portion of the liability representing an accrual for probablelosses under SFAS No. 5, “Accounting for Contingencies” (“FAS 5”) is adjustedas loss estimates change; the portion representing our willingness to stand byas guarantor will be amortized over the expected life of the guarantee..

 

The components of the change in MSRs are as follows:

 

|                                                      |   | **(Dollars  in millions)** |   |
|-----------------------------------------------------------|--------|----------------------------|--------|
|                                                      |   |                       |   |
| Servicing Assets                                          |   |                       |   |   |
| Balance at December 31, 2002                              |   | $                          | 35.6   |   |
| MSRs capitalized during the year ended  December 31, 2003 |   | 6.5                        |   |
| Amortization                                              |   | (6.3                       | )      |
| Increase in reserves                                      |   | (2.4                       | )      |
| Balance at December 31, 2003                              |   | $                          | 33.4   |   |
|                                                      |   |                       |   |
| Reserve for Loan Loss Reserves of Servicing  Assets       |   |                       |   |
|                                                      |   |                       |   |
| Balance at December 31, 2002                              |   | $                          | 4.3    |   |
| Additions                                                 |   | 2.4                        |   |
| Balance at December 31, 2003                              |   | $                          | 6.7    |   |

 

The estimated fair values of the MSRs were $39.7 million and $36.7million, at December 31, 2003 and 2002, respectively.

 

The significant assumptions used by the third party valuation firm inestimating the fair value of the servicing assets at December 31, 2003 were asfollows:

 
|                            |   | **Fannie Mae** |   | **FHA**     |   | **Freddie  Mac** |   |
|---------------------------------|--------|----------------|--------|-------------|--------|------------------|--------|
|                            |   |           |   |        |   |             |   |
| Weighted average discount rate  |   | 17.13          | %      | 17.00       | %      | 17.20            | %      |
| Weighted average pre-pay speed  |   | 13.19          | %      | 10.59       | %      | 11.27            | %      |
| Weighted average lockout period |   | 57.6 months    |   | 34.9 months |   | 84.8 months      |   |
| Cost to service loans           |   | $2,450         |   | $1,289      |   | $1,937           |   |
| Acquisition cost (per loan)     |   | $1,500         |   | $500        |   | $1,481           |   |

 

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The table below illustrates hypothetical, fair values of PWF’s MSRs atDecember 31, 2003 caused by assumed immediate adverse changes to keyassumptions are used to determine fair value.

 

|                                    |   | **(In  thousands)** |   |
|-----------------------------------------|--------|---------------------|--------|
|                                    |   |                |   |
| Fair value of MSRs at December 31, 2003 |   | $                   | 39,664 |   |
|                                    |   |                |   |
| Prepayment speed:                       |   |                |   |
| Fair value after impact of +10% change  |   | 39,320              |   |
| Fair value after impact of -10% change  |   | 40,012              |   |
| Fair value after impact of +20% change  |   | 39,011              |   |
| Fair value after impact of -20% change  |   | 40,398              |   |
|                                    |   |                |   |
| Discount rate:                          |   |                |   |
| Fair value after impact of +10% change  |   | 37,688              |   |
| Fair value after impact of -10% change  |   | 41,860              |   |
| Fair value after impact of +20% change  |   | 35,900              |   |
| Fair value after impact of -10% change  |   | 44,310              |   |
|                                    |   |                |   |
| Default rate:                           |   |                |   |
| Fair value after impact of +10% change  |   | 39,591              |   |
| Fair value after impact of -10% change  |   | 39,746              |   |
| Fair value after impact of +20% change  |   | 39,528              |   |
| Fair value after impact of -20% change  |   | 39,809              |   |
|                                         |        |                     |        |  |

 

*Revenue Recognition*

 

We derive our revenues from a variety ofinvestments and guarantees, summarized as follows:

 

•                  **Revenue Bond Interest Income -**Interestincome is recognized at the stated rate as it accrues and when collectibilityof future amounts is reasonably assured. Contingent interest is recognized when received.  Interest income from revenue bonds withmodified terms or where the collectibility of future amounts is uncertain isrecognized based upon expected cash receipts. Certain construction revenue bonds carry a higher interest rate duringthe construction period, which declines to a lower rate for the balance of theterm.  In these cases, we calculate theeffective yield on the revenue bond and uses that rate to recognize interestover the life of the bond.

 

•                  **Mortgage Banking Fees –**PWFfees earned for arranging financings under the Fannie Mae DUS product line aswell as Freddie Mac, insurance and banking or other programs are recorded atthe point the financing commitment is accepted by the mortgagor and the interestrate of the mortgage loan is fixed.  PWFalso receives fees for servicing the loans it has originated.  This income is recognized on an accrual basis.

 

•                  **Other Income**

 

*Interest Income from Promissory Notes andMortgages Receivable***–**Interest on mortgage loans and notes receivable is recognized onthe accrual basis as it becomes due. Deferred loan origination costs and fees are amortized over the life ofthe applicable loan as an adjustment to interest income, using the interestmethod.  Interest which was accrued isreversed out of income if deemed to be uncollectible.

 

*Interest Income on TemporaryInvestments* – Interest income fromtemporary investments, such as cash in banks and short-term instruments, isrecognized on the accrual basis as it becomes due.

 

*Construction Service Fees*– We receive fees, in advance, from borrowers for servicing revenue bondsduring the construction period.  Thesefees are deferred and amortized into other income over the anticipatedconstruction period.

 

*Credit Enhancement Fees***–**We receive fees forproviding credit enhancements.  Thecredit enhancement fees are received monthly and recognized in other incomewhen received.

 

*Guarantee Fees*– We receive fees for providing guarantees on guaranteed yields.  These fees are deferred and recognized inother income on a pro-rata basis over the guarantee period.

 

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•                  **Fund Management Fees**

 

*OriginationFees* – Origination fees include both propertyacquisition fees and partnership management fees which are received by Relatedfrom the proceeds raised at formation of the investment funds.  Property acquisition fees (generally 2% to4% of equity raised) are for services performed in connection with theacquisition of interests in property-owning partnerships and are recognizedwhen the earnings process is complete and collectibility is reasonably assured,which is defined as the date the investor equity is raised and the propertieshave been acquired by the investment fund. Partnership management fees (generally 1% of equity raised) are forservices to be performed by Related for (i) maintaining the books and recordsof the investment fund, including requisite investor reporting, and (ii)monitoring the acquired property interests to ensure that their development,leasing and operations comply with low income housing or other tax creditrequirements.  Related recognizes thesefees when such services are rendered, which, per the partnership agreements,are contractually over five years following the initial closing of theinvestment fund, using the straight-line method.

 

*AcquisitionFees***–**Acquisition fees are earned uponacquisition of investments by publicly-held entities for which Related acts asthe advisor.  These fees are calculatedas a percentage of the purchase price of investments acquired, up to 1%.

 

*DevelopmentFees***–**Development fees are earned fromproperties co-developed by Related with unaffiliated developers and sold toinvestment funds.  Recognition ofdevelopment fees is based on completion and stabilization of properties, afterguarantees of completion and deficits are no longer deemed to requirefunding.  The guarantees are issued byan affiliate of Related, which is also a subsidiary of CharterMac to the lender(for the underlying financing of the properties) on behalf of Related and asrequired by the investment fund.

 

*AssetManagement Fees*- Related earns asset management feesfrom its investment funds on an annual basis calculated based on a percentageof each investment fund’s invested assets, generally 0.5%.  These fees are paid from the investmentfund’s available working capital balances, and are earned by Related formanaging the Underlying Property assets of the investment fund.  These fees are recorded monthly as earned,but only when the management of Related determines that collection isreasonably assured based on the investment funds’ working capital balance.

 

•                  **Equity in Earnings of ARCap –**Ourequity in the earnings of ARCap Investors, LLC (“ARCap”) is accrued at our preferreddividend rate of 12%, unless ARCap does not have earnings and cash flowsadequate to meet this dividend requirement. In the case where earnings are not sufficient to cover the 12% dividendrate, any excess dividends received would be a returned capital and woulddecrease our investment.

 

*Deferred Costs*

 

Prior to our acquisition of Related, we paid fees to Related, as ourManager, for its activities performed to acquire revenue bonds, including theirevaluation and selection, negotiation of mortgage loan terms, coordination ofproperty developers and government agencies, and other direct expenditures ofacquiring or investing in revenue bonds. These fees are capitalized and amortized as a reduction to interestincome over the terms of the revenue bonds. Direct costs relating to unsuccessful acquisitions and all indirectcosts relating to the revenue bonds are charged to operations.

 

Costs incurred in connection with our TOP, such as legal, accounting,documentation and other direct costs, have been capitalized and are beingamortized using the straight-line method over 10 years, which approximates theaverage remaining term to maturity of the revenue bonds in this program.

 

Costs incurred in connection with theissuance of preferred shares of Equity Issuer subsidiary, such as legal,accounting, documentation and other direct costs, have been capitalized and arebeing amortized using the straight line method over the period to the mandatoryrepurchase date of the shares, approximately 50 years.  Costs incurred in connection with theissuance of Convertible Community Reinvestment Act (“CRA”) Shares, such aslegal, accounting, documentation and other direct costs, have been accountedfor as an offset to beneficial owners’ equity of such shares.

 

*Basis of Consolidation*

 

We consolidate all of our wholly owned andmajority owned subsidiaries.  We own anon-controlling interest in ARCap, which we record on an equity basis.  We also invest in partnership interests,related to the real estate equity investment funds we sponsor.  Typically, we hold these investments for ashort period, essentially warehousing the investments until a new fund isestablished.  We exercise no controlduring this period.  The assets areshown as Investments in Partnership on our consolidated balance sheets.  We record our interest in these investmentson the equity basis.

 

*Financial Risk Management and Derivatives*

 

We have entered into several derivative instruments, including aninterest rate cap, forward commitments and interest rate swaps, all of whichare accounted for under the Statement of Financial Accounting Standards No.133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS133”), as amended and interpreted.  Wehave designated the interest rate swaps as cash flow hedges on the variableinterest payments on our floating rate securitizations.  Two of the interest rate swaps do not becomeeffective until 2005.  The two interestrate swaps that are currently

 

57

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in place, are recorded at their respective fair market value eachaccounting period, with changes in market value being recorded in accumulatedother comprehensive income to the extent the hedges are effective in achievingoffsetting cash flows.  These hedgeshave been perfectly effective, so have generated no ineffectiveness that needsto be included in earnings.  Theeffectiveness of the other two swaps is being measured using the hypotheticalswap method, until they go into effect in 2005.  For the year ended December 31, 2003, there was noineffectiveness related to these two swaps. Had there been any ineffectiveness or should there be anyineffectiveness in the future, the amount would have been or will flow throughour consolidated statements of income.  The interest rate cap, although designed to mitigate our exposureto rising interest rates, was not designated as a hedging derivative;therefore, any change in fair market value flows through the consolidated statementsof income, where it is included in interest income.  The forward commitments create derivative instruments under SFAS133, which have been designated as cash flow hedges of the anticipated fundingof the revenue bonds, and, as such, are recorded at fair value, with changes infair value recorded in accumulated other comprehensive income until the revenuebonds are funded.

 

*Goodwill and Other Intangible Assets*

 

We have adopted SFAS 141 on July 1, 2001 and SFAS 142,on January 1, 2002.  We have determinedthat the amounts previously capitalized as goodwill relating to our initialformation and to the merger of American Tax-Exempt Bond Trust meet the criteriain SFAS 141 for recognition as intangible assets apart from goodwill, andaccordingly will continue to amortize the remaining $2.2 million over theirremaining useful lives, subject to impairment testing.  Therefore, the implementation of SFAS 142did not materially affect our results of operations.

 

During the quarter ended June 30, 2002, PWF engaged athird party valuation firm to evaluate PWF’s licenses with Fannie Mae, FreddieMac, FHA, GNMA and various private investors. As a result of this process, approximately $8.6 million has beenreclassified from goodwill to intangible assets, representing the estimatedmarket value of PWF’s licenses.  Theselicenses have an indefinite life and, as a result, are not being amortized.

 

On November 17, 2003, we completed our purchase ofRelated, which resulted in additional intangible assets and goodwill, whichwere based on fair values verified by an independent third party valuationfirm.  (See Note 2).

 

We amortize intangible assets on a straight line basisover their estimated useful lives.  Thegoodwill amounts recorded are tested annually for impairment in accordance withthe provisions of FAS 142.  We haveconcluded that goodwill was not impaired at December 31, 2003.

 

*Fair Value of Financial Instruments*

 

As described above, our investments inrevenue bonds, its mortgage servicing rights and its liability under theinterest rate derivatives are carried at estimated fair values.  We have determined that the fair value ofits remaining financial instruments, including its temporary investments, cashand cash equivalents, promissory notes receivable, mortgage notes receivableand borrowings approximate their carrying values at December 31, 2003 and 2002.

 

*Income Taxes*

 

Effective July 1, 2001, we began operation of a newwholly owned, taxable subsidiary, CM Corp., which conducts most of our taxablebusiness, including our mortgage servicing activities and fund managementactivities in which we may engage.  Weprovide for income taxes in accordance with Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes” (“FAS 109”).  FAS 109 requires the recognition of deferredtax assets and liabilities for the expected future tax consequences oftemporary differences between the financial statement carrying amounts and thetax basis of assets and liabilities.

 

*Segment Information*

 

SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information”, requiresenterprises to report certain financial and descriptive information about theirreportable operating segments, and certain enterprise-wide disclosuresregarding products and services, geographic areas and major customers.

 

We have three reportable business segments:portfolio investing, mortgage banking and fund management.  Portfolio investing includes our activitiesrelated to investing in revenue bonds. Mortgage banking includes our activities, carried out through PWFinvolving origination mortgages on behalf of third parties.  Fund management involves our activitiesrelated to providing management services to real estate investment programssponsored by Related.

 

*New Pronouncements*

 

In April 2002, theFASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13 and Technical Corrections”.  SFAS No. 145, among other things, rescindsSFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, andaccordingly, the reporting of gains or losses from the early extinguishments ofdebt as extraordinary items will only be required if they meet the specificcriteria of extraordinary items included in Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations”. The revision of SFAS No. 4 became effective January 2003.  The implementation of SFAS No. 145 did nothave a material impact on our consolidated financial statements.

 

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In July 2002, the FASB issued SFAS No. 146 “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS No. 146 replaces current accounting literature and requires therecognition of costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposalplan.  SFAS No. 146 became effectiveJanuary 1, 2003.  The implementation ofSFAS No. 146 did not have a material impact on our consolidated financialstatements.

 

In November 2002, the FASB issued FIN 45.  FIN 45 elaborates on the disclosures to be made by a guarantor inits financial statements about its obligations under certain guarantees that ithas issued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  This Interpretation does notprescribe a specific approach for subsequently measuring the guarantor’srecognized liability over the term of the related guarantee.  The initial recognition and initialmeasurement provisions of this FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  We entered into one credit enhancementtransaction and two yield guarantee transactions prior to December 31,2002.  The fee for the creditenhancement transaction is received monthly and recognized as income whendue.  The fees for the yield guaranteetransactions, received in advance, were deferred and amortized over theguarantee periods.  During 2003, weentered into four more yield guarantee transactions.  We believe the fees received for these guarantees approximatesthe fair value of the obligations undertaken in issuing the guarantees and haverecorded  liabilities included in deferredincome equal to the fair values of the obligations.

 

In December 2002, the FASB issued SFAS No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure,” an amendment of FASBstatement No. 123.  This statementamends SFAS No. 123, “Accounting for Stock-Based Compensation” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employer compensation.  Because we account for our share optionsusing the fair value method, implementation of this statement did not have animpact on our consolidated financial statements.  We have adopted the provisions of SFAS No. 123 for its shareoptions issued to employees.  Accordingly,compensation cost is accrued based on the estimated fair value of the optionsissued, and amortized over the vesting period. Because vesting of the options is contingent upon the recipientcontinuing to provide services to us until the vesting date, we estimate the fairvalue of the employee options at each period-end up to the vesting date, andadjust expensed amounts accordingly. The fair value of each option grant is estimated using the Black-Scholesoption-pricing model.  In connectionwith the purchase of Related, we issued 778,420 common shares to employees, ofwhich 52,863 vested immediately.  Thebalance of 725,557 vests over two, three or four years depending on the numberof shares granted to each employee.  Werecognized compensation expense for the vested shares at the market price forthe shares on the grant date and deferred compensation expense for thenon-vested shares also at the market price on the grant date.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable Interest Entities”(“FIN 46”).  In December 2003, the FASBissued FIN 46R, which revises FIN 46, codifying certain FASB Staff positionsand extending the implementation date. FIN 46, as revised by FIN 46R, clarifies the application of existingaccounting pronouncements to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  Prior to the issuance of FIN 46R, we had notapplied FIN 46 to any entities; accordingly, the provision of FIN 46R areeffective for us beginning March 31, 2004.

 

FIN 46R is a complexstandard that requires significant analysis and judgment. We are still in theprocess of evaluating its impact on our financial statements, particularly asit applies to the investment fund sponsorship business we acquired bypurchasing Related in November of 2003. In that acquisition, and in subsequentfund originations, we became the general partner or equivalent in over 70investment funds, all of which may represent variable interest entities underFIN 46R. As the general partner, and, in some cases, the guarantor of theunderlying fund returns, we may be deemed to be the primary beneficiary of someor all of such entities, even though we have no equity investment in theinvestment partnerships. If we determine that we are required to consolidateall of our investment partnerships under FIN 46R, our total assets wouldincrease by approximately $2.5 billion. The investment partnerships do not carry debt, so minority partners’interest of approximately $2.5 billion would be recorded between liabilitiesand equity on our balance sheet.

 

In recording our acquisitionof Related, we ascribed approximately $5 million of the purchase price to theestimated future cash flows to be received from general partner interests ininvestment partnership in which we maintain a non-equity controllingpartner.  However, from time to time thegeneral partner of the investment funds, may be called upon to fund investmentfund operations which we would advance on behalf of the general partner andwould be repaid to us out of future operating cash flow or sale or refinancingproceeds received by the investment fund, so our maximum exposure to losscannot be quantified.  We also haveexposure to losses under guarantees of returns on certain funds, as describedin Note 16.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”SFAS 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS 133.  SFAS149 is generally effective for contracts entered into or modified after June30, 2003 and for hedging relationships designated after June 30, 2003.  The adoption of SFAS No. 149 on July 1,2003, as required, had no impact on our consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  This statement requires thatcertain financial instruments that have the characteristics of debt and equitybe classified as debt.  SFAS No. 150 waseffective for financial instruments entered into or modified after May 31,2003, and otherwise was effective at the beginning of the first interim periodbeginning after June 15, 2003.  Pursuantto SFAS No. 150, on July 1, 2003 we classified the $273.5 million previouslyshown in the “mezzanine” (between liabilities and equity) in the consolidatedbalance sheets as “preferred shares of subsidiary subject to mandatoryredemption” into the liability section, and the dividends paid on such shares(approximately $9.4 million for the period from July 1, 2003 through

 

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December 31, 2003) have been classified as interest expense; dividendsrelated to prior periods continue to be classified as income allocated topreferred shareholders of subsidiary.

 

 

NOTE2 – Acquisition of Related Capital Company

 

OnNovember 17, 2003, we purchased 100% of the ownership interests andsubstantially all of the businesses operated by Related for approximately $346million, of which $50 million was paid in cash and the remainder by SCUs issuedby a newly formed, 100% owned subsidiary of CM Corp., CharterMac CapitalCompany (“CCC”).  In conjunction withthe acquisition, two bridge loans totaling $60 million were obtained to coverthe cash portion of the purchase price as well as other acquisition relatedcosts.

 

Theacquisition is being accounted for as a purchase.  The total purchase price was approximately $346 million,including acquisition costs.  Weallocated our cost of the acquisition on the basis of the estimated fair valuesof the assets and liabilities assumed, as summarized below.  Certain allocations are preliminary as ofDecember 31, 2003 and may be refined as we gather further information on fairvalue.  The excess of the purchase priceover the net of the amounts assigned to the assets acquired and liabilityassumed was recognized as goodwill.

 

Purchaseof Related

Summaryof Net Assets

(Dollarsin thousands)

 

| ASSETS:                    |   |    |    |
|----------------------------|--------|---------|---------|
| Cash                       |   | $       | 422     |   |
| Investment in partnerships |   | 34,282  |    |
| Intangible assets          |   | 185,300 |    |
| Goodwill                   |   | 210,294 |    |
| Deferred costs             |   | 1,142   |    |
| Other assets               |   | 2,991   |    |
| Total assets               |   | 434,431 |    |
|                       |   |    |    |
| LIABILITIES:               |   |    |    |
| Note payable               |   | 28,952  |    |
| Deferred tax liability     |   | 59,071  |    |
| Total liabilities          |   | 88,023  |    |
| Purchase price             |   | $       | 346,408 |   |

 

Weassigned the following amounts to various identifiable intangible assets.

 

(Dollarsin thousands)

 
| **Intangible Asset**                       |   | **Estimated  Fair Value** |    | **Estimated  Useful  Life** |   | **2003  Amortization** |   | **December  31, 2003  Unamortized  Balance** |   |
|--------------------------------------------|--------|---------------------------|---------|-----------------------------|--------|------------------------|--------|----------------------------------------------|--------|
|                                       |   |                      |    |                        |   |                   |   |                                         |   |
| Trademarks and trade names                 |   | $                         | 25,100  |                        | 21     |                   | $      | 143                                          |   | $ | 24,957 |   |
| Partnership service contract — AMAC   |   | 17,900                    |    | 10                          |   | 214                    |   | 17,686                                       |   |
| Partnership service contracts — other |   | 29,400                    |    | 9                           |   | 390                    |   | 29,010                                       |   |
| Transactional relationships – GSEs    |   | 73,400                    |    | 21                          |   | 417                    |   | 72,983                                       |   |
| Transactional relationships — other   |   | 29,600                    |    | 6                           |   | 589                    |   | 29,011                                       |   |
| Joint venture developer relationships      |   | 4,800                     |    | 5                           |   | 115                    |   | 4,685                                        |   |
| General partner interests                  |   | 5,100                     |    | 9                           |   | 68                     |   | 5,032                                        |   |
|                                       |   | $                         | 185,300 |                        |   |                   | $      | 1,936                                        |   | $ | 183,364 |   |

 

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Theestimated amortization expense for these intangible assets for the next fiveyears is as follows:

 

|   |   | **(Dollars in thousands)** |   |
|--------|--------|----------------------------|--------|
|   |   |                       |   |
| 2004   |   | 16,207                     |   |
| 2005   |   | 16,207                     |   |
| 2006   |   | 16,207                     |   |
| 2007   |   | 16,207                     |   |
| 2008   |   | 16,092                     |   |

 

The following unaudited pro forma data summarizes the results ofoperations for the periods indicated as if our acquisition of Related had beencompleted as one of the beginning of the periods presented.  The pro forma data includes the actualoperating results prior to the acquisition date, adjusted as if the intangibleassets had been amortized as of the beginning of the period.  These pro forma amounts are not indicativeof the results that would have been obtained had the acquisition actuallyoccurred as of the beginning of the periods presented or that may be obtainedin future periods.

 
| **(Dollars in  thousands, except per share data)** |   | **For the Year  Ended December 31, 2003** |    | **For the Year  Ended December 31, 2002** |   |
|----------------------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|
| Total revenues                                     |   | $                                         | 209,547 |                                      | $      | 182,996 |   |
| Net income                                         |   | $                                         | 36,634  |                                      | $      | 27,655 |   |
| Earnings per share:                                |   |                                      |    |                                      |   |
| Basic                                              |   | $                                         | 0.79    |                                      | $      | 0.65 |   |
| Diluted                                            |   | $                                         | 0.78    |                                      | $      | 0.65 |   |

 

In connection with the acquisition, we established a restricted shareprogram and issued 778,420 of our common shares to employees of Related, otherthan the Related Principals.  As aresult of the acquisition, the economic interest in our Company of (i) TRCLPequals approximately 15.4% and (ii) our management and employees equalsapproximately 7.1%.  We conduct our fundmanagement business through Related.

 

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NOTE3 – Revenue Bonds

 

Thefollowing tables summarize our revenue bond portfolio at December 31, 2003.

 
|                    |   | **Number** |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
|-------------------------|--------|------------|--------|------------|--------|--------------------------|--------|----------------------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|
|                    |   | **of**     |   | **Units**  |   | **Face  Amount of Bond** |   | **Fair Value at 12/31/03** |   |
|                    |   | **Bonds**  |   | **Number** |   | **%****of Total**        |   | **$****Amount**            |   | **%****of Total** |   | **$****Amount** |   | **%****of Total** |   |
|                    |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| **By Region:**          |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| East                    |   | 80         |   | 15,163     |   | 37.4                     | %      | 671,505,172                |   | 36.5              | %      | 680,636,000     |   | 36.4              | %      |
| Central                 |   | 112        |   | 18,855     |   | 46.5                     | %      | 898,390,385                |   | 48.9              | %      | 916,466,000     |   | 49.0              | %      |
| West                    |   | 51         |   | 6,538      |   | 16.1                     | %      | 268,905,439                |   | 14.6              | %      | 273,907,000     |   | 14.6              | %      |
| Total                   |   | 243        |   | 40,556     |   | 100.0                    | %      | 1,838,800,996              |   | 100.0             | %      | 1,871,009,000   |   | 100.0             | %      |
|                    |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| **By State:**           |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| Texas                   |   | 64         |   | 10,318     |   | 25.4                     | %      | 545,976,970                |   | 29.7              | %      | 564,279,000     |   | 30.2              | %      |
| Georgia                 |   | 19         |   | 4,309      |   | 10.6                     | %      | 211,910,000                |   | 11.5              | %      | 214,068,000     |   | 11.4              | %      |
| California              |   | 36         |   | 4,354      |   | 10.7                     | %      | 189,936,439                |   | 10.3              | %      | 197,947,000     |   | 10.6              | %      |
| Florida                 |   | 22         |   | 3,950      |   | 9.7                      | %      | 160,614,765                |   | 8.7               | %      | 163,771,000     |   | 8.8               | %      |
| Missouri                |   | 11         |   | 2,107      |   | 5.2                      | %      | 103,048,000                |   | 5.6               | %      | 101,612,000     |   | 5.4               | %      |
| All others              |   | 91         |   | 15,518     |   | 38.4                     | %      | 627,314,822                |   | 34.2              | %      | 629,332,000     |   | 33.6              | %      |
| Total                   |   | 243        |   | 40,556     |   | 100.0                    | %      | 1,838,800,996              |   | 100.0             | %      | 1,871,009,000   |   | 100.0             | %      |
|                    |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| **By Property Status:** |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| Stabilized              |   | 83         |   | 15,499     |   | 38.2                     | %      | 613,004,923                |   | 33.3              | %      | 627,521,000     |   | 33.6              | %      |
| Lease-up                |   | 66         |   | 9,883      |   | 24.4                     | %      | 517,994,377                |   | 28.2              | %      | 530,357,000     |   | 28.3              | %      |
| Construction            |   | 70         |   | 9,907      |   | 24.4                     | %      | 515,001,381                |   | 28.0              | %      | 520,747,000     |   | 27.8              | %      |
| Rehab                   |   | 24         |   | 5,267      |   | 13.0                     | %      | 192,800,315                |   | 10.5              | %      | 192,384,000     |   | 10.3              | %      |
| Total                   |   | 243        |   | 40,556     |   | 100.0                    | %      | 1,838,800,996              |   | 100.0             | %      | 1,871,009,000   |   | 100.0             | %      |

 
|                                 |   | **Current  Stated  Interest  Rate** |   |                                        |   |                                |   |
|--------------------------------------|--------|-------------------------------------|--------|---------------------------------------------|--------|-------------------------------------|--------|
| **Pertinent Weighted Average Dates** |   | **Annualized Base Interest**        |   | **Occupancy  on Stabi-  lized  Properties** |   | **DSCR on  Stabilized  Properties** |
| **Put Date**                         |   | **Optional  Redemption  Date**      |   | **Maturity  Date**                          |   | **$****Amount**                     |   | **%****of  Total** |
|                                 |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| **By Region:**                       |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| East                                 |   | 6.91                                | %      | Sep-17                                      |   | May-14                              |   | May-37 |   | 46,326,358 |   | 36.5 | % | 92.2 | % | 1.16 | x |
| Central                              |   | 6.96                                | %      | Oct-19                                      |   | Dec-17                              |   | Jul-39 |   | 61,530,647 |   | 48.4 | % | 87.6 | % | 1.12 | x |
| West                                 |   | 6.90                                | %      | Mar-18                                      |   | Dec-15                              |   | Dec-36 |   | 19,145,029 |   | 15.1 | % | 94.3 | % | 1.31 | x |
| Total                                |   | 6.93                                | %      | Oct-18                                      |   | May-16                              |   | May-38 |   | 127,002,034 |   | 100.0 | % | 91.8 | % | 1.20 | x |
|                                 |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| **By State:**                        |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Texas                                |   | 7.16                                | %      | Feb-21                                      |   | Apr-20                              |   | May-41 |   | 38,096,626 |   | 30.0 | % | 92.3 | % | 0.98 | x |
| Georgia                              |   | 6.47                                | %      | Apr-16                                      |   | Nov-12                              |   | Jun-38 |   | 13,999,183 |   | 11.0 | % | 82.8 | % | 0.91 | x |
| California                           |   | 6.84                                | %      | Apr-18                                      |   | Mar-16                              |   | Feb-37 |   | 13,579,197 |   | 10.7 | % | 94.7 | % | 1.29 | x |
| Florida                              |   | 7.06                                | %      | Apr-20                                      |   | Apr-15                              |   | Jun-39 |   | 11,274,382 |   | 8.9 | % | 95.0 | % | 1.22 | x |
| Missouri                             |   | 6.95                                | %      | Sep-14                                      |   | Jul-09                              |   | Dec-29 |   | 7,206,965 |   | 5.7 | % | 82.0 | % | 1.33 | x |
| All others                           |   | 6.87                                | %      | Feb-18                                      |   | Jul-15                              |   | Apr-37 |   | 42,845,681 |   | 33.7 | % | 94.3 | % | 1.42 | x |
| Total                                |   | 6.93                                | %      | Oct-18                                      |   | May-16                              |   | May-38 |   | 127,002,034 |   | 100.0 | % | 91.8 | % | 1.20 | x |
|                                 |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| **By Property Status:**              |   |                                |   |                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Stabilized                           |   | 7.22                                | %      | Sep-15                                      |   | Sep-12                              |   | Jun-32 |   | 43,954,222 |   | 34.6 | % | 91.8 | % | 1.20 | x |
| Lease-up                             |   | 7.31                                | %      | Sep-18                                      |   | Apr-16                              |   | May-41 |   | 37,773,932 |   | 29.7 | % | N/A |   | N/A |   |
| Construction                         |   | 6.44                                | %      | Jul-22                                      |   | Apr-21                              |   | Aug-42 |   | 32,967,266 |   | 26.0 | % | N/A |   | N/A |   |
| Rehab                                |   | 6.33                                | %      | Jul-18                                      |   | Jul-14                              |   | Oct-37 |   | 12,306,614 |   | 9.7 | % | N/A |   | N/A |   |
| Total                                |   | 6.93                                | %      | Oct-18                                      |   | May-16                              |   | May-38 |   | 127,002,034 |   | 100.0 | % | 91.8 | % | 1.20 | x |

 

62

----

 
|                  |   | **Number** |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
|-----------------------|--------|------------|--------|------------|--------|--------------------------|--------|----------------------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|
|                  |   | **of**     |   | **Units**  |   | **Face  Amount of Bond** |   | **Fair Value at 12/31/03** |   |
|                  |   | **Bonds**  |   | **Number** |   | **%****of Total**        |   | **$****Amount**            |   | **%****of Total** |   | **$****Amount** |   | **%****of Total** |   |
|                  |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| **By Put Date:**      |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| No put date           |   | 48         |   | 1,362      |   | 3.4                      | %      | 80,229,724                 |   | 4.4               | %      | 79,105,000      |   | 4.2               | %      |
| With 6 months notice  |   | 2          |   | 400        |   | 1.0                      | %      | 13,975,000                 |   | 0.8               | %      | 12,538,000      |   | 0.7               | %      |
| Pre-2000              |   | —     |   | —     |   | 0.0                      | %      | —                     |   | 0.0               | %      | —          |   | 0.0               | %      |
| 2001-2005             |   | 7          |   | 1,380      |   | 3.4                      | %      | 58,750,000                 |   | 3.2               | %      | 57,840,000      |   | 3.1               | %      |
| 2006-2010             |   | 8          |   | 1,806      |   | 4.5                      | %      | 69,835,000                 |   | 3.8               | %      | 69,229,000      |   | 3.7               | %      |
| 2011-2015             |   | 9          |   | 2,414      |   | 6.0                      | %      | 89,853,000                 |   | 4.9               | %      | 94,214,000      |   | 5.0               | %      |
| 2016-2020             |   | 153        |   | 30,155     |   | 74.2                     | %      | 1,384,440,985              |   | 75.2              | %      | 1,418,928,000   |   | 75.8              | %      |
| 2021-2025             |   | 6          |   | 1,062      |   | 2.6                      | %      | 51,350,000                 |   | 2.8               | %      | 51,768,000      |   | 2.8               | %      |
| 2026-2030             |   | 10         |   | 1,977      |   | 4.9                      | %      | 90,367,287                 |   | 4.9               | %      | 87,387,000      |   | 4.7               | %      |
| Total                 |   | 243        |   | 40,556     |   | 100.0                    | %      | 1,838,800,996              |   | 100.0             | %      | 1,871,009,000   |   | 100.0             | %      |
|                  |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| **By Maturity Date:** |   |       |   |       |   |                     |   |                       |   |              |   |            |   |              |   |
| 2003-2005             |   | 4          |   | —     |   | 0.0                      | %      | 3,317,381                  |   | 0.2               | %      | 2,969,000       |   | 0.2               | %      |
| 2006-2010             |   | 20         |   | 640        |   | 1.6                      | %      | 36,187,500                 |   | 2.0               | %      | 32,910,000      |   | 1.8               | %      |
| 2011-2015             |   | 16         |   | 293        |   | 0.7                      | %      | 18,943,160                 |   | 1.0               | %      | 17,683,000      |   | 0.9               | %      |
| 2016-2020             |   | 17         |   | 1,978      |   | 4.9                      | %      | 100,086,683                |   | 5.4               | %      | 98,559,000      |   | 5.3               | %      |
| 2021-2025             |   | 10         |   | 1,024      |   | 2.5                      | %      | 55,130,800                 |   | 3.0               | %      | 53,282,000      |   | 2.8               | %      |
| 2026-2030             |   | 10         |   | 2,132      |   | 5.3                      | %      | 68,847,428                 |   | 3.7               | %      | 71,162,000      |   | 3.8               | %      |
| 2031-2035             |   | 10         |   | 1,985      |   | 4.9                      | %      | 81,322,000                 |   | 4.4               | %      | 84,320,000      |   | 4.5               | %      |
| 2036-2040             |   | 54         |   | 10,919     |   | 26.9                     | %      | 429,880,490                |   | 23.4              | %      | 444,699,000     |   | 23.8              | %      |
| 2041-2045             |   | 102        |   | 21,585     |   | 53.2                     | %      | 1,045,085,554              |   | 56.9              | %      | 1,065,425,000   |   | 56.9              | %      |
| 2046 and after        |   | 0          |   | —     |   | 0.0                      | %      | —                     |   | 0.0               | %      | —          |   | 0.0               | %      |
| Total                 |   | 243        |   | 40,556     |   | 100.00                   | %      | 1,838,800,996              |   | 100.00            | %      | 1,871,009,000   |   | 100.00            | %      |

 
|                  |   | **Current  Stated  Interest  Rate** |   | **Pertinent Weighted Average Dates** |   | **Annualized Base Interest** |   | **Occupancy  on Stabi-  lized  Properties** |   | **DSCR on  Stabilized  Properties** |   |
|-----------------------|--------|-------------------------------------|--------|--------------------------------------|--------|------------------------------|--------|---------------------------------------------|--------|-------------------------------------|--------|
| **Put Date**          |   | **Optional  Redemption  Date**      |   | **Maturity  Date**                   |   | **$****Amount**              |   | **%****of  Total**                          |
|                  |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| **By Put Date:**      |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| No put date           |   | 7.3                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| With 6 months notice  |   | 8.0                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| Pre-2000              |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2001-2005             |   | 7.0                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2006-2010             |   | 7.3                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2011-2015             |   | 7.1                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2016-2020             |   | 6.9                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2021-2025             |   | 5.7                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2026-2030             |   | 6.5                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| Total                 |   | 6.93                                | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
|                  |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| **By Maturity Date:** |   | 9.2                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2003-2005             |   | 7.2                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2006-2010             |   | 6.3                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2011-2015             |   | 7.0                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2016-2020             |   | 9.1                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2021-2025             |   | 7.0                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2026-2030             |   | 7.0                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2031-2035             |   | 7.2                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2036-2040             |   | 6.7                                 | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2041-2045             |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| 2046 and after        |   |                                |   |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |
| Total                 |   | 6.93                                | %      |                                 |   |                         |   |                                        |   |                                |   |   |   |   |   |   |   |

 

63

----

 

(Dollars in thousands)

 

| **Reconciliation of revenue bonds:**                                           |   | **2003** |      | **2002** |   | **2001**  |   |
|--------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                                           |   |     |      |     |   |      |   |
| Balance at  beginning of period                                                |   | $        | 1,579,590 |     | $      | 1,137,715 |   | $ | 845,405 |   |
| Acquisitions                                                                   |   | 432,915  |      | 457,060  |   | 295,962   |   |
| Proceeds  from repayments of bonds                                             |   | (83,795  | )         | (108,630 | )      | (24,227   | )      |
| Periodic  principal repayments of bonds                                        |   | (16,136  | )         | (4,986   | )      | (1,584    | )      |
| Carrying  amount of bonds in excess of (less than) proceeds from the repayment |   | 2,472    |      | 4,273    |   | (681      | )      |
| Bond advance  held by Trustee                                                  |   | (3,643   | )         | —   |   | —    |   |
| Loss on impairment  of assets                                                  |   | (1,759   | )         | (920     | )      | (400      | )      |
| Net change  in fair value of bonds                                             |   | (38,559  | )         | 95,126   |   | 23,135    |   |
| Accretion of  deferred income and purchase accounting adjustment               |   | (76      | )         | (48      | )      | 105       |   |
| Balance at  close of period                                                    |   | $        | 1,871,009 |     | $      | 1,579,590 |   | $ | 1,137,715 |   |

 

Total interest income from revenue bonds, including participatinginterest, was approximately $113,655,000, $92,681,000 and $71,500,000 for theyears ended December 31, 2003, 2002 and 2001 respectively, which represents anaverage annual yield of 7.06%, 7.32% and 7.40% based on weighted average faceamounts of approximately $1,609,000, $1,267,000 and $965,865,000,  respectively.

 

The amortized cost basisof our portfolio of revenue bonds at December 31, 2003 and 2002 wasapproximately $1,814,180,000 and $1,468,233,000 , respectively.  The net unrealized gain on revenue bonds ofapproximately $56,829,000 at December 31, 2003 consisted of gross unrealizedgains and losses of approximately $65,394,000 and $8,565,000,respectively.  The net unrealized gainon revenue bonds of approximately $95,387,000 at December 31, 2002 consisted ofgross unrealized gains and losses of approximately $100,964,000 and $5,577,000,respectively.

 

The fair value and grossunrealized losses of our revenue bonds aggregated by length of time thatindividual bonds have been in a continuous unrealized loss position, atDecember 31, 2003, is summarized in the table below:

 

| **(In thousands)**    |   | **Less than********12 Months** |    | **12 Months********or More** |   | **Total** |   |
|-----------------------|--------|--------------------------------|---------|------------------------------|--------|-----------|--------|
| Fair value            |   | $                              | 216,743 |                         | $      | 36,660    |   | $ | 253,403 |   |
| Gross unrealized loss |   | $                              | (5,789  | )                            | $      | (2,777    | )      | $ | (8,565 | ) |

 

The following is a table summarizing the maturity dates of our revenuebonds.

 

| **(In thousands)**             |   | **Outstanding********Bond Amount** |      | **Fair Value** |   | **Weighted Average********Interest Rate** |   |
|--------------------------------|--------|------------------------------------|-----------|----------------|--------|-------------------------------------------|--------|
| Due in less than one year      |   | $                                  | 3,159     |           | $      | 2,969                                     |   | 9.69 | % |
| Due between one and five years |   | 30,822                             |      | 28,463         |   | 6.84                                      | %      |
| Due after five years           |   | 1,796,085                          |      | 1,839,577      |   | 7.03                                      | %      |
| Total                          |   | $                                  | 1,830,066 |           | $      | 1,871,009                                 |   | 7.03 | % |

 

Allof our revenue bonds have fixed interest rates.

 

The principal and interest payments on each revenue bond are payableonly from the cash flows of the Underlying Properties, including proceeds froma sale of an Underlying Property or the refinancing of the mortgage loansecuring such revenue bonds.  None ofthe revenue bonds constitutes a general obligation of any state or localgovernment, agency or authority.  Thestructure of each Mortgage Loan mirrors the structure of the correspondingrevenue bond that it secures.  In orderto protect the tax-exempt status of the revenue bonds, the owners of theUnderlying Properties are required to enter into certain agreements to own,manage and operate such Underlying Properties in accordance with requirementsof the Internal Revenue Code of 1986, as amended.

 

No single revenue bond provided interest income that exceeded 10% of ourtotal revenue for the years ended December 31, 2003, 2002 or 2001.  Based on the face amount of revenue bonds atDecember 31, 2003, approximately 29.7% are located in Texas, 11.5% are locatedin Georgia and 10.3% are located in California.  No other state comprises more than 10% of the total face amountat December 31, 2003.  Based on the faceamount of revenue bonds at December 31, 2002, approximately 29.6% were locatedin Texas, 12.5% were located in California, and 11.2% were located inFlorida.  No other state comprised morethan 10% of the total face amount at December 31, 2002.

 

64

----

 

Our revenue bonds bear a fixed base interest rate and, to the extentpermitted by existing regulations, may or may not also provide for contingentinterest and other features.  Terms areexpected to be five to 35 years, although we may have the right to causerepayment prior to maturity through a mandatory redemption feature (five toseven years with up to six month’s notice). In some cases, the bonds call for amortization or “sinking fund”payments, generally at the completion of rehabilitation or construction, ofprincipal based on thirty to forty year level debt service amortizationschedules.

 

Revenue bonds are generally not subject to optional prepayment duringthe first 5-10 years of our ownership of the bonds and may carry prepaymentpenalties thereafter beginning at 5% of the outstanding principal balance,declining by 1% per annum.  Certainrevenue bonds may be purchased at a discount from their face value.  Up to 15% of our Total Market Value (asdefined in its trust agreement) may be invested in revenue bonds secured byUnderlying Properties in which affiliates of Related have a controllinginterest, equity interest or security interest.  The 15% limit is not applicable to properties to which Related orits affiliates have taken title for the benefit of us and only applies torevenue bonds acquired after the Merger. In selected circumstances and generally only in connection with theacquisition of tax-exempt revenue bonds, we may acquire a small amount oftaxable bonds (i) which we may be required to acquire in order to satisfy stateregulations with respect to the issuance of tax-exempt bonds and (ii) to fundcertain costs associated with the issuance of revenue bonds, that under currentlaw cannot be funded by the revenue bond itself.

 

Certain revenue bonds provide for “participating interest” which isequal to a percentage of net property cash flow of the net sale or refinancingproceeds.  Both the stated andparticipating interest on the revenue bonds are exempt from federal incometax.  During the years ended December31, 2003, 2002 and 2001, participating interest was collected amounting toapproximately $2.0 million, $3.1 million and $1.5 million, respectively.  Revenue bonds that contain provisions forcontingent interest are referred to as “participating”; revenue bonds lackingthis provision are “non-participating”.

 

*2003 Transactions*

 

Revenuebonds acquired or additional fundings made during 2003 are summarized below:

* *

| **(In  thousands)**                    |   | **Face  Amount** |    | **Weighted  Average  Construction  Rate** |   | **Weighted  Average  Permanent  Interest Rate** |   |
|----------------------------------------|--------|------------------|---------|-------------------------------------------|--------|-------------------------------------------------|--------|
|                                   |   |             |    |                                      |   |                                            |   |
| Non-participating revenue bonds        |   |             |    |                                      |   |                                            |   |   |
| Construction/rehabilitation properties |   | $                | 421,595 |                                      | 6.21   | %                                               | 6.58   | % |
| Additional fundings of existing bonds  |   | $                | 11,320  |                                      | 7.00   | %                                               | 7.00   | % |

 

Revenue bonds and notes repaid during 2003 aresummarized below:

 

| **(In thousands)**              |   | **Face  Amount** |   | **Cost** |   | **Realized  Gains/Losses** |   |
|---------------------------------|--------|------------------|--------|----------|--------|----------------------------|--------|
|                            |   |             |   |     |   |                       |   |
| Participating revenue bonds     |   |             |   |     |   |                       |   |
| Stabilized                      |   | $                | 23,550 |     | $      | 21,330                     |   | $ | 2,219 |   |
|                            |   |             |   |     |   |                       |   |
| Non-participating revenue bonds |   |             |   |     |   |                       |   |
| Stabilized                      |   | 61,081           |   | 60,615   |   | (268                       | )      |
|                            |   |             |   |     |   |                       |   |
| Notes                           |   |             |   |     |   |                       |   |
| Stabilized                      |   | 245              |   | 245      |   | —                     |   |
|                            |   |             |   |     |   |                       |   |
|                            |   |             |   |     |   | $                          | 1,951  |   |
|                                 |        |                  |        |          |        |                            |        |  |  |  |

 

65

----

 

*2002 Transactions*

 

Revenuebonds and other investments acquired or made during 2002 are summarized below:

* *

| **(In  thousands)**                    |   | **Face  Amount** |    | **Weighted  Average  Construction  Rate** |   | **Weighted  Average  Permanent  Interest Rate** |   |
|----------------------------------------|--------|------------------|---------|-------------------------------------------|--------|-------------------------------------------------|--------|
|                                   |   |             |    |                                      |   |                                            |   |
| Non-participating revenue bonds        |   |             |    |                                      |   |                                            |   |
| Construction/rehabilitation properties |   | $                | 457,060 |                                      | 6.940  | %                                               | 6.981  | % |
| Other Investments                      |   |             |    |                                      |   |                                            |   |
| Bridge and mezzanine loans             |   | 4,375            |    | N/A                                       |   | 8.257                                           | %      |
|                                        |        |                  |         |                                           |        |                                                 |        |  |

 

Revenue bond and notes repaid during 2002 are summarized below:

 

| **(In thousands)**              |   | **Face  Amount** |   | **Cost** |   | **Realized  Gains** |   |
|---------------------------------|--------|------------------|--------|----------|--------|---------------------|--------|
|                            |   |             |   |     |   |                |   |
| Participating revenue bonds     |   |             |   |     |   |                |   |
| Stabilized                      |   | $                | 36,175 |     | $      | 39,143              |   | $ | 2,968 |   |
|                            |   |             |   |     |   |                |   |
| Non-participating revenue bonds |   |             |   |     |   |                |   |
| Stabilized                      |   | 81,825           |   | 82,749   |   | 917                 |   |
|                            |   |             |   |     |   |                |   |
| Notes                           |   |             |   |     |   |                |   |
| Stabilized                      |   | 7,350            |   | 7,350    |   | —              |   |
|                            |   |             |   |     |   |                |   |
|                            |   |             |   |     |   | $                   | 3,885  |   |
|                                 |        |                  |        |          |        |                     |        |  |  |  |

 

*Bond Impairment*

 

The original developer of Waterford Place Phase II, is in the processof divesting its assets and unwinding its business, which triggered defaultsunder our guarantees with the developer. Additionally, we have determined there has been a softening of thismarket.  The equity investor, anaffiliate of Related, has agreed to release and transfer its ownership to anominee of our Company, who will foreclose on the Underlying Property.  We have determined this bond is impaired,and as such we have stopped accruing interest and have written down the bond toits estimated fair value of approximately $900,000, taking a loss on impairmentof approximately $1.8 million during the quarter ended September 30, 2003.  We determined the fair value of the propertyas equal to the appraised value of the land plus the cost of certainimprovements made to date, discounted for the softening in the market.

 

During the second quarter of 2001, the borrowers of Lexington Trailsfailed to make the regular interest payments. As a result, we determined the bond was impaired and stoppedaccruing interest, and havewritten down the bond to its estimatedfair value of approximately $5.5 million and took a loss on impairment of$400,000.  During the fourth quarter of2001, we caused the trustee, for the benefit of us, to foreclose on theUnderlying Property.  During the fourthquarter of 2002, we began marketing the Underlying Property for sale, and wewrote this bond down to its estimated fair value of $4.5 million resulting in arecorded loss of $920,000.  LexingtonTrails was sold on December 31, 2003, for a total sales price of approximately$4,412,500 million, which resulted in a loss of $630,695.

 

NOTE4 – Investment in Partnerships

 

Investments in partnerships at December 31, 2003 consist of:

 

| **(In thousands)**                      |   | **2003** |   |
|-----------------------------------------|--------|----------|--------|
|                                    |   |     |   |
| Investment to acquire equity interests  |   | $        | 24,644 |   |
| Investment in properties in development |   | 1,994    |   |
|                                    |   | $        | 26,638 |   |

 

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A subsidiary wholly owned by Related acquires equity interests inproperty ownership entities on a short-term basis, and also invests funds withthird party developers to develop properties for inclusion in offerings toinvestors, which are arranged by Related. Such amounts are expected to be distributed from the proceeds of theequity and debt financing when the investment fund has closed.  The developer has also guaranteed repaymentof these investments to Related. Substantially all of these investments are pledged as collateral forRelated’s borrowings under the warehouse facility.

 

Related also invests funds in affiliated entities, whereby subsidiariesof Related co-develops properties to be sold to investment funds.  Development investments include amountsinvested to fund pre-development and development costs.  Investment funds organized by Relatedacquire the limited partnership interests in these properties.  Distributions of the development investmentby the affiliated entity is expected to be made from various sourcesattributable to the properties, including capital contributions of investmentsfunds, cash flow from operations, and/or from co-development partners, who inturn have cash flow notes from the properties. In connection with Related’s co-development agreements, affiliates ofCharterMac issue construction completion, development deficit guarantees andoperating deficit guarantees to the lender and investment funds (for the underlyingfinancing of the properties) on behalf of Related.

 

NOTE 5 – Other Investments

 

*Investment in ARCap*

 

On October 18, 2001, our Company, through CM Corp., purchased 739,741units of Series A Convertible Preferred Membership Interests in ARCap Investors,LLC at the price of $25 per unit, with a preferred return of 12%.  The carrying value of our interests in ARCapat December 31, 2003 was $19,054,409, which is included in other assets.

 

ARCap Investors, LLC was formed in January 1999 by REM/CAP and ApolloReal Estate Investors to invest exclusively in subordinated CMBS.  Since then, ARCap has changed its focus andhas begun to provide portfolio management services for third parties.

 

NOTE 6 - Deferred Costs

 

The components of deferred costs are as follows:

 
|                                                                                    |   | **(Dollars in thousands)** |   |
|-----------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                    |   | **December  31,**          |   |
|                                                                                    |   | **2003**                   |   | **2002** |   |
|                                                                                    |   |                       |   |   |   |
| Deferred bond selection costs (1)                                                       |   | $                          | 46,479 |   | $ | 34,810 |   |
| Deferred financing costs                                                                |   | 11,170                     |   | 8,030 |   |
| Deferred costs relating to the issuance of  preferred shares of subsidiary (see Note 9) |   | 10,445                     |   | 10,445 |   |
| Deferred costs relating to acquisition of  Related                                      |   | —                     |   | 2,483 |   |
| Other deferred costs                                                                    |   | 3,777                      |   | 1,376 |   |
|                                                                                    |   | 71,871                     |   | 57,144 |   |
| Less: Accumulated amortization                                                          |   | (13,463                    | )      | (8,451 | ) |
|                                                                                    |   |                       |   |   |   |
|                                                                                    |   | $                          | 58,408 |   | $ | 48,693 |   |

 

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(1)   This primarily represents the 2% bond selection feepaid to the Manager prior to our acquisition of Related (see Note 12).

 

NOTE7 - Financing Arrangements

 

Weraise capital to acquire additional revenue bonds through two securitizationprograms.

 

*P-FLOATS/RITESProgram (“P-FLOATS”)*

 

Wehave securitized certain revenue bonds through the Merrill Lynch Pierce Fenner& Smith Incorporated (“Merrill Lynch”) P-FLOATS/RITES program.  Under this program, we transfer certainrevenue bonds to Merrill Lynch.  MerrillLynch deposits each revenue bond into an individual special purpose trusttogether with a credit enhancement guarantee (“Guarantee”).  Two types of securities are then issued byeach trust, (1) Puttable Floating Option Tax-Exempt Receipts (“P-FLOATS”), ashort-term senior security which bears interest at a floating rate that isreset weekly and (2) Residual Interest Tax Exempt Securities (“RITES”), asubordinate security which receives the residual interest payment after paymentof P-FLOAT interest and ongoing transaction fees.  The P-FLOATS are sold to third party investors and the RITES aregenerally sold back to us.  We have theright, with 14 days notice to the trustee, to purchase the outstanding P-FLOATSand withdraw the underlying revenue bonds from the trust.  When the revenue bonds are deposited intothe P-FLOAT Trust, we receive the proceeds from the sale of the P-FLOATS

 

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lesscertain transaction costs.  In certainother cases, Merrill Lynch may directly buy the revenue bonds from localissuers, deposit them in the trust, sell the P-FLOAT security to investors andthen the RITES to us.

 

Forfinancial reporting purposes, due to the repurchase right, we account for thenet proceeds received upon the transfer of our revenue bonds through theP-FLOATS/RITES program as secured borrowings and, accordingly, continue toaccount for the revenue bonds as assets. When Merrill Lynch purchases revenue bonds directly and sells the RITESto us, the RITES are included in other assets and accounted for at fair valueas available-for-sale debt securities.

 

In order to facilitate the securitization, we have pledged certainadditional revenue bonds as collateral for the benefit of the credit enhanceror liquidity provider.  At December 31,2003, the total carrying amount of such additional revenue bonds, cash and cashequivalents and temporary investments pledged as collateral was approximately$168.9 million.

 

Duringthe year 2003, we transferred 46 revenue bonds with an aggregate face amount ofapproximately $292.7 million to the P-FLOATS/RITES program and receivedproceeds of approximately $297.7 million. Additionally, we repurchased 14 revenue bonds with an aggregate facevalue of approximately $190.5 million.

 

Our cost of funds relating to its securedborrowings under the Merrill Lynch P-FLOATS/RITESprogram(calculated as interest expense as a percentage of the weighted average amountof the secured borrowings) was approximately 2.03%, 2.4% and 3.7%, annualized,for the years ended December 31, 2003 and 2002 and 2001, respectively.

 

MBIA

 

On May 21, 1998, our Company closed on the MBIATender Option Program (“TOPs”).  MBIA isa financial insurer, which has entered into a surety commitment with ourCompany and certain of its subsidiaries whereby MBIA has agreed to creditenhance certain pools of bonds in exchange for certain fees.  Under the TOPs structure, we contributerevenue bonds to CharterMac Origination Trust I (the “Origination Trust”), aconsolidated wholly owned, indirect subsidiary of our Company.  The Origination Trust then contributescertain of these revenue bonds to CharterMac Owner Trust I (the “Owner Trust”)and others to CharterMac Action Rate Trust I (the “Auction Rate Trust”), whichare controlled by us.  The Owner Trustand the Auction Trust contribute selected bonds to specific “SeriesTrusts.”  As of December 31, 2003, sevensuch Series Trusts were created.  Six ofthese series trusts reside beneath Owner Trust including two California onlyseries and four National (non-state specific) series.  One series trust resides beneath Auction Trust.

 

Each Series Trust, issues two equitycertificates:  (i) a Senior Certificatewhich has been deposited into a “Certificate Trust” which issues and sells“Floater Certificates” or “Auction Certificates” representing proportionalinterests in the Senior Certificate to new investors and (ii) a ResidualCertificate, issued to the Origination Trust which represents the remainingbeneficial ownership interest in each Series Trust.

 

Asof December 31, 2003, the maximum amount of capital that could be raised underthe TOPs facility was $650 million, including $425 million in FloaterCertificates under the Owner Trust and $225 million in Auction Certificatesunder the Auction Trust.  In addition,the surety commitment by MBIA was recently extended for eight years, throughOctober 1, 2011.  As of December 31,2003, total outstanding under the TOPs program was $483.5 million, including$383.5 million in Floater Certificates and $100.0 million in AuctionCertificates.

 

Thesurety commitment by MBIA can be used to enhance certificates sold under lowfloater and auction rate programs.  Thelow floater program requires the existence of liquidity due to the put optionavailable to the buyers of the low floater certificates.  The liquidity is currently supplied by aconsortium of highly-rated banks.  Theliquidity commitments are one-year renewable contracts.  We expect to renew or replace suchcommitments upon expiration of their terms. The auction rate program does not require liquidity as the buyers ofthose securities do not have the option to put their certificates back to theseller.

 

Theeffect of the TOPs structure is that a portion of the interest received on therevenue bonds in the Owner Trust and the Auction Trust is distributed throughthe Senior Certificate to the holders of the Floater or Auction RateCertificates with any remaining interest remitted to the Origination Trust (andthus to our benefit) via the Residual Certificate.  The revenue bonds remaining in the Origination Trust (aggregateprincipal amount of approximately $160 million) are an additional collateralpool for the Owner Trust’s obligations. In addition, five taxable revenue bonds totaling $10.8 million in principaloutstanding, have been allocated as additional collateral for Owner Trust’sobligations.

 

OurCompany’s floating rate cost of funds relating to the TOPs program (calculatedas interest expense plus recurring fees as a percentage of the weighted averageamount of the outstanding Senior Certificate) was approximately 2.2%, 2.4% and3.5% for the years ended December 31, 2003, 2002 and 2001, respectively.

 

During 2003, we further refined the TOP.  We placed certain revenue bonds in trusts, in connection with ourguarantees of specified rate of returns to third party investors in mortgagepools.  (See Note 16).  We agreed to subordinate approximately 50%of the par value of the revenue bonds we acquired that are secured by theproperties in these pools.  The trustsissued Class A Certificates, which have been securitized through theP-Floats/RITES program.  The Class BCertificates are currently being held at CharterMac as excess collateral tosupport our obligations to the Primary Guarantor.

 

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For financial accounting and reporting purposes, the Owner Trust, whichis controlled by our Company, is consolidated. Income earned by the Owner Trust is allocated to the minority interestin an amount equal to the distributions through the Senior Certificate to theholders of the Floater Certificates.

 

On October 30, 2003, we entered into a new form ofsecuritization, under which auction rate certificates secured by an open poolof revenue bonds were auctioned through UBS Financial Services Inc.  to corporations as an alternative totax-exempt money market funds.

 

Weplaced revenue bonds with an aggregate par value of approximately $143 millioninto CharterMac Auction Rate Certificate Trust I, (“ARCSI”).  A portion of these bonds, approximately $81million, had been previously securitized under TOPS in the Nat-1 SeriesTrust.  In order to move the bonds toARCSI, we redeemed low-floater certificates aggregating approximately $118million.  On October 30, 2003, ARCSI issued$100 million of auction rate certificates. These certificates have an initial rate of 1% which will be reset every35 days through a dutch auction process.

 

On April 1, 2003, we closed on our sale ofTax-Exempt Multi-family Housing Trust Certificates Series 2003A (the“Trust”).  Pursuant to the terms of theTrust, we contributed revenue bonds with an aggregate par value ofapproximately $196.8 million in aggregate principal into a trust out of whichwas sold $100 million in Class A Certificates to various institutionalinvestors.  A consolidated wholly ownedindirect subsidiary of CharterMac retained the subordinated Class BCertificates totaling approximately $96.8 million.  CharterMac has agreed that it will hold the Class B Certificatesuntil the Trust is terminated.  TheClass A Certificates will accrue interest at the fixed rate of 3.25% per annumfor two years.  Distributions to theClass A Certificate holders are made on the 15th day of each month,commencing on May 15, 2003.  The Class ACertificates will be subject to mandatory tender for purchase at a price equalto the outstanding Certificate Balance thereof plus accrued interest thereon onMarch 15, 2005.  If CharterMac does notexercise its option to terminate the Trust on March 15, 2005, the Class ACertificates will be subject to remarketing. The Class A Certificates will be subject to mandatory tender forpurchase and cancellation on the Final Distribution Date from proceeds of theliquidation of the bonds on March 15, 2007.

 

Thefollowing table shows the components of the financing arrangements.

 

|                       |   | **Amount Financed (Dollars in thousands)** |    |
|----------------------------|--------|--------------------------------------------|---------|
| **Financing Arrangement**  |   | **December 31, 2003**                      |    | **December 31, 2002** |   |
|                       |   |                                       |    |   |   |
| P-FLOATS/RITES             |   | $                                          | 316,508 |   | $ | 215,159 |   |
| MBIA: Loan Floater         |   | 383,500                                    |    | 456,500 |   |
| MBIA: Auction Rate         |   | 100,000                                    |    | — |   |
| Fixed-Rate  Securitization |   | 100,000                                    |    | — |   |
|                       |   |                                       |    |   |   |
| Total                      |   | $                                          | 900,008 |   | $ | 671,659 |   |

 

NOTE8 - Notes Payable

 

Inconnection with the acquisition of PWF, we entered into a loan commitment (the“PWF acquisition loan”).  The PWFAcquisition Loan has a term of five years with an interest rate of LIBOR plus2.25%.  The loan is interest only forthe first twelve months.  Beginning inJanuary 2003 and through the remaining loan term, quarterly straight-lineprincipal amortization on the Initial Advance is paid based on a ten-yearamortization period.

 

AtDecember 31, 2003 and 2002, there was approximately $25.2 and $27.2 millionoutstanding on this loan, respectively, included in notes payable in theaccompanying consolidated financial statements.

 

PWFhas a $100 million secured, revolving mortgage warehouse facility, subject toannual renewal.  CM Corp. is a guarantorof this warehouse facility.  Theinterest rate for each warehouse advance is the Fed Funds rate at the end ofeach year plus 1.25%, which at December 31, 2003 was 2.24%.  At December 31, 2003 and 2002, the amount outstandingwas approximately $21.9 and $41.3 million, respectively.

 

In order tofurther increase financial flexibility, on March 31, 2003, Equity Issuer enteredinto a $75 million secured revolving tax-exempt bond warehouse line of creditwith Fleet Securities, Inc.  andWachovia Securities, Inc.  This facilityhas a built in accordion feature allowing up to a $25 million increase for atotal size of $100 million and a term of two years, plus a one year extensionat our option.  This facility bearsinterest at 31, 60, 90, or 180-day reserve adjusted LIBOR plus 1.5%, or primeplus 0.25%, at our option.  During thethird quarter of 2003, Citibank became the third lender under thisfacility.  The outstanding balance ofthis facility at December 31, 2003 was approximately $21.7 million.

 

On November17, 2003, CM Corp. entered into $50 million and $10 million acquisition bridgeloan facilities with Wachovia Bank in order to fund the cash portion, fees andexpenses of our acquisition of Related. These bridge loan facilities have a nine-month term with two 90-dayextension options.  We have pledged ourcommon ownership interest in the Equity Issuer as security under thesefacilities.  The facilities arepre-payable at any time and bear interest at LIBOR plus 1.5% and 2.4%,respectively.  As of December 31, 2003,CM Corp. had borrowed the full $60 million available under these facilities.

 

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On November 17, 2003,Related entered into a warehouse facility in the amount of $85 million, withFleet National Bank, Merrill Lynch C.D.C and Citicorp, USA.  This facility has a maturity date of October29, 2004 and bears interest, at Related’s option, at either LIBOR plus 2% orthe prime rate plus .125%.  At December31, 2003, there was an outstanding balance of $24.5 million at a weightedaverage net rate of 3.73%.  Thisfacility is collateralized by a lien on certain limited partnership interests(See Note 4).  Payments of interest onlyare due on a monthly basis.  Related hasthe option to extend the warehouse facility upon its maturity in 2004, renegotiatethe terms of the warehouse facility or arrange alternate sources of financingto repay the outstanding balance.

 

| **(In thousands)**  |   | **Payments Due** |    |
|---------------------|--------|------------------|---------|
|                |   |             |    |
| 2004                |   | $                | 109,128 |   |
| 2005                |   | 24,456           |    |
| 2006                |   | 2,726            |    |
| 2007                |   | 2,726            |    |
| 2008 and thereafter |   | 14,314           |    |
|                |   |             |    |
|                |   | $                | 153,350 |   |

 

NOTE 9 -Preferred Shares of Subsidiary

 

SinceJune 1999, our Company, through a consolidated subsidiary, has issued multipleseries of “Cumulative Preferred Shares”.

 
| **Preferred********Series** |   | **Date of********Issuance** |   | **Mandatory********Tender** |   | **Mandatory********Repurchase** |   | **Number of********Shares** |   | **Liquidation********Preference  per********Share** |      | **Total Face********Amount** |   | **Dividend********Rate** |   |
|-----------------------------|--------|-----------------------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------------------|--------|-----------------------------------------------------|-----------|------------------------------|--------|--------------------------|--------|
|                        |   |                        |   |                        |   |                            |   |                        |   |                                                |      |                         |   |                     |   |
| Series A                    |   | 06/29/99                    |   | 06/30/09                    |   | 06/30/49                        |   | 45                          |   | $                                                   | 2,000,000 |                         | $      | 90,000,000               |   | 6.625 | % |
| Series A-1                  |   | 07/21/00                    |   | 06/30/09                    |   | 06/30/49                        |   | 48                          |   | 500,000                                             |      | 24,000,000                   |   | 7.100                    | %      |
| Series A-2                  |   | 10/09/01                    |   | 06/30/09                    |   | 06/30/49                        |   | 62                          |   | 500,000                                             |      | 31,000,000                   |   | 6.300                    | %      |
| Series A-3                  |   | 06/04/02                    |   | 10/31/14                    |   | 10/31/52                        |   | 60                          |   | 500,000                                             |      | 30,000,000                   |   | 6.800                    | %      |
| Series B                    |   | 07/21/00                    |   | 11/30/10                    |   | 11/30/50                        |   | 110                         |   | 500,000                                             |      | 55,000,000                   |   | 7.600                    | %      |
| Series B-1                  |   | 10/09/01                    |   | 11/30/10                    |   | 11/30/50                        |   | 37                          |   | 500,000                                             |      | 18,500,000                   |   | 6.800                    | %      |
| Series B-2                  |   | 06/04/02                    |   | 10/31/14                    |   | 10/31/52                        |   | 50                          |   | 500,000                                             |      | 25,000,000                   |   | 7.200                    | %      |
|                             |        |                             |        |                             |        |                                 |        |                             |        |                                                     |           |                              |        |                          |        |  |  |

 

Inconnection with the offerings of these Cumulative Preferred Shares, we caused100% of the ownership of Origination Trust to be transferred to Equity Issuer,a Delaware business trust and a consolidated indirectly-owned subsidiary inwhich we own 100% of the common equity. Equity Issuer then issues the Cumulative Preferred Shares and, as aresult, Equity Issuer became the direct and indirect owner of the entireoutstanding issue of revenue bonds held by the Origination Trust and OwnerTrust and its directly-owned and indirectly-owned subsidiaries (see discussionof Private Label Tender Option Program, above).  In addition to contributing the ownership of Origination Trust,we also contributed certain additional revenue bonds to Equity Issuer.

 

Eachseries of Cumulative Preferred Shares has an annual preferred dividend payablequarterly in arrears upon declaration thereof by the Board of Trustees, but onlyto the extent of tax-exempt net income for the particular quarter.  All series of Cumulative Preferred Sharesare subject to mandatory tender by the holders thereof for remarketing andpurchase on their respective mandatory tender dates and each remarketing datethereafter at their respective liquidation preference per share plus an amountequal to all distributions accrued but unpaid.

 

Holdersof Cumulative Preferred Shares may elect to retain their shares uponremarketing, with a distribution rate to be determined immediately prior to theremarketing date by the remarketing agent. Each holder of Cumulative Preferred Shares will be required to tenderits shares to the Issuer for mandatory repurchase on the mandatory repurchasedate, unless we decide to remarket the shares on such date.  Cumulative Preferred Shares are notconvertible into common shares of our Company.

 

TheSeries A, A-1, A-2 and A-3 Cumulative Preferred Shares rank, with respect topayment of distributions and amounts upon liquidation, dissolution orwinding-up of our Company, senior to all classes or series of Convertible CRAShares, Series B, B-1 and B-2 Cumulative Preferred Shares and Common shares ofour Company.  The Series B, B-1 and B-2Subordinate Cumulative Preferred Shares rank, with respect to payment ofdistributions and amounts upon liquidation, dissolution or winding-up of ourCompany, senior to our Company’s common shares and our Convertible CRA Sharesand junior to the Issuer’s Series A, A-1, A-2 and A-3 Cumulative PreferredShares.

 

Since issuance of the Cumulative Preferred Shares, all quarterlydistributions have been declared at each stated annualized dividend rate foreach respective series and all distributions due have been paid.

 

In accordance with FAS 150, we began, in July2003, to include the Cumulative Preferred Shares in the liability section ofour consolidated balance sheet, and to include the dividends paid in thoseshare as an interest expense on our consolidated statement of operations.

 

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NOTE 10 - Income Taxes

 

The income tax benefit (provision) consisted of the followingcomponents:

 
|                                       |   | **2003** |   | **2002** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|
| Current:                                   |   |     |   |     |   |
| Federal                                    |   | $        | (2,212 | )        | $      | (1,303 | ) |
| State and Local                            |   | (1,207   | )      | (520     | )      |
| Total current                              |   | $        | (3,419 | )        | $      | (1,823 | ) |
|                                       |   |     |   |     |   |
| Deferred Federal, State and Local          |   | 9,491    |   | 539      |   |
|                                       |   |     |   |     |   |
| Total benefit (provision) for income taxes |   | $        | 6,072  |     | $      | (1,284 | ) |

 

Until December 30, 2001, PWF elected for both Federal and state incometax purposes to be treated as an S corporation.  As an S corporation, the net earnings of PWF were taxed directlyto its stockholders rather than PWF.

 

Deferred income tax assets and liabilities are computed based ontemporary differences between the financial statement and income tax bases ofassets and liabilities that existed at December 31, 2003.

 

Our effective tax rate for CM Corp. is 44.2% and 45.8% for the yearsended December 31, 2003 and 2002, respectively, due to State income taxes, netof the Federal benefit.

 

A reconciliation of the statutory federal tax rate and the effectivetax rate is as follows:

 
| Statutory  tax rate |   | 34.0 | % |
|---------------------|--------|------|---|
| State and  Local    |   | 10.2 | % |
| Effective  tax rate |   | 44.2 | % |

 

The components of the deferred tax, liability are as follows:

 
|                                  |   | **2003** |   | **2002** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
| Allowance  for loan loss reserves     |   | $        | — |     | $      | (752 | ) |
| Originated  mortgage service rights   |   | 11,072   |   | 12,314   |   |
| Deferred  guarantee fees              |   | (2,619   | )      | (1,456   | )      |
| Deferred  construction servicing fees |   | (3,352   | )      | (1,477   | )      |
| Other  deferred costs                 |   | (900     | )      | 2,161    |   |
| Intangible  asset                     |   | 58,398   |   | —   |   |
| Deferred  management fee fund         |   | (2,229   | )      | —   |   |
|                                  |   |     |   |     |   |
|                                  |   | $        | 60,370 |     | $      | 10,790 |   |

 

NOTE 11 - Convertible Community Reinvestment Act Preferred ShareOfferings

 

OurConvertible CRA Shares enable financial institutions to receive certainregulatory benefits in connection with their investment.  We have developed a proprietary method forspecially allocating these regulatory benefits to specific financialinstitutions that invest in the Convertible CRA Shares.  Other than the preferred allocation ofregulatory benefits, the preferred investors receive the same economic benefitsas common shareholders of our Company, including receipt of the same dividendsper share as those paid to common shareholders.  The Convertible CRA Shares have no voting rights, except onmatters relating to the terms of the Convertible CRA Shares or to amendments toour Trust Agreement which would adversely affect the Convertible CRA Shares Ourearnings are allocated pro rata among the common shares and the Convertible CRAShares, and the Convertible CRA Shares rank on parity with the common shareswith respect to rights upon liquidation, dissolution or winding up of ourCompany.

 

The investors, at their option, have the ability to convert theirConvertible CRA Shares into common shares at a predetermined conversionprice.  Upon conversion, the investorswill no longer be entitled to a special allocation of the regulatorybenefit.  The conversion price is thegreater of (i) our book value per common share as set forth in our mostrecently issued annual or quarterly report filed with the SEC prior to therespective Convertible CRA Share issuance date or (ii) 110% of the closingprice of a common share on the respective Convertible CRA Share’s pricing date.

 

DuringJuly and November 2002, we issued approximately 1.4 million and 576,000 SeriesA Convertible CRA Shares, respectively. The shares were priced at $17.43 and $17.37 respectively, raising netproceeds for the two issuances of approximately $32.5 million.  These Series A CRA Shares are convertible ona one to one basis.  As of December 31,2002, there were 3,835,002 Convertible CRA Shares outstanding, which areconvertible at the holders option into 3,717,301 common shares.  Series A Convertible CRA Shares may beconverted to common shares on a one-to-one basis.

 

InAugust 2003, we issued approximately 3.1 million Series A Convertible CRAShares, at $18.48 per share, raising proceeds net of underwriting discounts ofapproximately $54.2 million.  We usedthese proceeds to fund additional investments in revenue bonds.

 

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InOctober 2003, we issued approximately 1.7 million and 239,000 Series AConvertible CRA Shares in two separate offerings, at $18.67 and $18.86 pershare, respectively, raising proceeds net of underwriting discounts ofapproximately $30.2 and $4.3 million, respectively.  We used these proceeds to invest in additional revenue bonds andfor our general purposes, including reduction of our indebtedness.

 

InDecember 2003, we completed a private placement of approximately 755,000 SeriesA Convertible CRA Shares, at $19.87 per share, raising proceeds net ofunderwriting discounts of approximately $14.4 million.  We used these proceeds to invest in additionalrevenue bonds.

 

Asof December 31, 2003, we had outstanding, 1,351,636 Convertible CRA Shareswhich could convert to 1,275,512 common shares, and 6,828,125 Series AConvertible CRA Shares convertible to common at a ratio of one-to-one.

 

NOTE 12 – Related Parties

 

Due to our acquisition of Related, our related parties have changedsubstantially from the period prior to the acquisition to the period after theacquisition.

 

*Prior to the RelatedAcquisition*

 

Prior to our acquisition of Related, we and our subsidiaries hadengaged a subsidiary of Related to provide us with management services.

 

Pursuant to the terms of our prior management Agreement, the Managerwas entitled to receive the fees and other compensation set forth below:

 
| **Fees/Compensation***                          |   | **Amount**                                                                                                                                                                                                                                                                             |
|-------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Bond Selection Fee                              |   | 2.00% of the face amount of each asset invested in or acquired by  CharterMac or its subsidiaries.                                                                                                                                                                                     |
| Special Distributions/Investment Management Fee |   | 0.375% per annum of the total invested assets of CharterMac or its  subsidiaries.                                                                                                                                                                                                      |
| Loan Servicing Fee                              |   | 0.25% per annum based on the outstanding face amount of revenue bonds  and other investments owned by CharterMac or its subsidiaries.                                                                                                                                                  |
| Operating Expense Reimbursement                 |   | For direct expenses incurred by the Manager in an amount not to  exceed $901,035 per annum (subject to increase based on increases in  CharterMac’s and its subsidiaries’ assets and to annual increases based upon  increases in the Consumer Price Index).                 |
| Incentive Share Options                         |   | The Manager may receive options to acquire additional Common shares  pursuant to the Share Option Plan only if CharterMac’s distributions in any  year exceed $0.9517 per common share and the Compensation Committee of the  Board of Trustees determines to grant such options. |
| Liquidation Fee                                 |   | 1.50% of the gross sales price of the assets sold by CharterMac in  connection with a liquidation of CharterMac assets supervised by Related.                                                                                                                                          |

 

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*      Related is also permitted to earn miscellaneouscompensation which may include, without limitation, construction fees, escrowinterest, property management fees, leasing commissions and insurance brokeragefees.  The payment of any such compensationis generally limited to the competitive rate for the services beingperformed.  A bond placement fee of 1.0%to 1.5% of the face amount of each asset invested in or acquired by CharterMacor its subsidiaries is payable to the Manager by the borrower, and not byCharterMac or its subsidiaries.

 

Affiliates of Related may provide certain financial guarantees tofacilitate leveraging by CharterMac, for which they could be paid market ratefees.  In addition, affiliates ofRelated may provide certain financial guarantees to the owner (or partners ofthe owners) of the Underlying Properties securing CharterMac’s revenue bonds,for which they could be paid market rate fees.

 

*Subsequent to theRelated Acquisition*

 

Subsequent to the Related acquisition the Management Agreement wasterminated and therefore the fees included in the agreement are no longerapplicable.  Since most of our employeeswork directly for Related, certain of our subsidiaries have entered intomanagement agreements with Related, under which Related is due a fee of .1% ofthe assets under management.  CharterMachas entered into a management agreement with Related under which CharterMacwill reimburse Related for its actual costs to provide the management servicesunder the provisions of the management agreement, after receiving credit forthe .1% management fees paid by its subsidiaries.  The fees between CharterMac, our subsidiaries, and Related alleliminate in consolidation.

 

72

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*General*

 

The costs, expenses and the special distributions paid or payable toRelated, prior to our acquisition of Related, its affiliates, and TRCLP for theyears ended December 31, 2003, 2002 and 2001 were as follows:

 
|                                            |   | **Paid or  Payable to  TRCLP** |   | **Paid or  Payable to Related and Affiliates** |   |
|-------------------------------------------------|--------|--------------------------------|--------|------------------------------------------------|--------|
|                                            |   | **Nov 18 –  Dec 31**      |   | **Jan 1 –  Nov 17**                       |   | **Year Ended  December 31,** |   |
| **(In thousands)**                              |   | **2003**                       |   | **2003**                                       |   | **2002** |   | **2001** |   |
|                                            |   |                           |   |                                           |   |   |   |   |   |
| Bond selection fees                             |   | $                              | — |                                           | $      | 8,905 |   | $ | 11,104 |   | $ | 7,853 |   |
| Special distribution/Investment management  fee |   | —                         |   | 3,809                                          |   | 4,872 |   | 3,621 |   |
| Bond servicing fees                             |   | —                         |   | 5,764                                          |   | 3,792 |   | 2,535 |   |
| Expense reimbursement                           |   | —                         |   | 901                                            |   | 768 |   | 556 |   |
| Shared service agreement                        |   | 755                            |   | —                                         |   | — |   | — |   |
|                                            |   |                           |   |                                           |   |   |   |   |   |
|                                            |   | $                              | 755    |                                           | $      | 19,379 |   | $ | 20,536 |   | $ | 14,565 |   |

 

*RELATED PARTY TRANSACTIONS*

 

Substantially all ofRelated’s revenues are received from investment funds they have originated andmanage.  Affiliates of Related maintaina continuing equity interest in the investment funds’ general partner and/ormanaging member/advisor.  Related has nodirect investments in these general partner and/or managing member/advisorentities, and Related does not guarantee the obligations of the general partnerand/or managing member/advisor entities. Related has agreements with these entities under which Related providesongoing services for the investment funds on behalf of the general partnersand/or managing members/advisors, and receives all fee income to which theseentities are entitled.  Related does notparticipate in the investment funds’ operating income or losses or on gains orlosses from property sales.

 

As of December 31, 2003,the obligors of certain revenue bonds are local partnerships for which thegeneral partners of the controlling investment partnerships are non-equitymanaging partners controlled by Related.

 

OnNovember 17, 2003, CCC entered into an agreement with TRCLP for the purpose ofTRCLP to provide various services to CCC and any of its affiliates includingRelated.  The services provided includecomputer support, office management, payroll, human resources and other officeservices as defined in the agreement. The majority of the services are charged to CCC at 100% of the directcosts incurred by TRCLP.

 

As of December 31, 2002, the owner of the Underlying Property andobligor of the Highpointe revenue bond was an affiliate of Related who has notmade an equity investment.  This entityhas assumed the day-to-day responsibilities and obligations of the UnderlyingProperty.  Buyers are being sought whowould make equity investments in the Underlying Property and assume thenonrecourse obligations for the revenue bond or otherwise buy the property andpayoff all or most of the revenue bond obligation.

 

In December 2001, we completed a credit enhancement transaction withMerrill Lynch Capital Services, Inc. (“MLCS”) pursuant to which CM Corp. initially will receive an annual feeof approximately $1.2 million in return for assuming MLCS’s $46.9 million firstloss position on a $351.9 million pool of tax-exempt weekly variable ratemulti-family mortgage loans originated by CreditRe Mortgage Capital, LLC, anaffiliate of Credit Suisse First Boston and the Related Companies, L.P.  During 2003, two of the tax-exempt weeklyvariable rate multi-family mortgage loans were repaid in the amount of $8.9million.  These repayments reduced thefirst loss position to $38 million and the pool of multi-family mortgage loansto $288.6 million.  This reduced ourmaximum exposure under the terms of the transaction to approximately $19million.

 

On April 11, 2000, Relcap Holding Company LLC (“Relcap”), an entitywhich was formed to hold the excluded assets and liabilities not included withthe Related acquisition, entered into an agreement to purchase $500,000 of theoutstanding face amount of the Walnut Park bonds, in $100,000 incrementsannually beginning April 1, 2001. Relcap has agreed, pursuant to an Intercreditor Agreement that its rightto payment on the purchased bonds is subordinate to the right to payment on thebonds held by our Company.

 

We have entered into several agreements with an unrelated third party(the “Primary Guarantor”) to guarantee agreed-upon internal rates of return forpools of multi-family properties owned by real estate investment funds forwhich we have received guarantee fees during 2003 totaling approximately $7.3million.

 

Related Management Company (“RMC”), which is wholly owned by TRCLPearned fees for performing property management services for various propertiesheld in investment funds, which are managed by Related.  The fees totaled $2,903,000, $2,516,000 and$2,261,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

73

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NOTE 13 – Earnings Per Share, Profit and Loss Allocations andDistributions

 

Prior to our acquisition of Related, pursuant to our Trust Agreementand the Management Agreement with the Manager, Related was entitled, in itscapacity as our general partner, to a special distribution equal to .375% perannum of our total invested assets (which equals the face amount of the revenuebonds and other investments), payable quarterly.  After payment of the special distribution, distributions weremade to the shareholders in accordance with their percentage interests.

 

Income was allocated first to Related in an amount equal to the specialdistribution.  The net remaining profitsor losses, after a special allocation of .1% to Related, were then allocated toshareholders in accordance with their percentage interests.

 

Subsequent to the Related acquisition, CCC’s income is allocated firstto the holders of the SCUs in an amount equivalent to the dividend per commonshare divided by .72, to take into account the fact that dividends paid on theSCUs are taxable.

 

Netincome per share is computed in accordance with SFAS No. 128, Earnings PerShare.  Basic income per share iscalculated by dividing income allocated to Common and Convertible CRA Shareholders(“Shareholders”) (See Note 9) by the weighted average number of Common andConvertible CRA Shares outstanding during the period.  The Convertible CRA shareholders are included in the calculationof shares outstanding as they share the same economic benefits as Commonshareholders, including receipt of the same dividends per share as commonshareholders.  Diluted income per shareis calculated using the weighted average number of shares outstanding duringthe period plus the additional dilutive effect of common shareequivalents.  The dilutive effect ofoutstanding share options is calculated using the treasury stock method.  The dilutive effect of the SCUs iscalculated using the “if-converted method”. The SCUs will always be antidilutive, because while the shares are convertibleon a one-to-one basis, the dividends paid will always be greater than thedividends paid per common share.

 
|                                                          |   | **For the  Year Ended December 31, 2003** |   |
|---------------------------------------------------------------|--------|-------------------------------------------|--------|
| **(Dollars in thousands, except per  share data)**            |   | **Income  Numerator**                     |   | **Shares*  Denominator** |   | **Per Share  Amount** |   |
|                                                          |   |                                      |   |   |   |   |   |
| Net income allocable to shareholders (Basic  EPS)             |   | $                                         | 61,248 |   | 46,653,270 |   | $ | 1.31 |   |
| Effect of Dilutive securities – 1,119,914  stock options |   | —                                    |   | 81,962 |   |   |   |
| Diluted net income allocable to  shareholders (Diluted EPS)   |   | $                                         | 61,248 |   | 46,735,232 |   | $ | 1.31 |   |

 
|                                                        |   | **For the  Year Ended December 31, 2002** |   |
|-------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                        |   | **Income  Numerator**                     |   | **Shares*  Denominator** |   | **Per Share  Amount** |   |
|                                                        |   |                                      |   |   |   |   |   |
| Net income allocable to shareholders (Basic  EPS)           |   | $                                         | 55,905 |   | 42,697,195 |   | $ | 1.31 |   |
| Effect of Dilutive securities – 263,509  stock options |   | —                                    |   | 70,944 |   |   |   |
| Diluted net income allocable to  shareholders (Diluted EPS) |   | $                                         | 55,905 |   | 42,768,139 |   | $ | 1.31 |   |

 
|                                                        |   | **For the Year Ended December 31, 2001** |   |
|-------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                        |   | **Income  Numerator**                    |   | **Shares*  Denominator** |   | **Per Share  Amount** |   |
|                                                        |   |                                     |   |   |   |   |   |
| Net income allocable to shareholders (Basic  EPS)           |   | $                                        | 35,010 |   | 30,782,161 |   | $ | 1.14 |   |
| Effect of Dilutive securities – 228,262  stock options |   | —                                   |   | 55,179 |   |   |   |
| Diluted net income allocable to  shareholders (Diluted EPS) |   | $                                        | 35,010 |   | 30,837,340 |   | $ | 1.14 |   |

 

NOTE 14 – Capital Stock and Share Option Plan

 

We have adopted anincentive share option plan (the “Incentive Share Option Plan”), the purpose ofwhich is to (i) attract and retain qualified persons as trustees and officersand (ii) to provide incentive and more closely align the financial interests ofRelated and its employees and officers with the interests of the shareholdersby providing Related and its employees with substantial financial interest inour success.  The Compensation Committeeof our board of trustees administers the Incentive Share Option Plan.  Pursuant to the Incentive Share Option Plan,the maximum number of common shares that may be awarded is the lesser of (i)10% of the number of shares outstanding as of December 31 preceding issuancesof such awards and (ii) the limited prescribed by the American Stock Exchangeor any other national security exchange or national quotation system on whichthe shares may then be listed.

 

74

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All options granted by the Compensation Committee have an exerciseprice equal to or greater than the fair market value of the common shares onthe date of the grant.  The maximumoption term is ten years from the date of grant.  All common share options granted pursuant to the Incentive ShareOption Plan may vest immediately upon issuance or in accordance with the determinationof the Compensation Committee.

 

Wehave adopted the provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” for its share options issued to non-employees.  Accordingly, compensation cost is accruedbased on the estimated fair value of the options issued.  The accrued compensation cost is beingamortized over the vesting period. Because vesting of the options is contingent upon the recipient continuingto provide services to us until the vesting date.  We estimate the fair value of the non-employee options at eachperiod-end up to the vesting date, and adjust the expense accordingly.  The fair value of each option grant isestimated using the Black-Scholes option-pricing model.

 

On May 1, 2000, options to purchase 297,830 common shares were grantedto our officers and certain employees of an affiliate of Related, none of whoare our employees.  The exercise priceof these options is $11.5625 per share. The term of each option is ten years. The options vest in equal installments on May 1, 2001, 2002 and2003.  The options granted on May 1,2000 had an estimated fair value at December 31, 2003, 2002 and 2001 of$886,542, $681,038 and $445,752, respectively. At December 31, 2003, the fair value, was calculated using theBlack-Scholes model, used the following assumptions:  dividend yield of 6.8%, estimated volatility of 20%, swap rate of 3.83% and expected lives of7.1 years.  On May 1, 2001, one-third,or 99,276, of the options vested, of which 69,568 were exercised.  On May 1, 2002 an additional 99,276 optionsvested, of which 4,753 were exercised. On May 1, 2003 the remaining one-third of the options vested, leaving abalance of 79,914 fully vested and not exercised.  We recorded compensation cost of $228,447, $379,206 and $168,936during the years ended December 31, 2003, 2002 and 2001, respectively, relatingto these option grants.

 

Duringthe quarter ended September 30, 2002, we issued 40,000 options at a strikeprice of $17.56.  These options vestequally, in thirds, in September 2003, 2004 and 2005 and expire in 10years.  These options were antidilutivefor the year ended December 31, 2003, so were not taken into account in thecalculation of diluted shares.  AtDecember 31, 2003, these options had a fair value of $62,500 based on theBlack-Scholes pricing model, using the following assumptions: dividend yield of6.7%, estimated volatility of 20%, swap rate of 4.175% and expected lives of8.7 years.  We recorded compensationcost of $35,705 and $3,222 for the years ended December 31, 2003 and 2002,relating to these options, respectively.

 

Aspart of the Related acquisition, we issued 1,000,000 options to Stephen M.Ross, at a strike price of $17.78, which vest over five years and expire in 10years.  At December 31, 2003, theseoptions had a fair value of $3,460,000.

 

Also,in conjunction with the Related acquisition, we issued 778,420 restrictedcommon shares to various individuals who are either employees of Related orTRCLP.  A small portion of these shares,52,863, vested immediately.  The balanceof 725,557 vest over periods ranging from three months to four years.

 

Wehave recorded deferred compensation of approximately $19.4 million equal to thenumber of shares for the share awards at $19.33, not yet vested, included inthe equity section of our consolidated balance sheet.  The deferred compensation is being amortized as compensationexpense on a straight line basis over the respective vesting periods.  Distributions paid related to thesenon-vested shares are being recorded directly to equity.  We recorded compensation expense of$1,021,842 related to the 52,863 which vested immediately.

 

Thefollowing table shows the number of options outstanding granted, exercised andexercisable and the exercise price of those options.

 
|                                                            |   | **Year Ended December 31,** |   |
|-----------------------------------------------------------------|--------|-----------------------------|--------|
|                                                            |   | **2003**                    |   | **2002** |   | **2001** |   |
|                                                            |   | **Options**                 |   | **Weighted  Average  Exercise  Price** |   | **Options** |   | **Weighted  Average  Exercise  Price** |   | **Options** |   | **Weighted  Average  Exercise  Price** |   |
|                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding at  beginning of year                       |   | 263,509                     |   | $ | 11.5625 |   | 228,262 |   | $ | 11.5625 |   | 297,830 |   | $ | 11.5625 |   |
|                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options granted during  the year                                |   | 1,000,000                   |   | $ | 17.78 |   | 40,000 |   | $ | 17.56 |   | — |   | $ | — |   |
|                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options exercised  during the year                              |   | 143,595                     |   | $ | 11.5625 |   | 4,753 |   | $ | 11.5625 |   | 69,568 |   | $ | 11.5625 |   |
| Options outstanding at  end of year                             |   | 1,119,914                   |   | 263,509 |   | $ | 11.5625 |   | 228,262 |   | $ | 11.5625 |   |   |   |
|                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at  end of year                             |   | 93,247                      |   | $ | 11.5625 |   | 124,231 |   | $ | 11.5625 |   | 29,708 |   | $ | 11.5625 |   |
|                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average fair  value of options granted during the year |   |                        |   | $ | 3,460,000 |   |   |   | $ | 33,600 |   |   |   | $ | — |   |
|                                                                 |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

75

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Thefollowing table summarizes information about stock options outstanding atDecember 31, 2003.

 
|                 |    | **Options Outstanding**              |      | **Options Exercisable**                           |   |
|----------------------|---------|--------------------------------------|-----------|---------------------------------------------------|--------|
| **Exercise  Prices** |    | **Number  Outstanding  at 12/31/03** |      | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted  Average  Exercise Price** |   | **Number  Exercisable at  12/31/03** |   | **Weighted  Average  Exercise Price** |   |
|                 |    |                                 |      |                                              |   |   |   |   |   |   |   |
| $                    | 11.5625 |                                 | 79,914    |                                              | 7.4    |   | $ | 11.5625 |   | 79,914 |   | $ | 11.5625 |   |
| $                    | 17.56   |                                 | 40,000    |                                              | 9.7    |   | $ | 17.5600 |   | 13,333 |   | $ | 17.5600 |   |
| $                    | 17.78   |                                 | 1,000,000 |                                              | 9.9    |   | $ | 17.7800 |   | — |   | $ | 17.7800 |   |

 

Other

 

ThroughNovember 17, 2003, two of our independent trustees are entitled to receiveannual compensation for serving as trustees in the aggregate amount of $17,500payable in cash (maximum of $7,500 per year) and/or common shares valued attheir fair market value on the date of issuance.  The third independent trustee is entitled to receive annualcompensation in the aggregate amount of $30,000 payable in cash (maximum of$20,000 per year) and/or common shares. As of December 31, 2003 and 2002, 1,728 and 1,830 common shares,respectively, having an aggregate value on the date of issuance of $30,000 eachyear, were issued to the independent trustees as compensation for servicesrendered during the years ended December 31, 2002 and 2001.  The independent trustees also received anaggregate of 5,535 shares, worth $97,500 at the time of issuance, as paymentfor their work on the special committee analyzing the proposed acquisition of Related.  After the acquisition of Related, the fivenew independent trustees received $18,750 as compensation for their servicesrendered during the year ended December 31, 2003.  In 2004, all eight of the independent trustees will receiveannual compensation of $30,000 payable in cash (maximum of $15,000 per year)and/or common shares valued at their fair market value on the date of issuance.

 

EffectiveMay 3, 2000, we implemented a dividend reinvestment and Common share purchaseplan (the “Plan”).  Under the Plan,common shareholders may elect to have their distributions from our Companyautomatically reinvested in additional common shares at a purchase price equalto the average of the high and low market price from the previous day’strading.  If a common shareholderparticipates in the Plan, such shareholder may also purchase additional commonshares through quarterly voluntary cash payments with a minimum contribution of$500.  There are no commissions forcommon shares purchased under the Plan. Participation in the Plan is voluntary and a common shareholder may joinor withdraw at any time.  Theopportunity for participation in the Plan began with the distributions paid inAugust 2000.

 

TheBoard of Trustees has authorized the implementation of a Common sharerepurchase plan, enabling us to repurchase, from time to time, up to 1,500,000  of its common shares.  The repurchases will be made in the openmarket and the timing is dependant on the availability of common shares andother market conditions.  As of December31, 2003 and 2002, we have acquired 22,632 and 8,400 of its common shares foran aggregate purchase price of approximately $378,000 and $103,000,respectively (including commissions and service charges).  Repurchased common shares are accounted foras treasury shares of beneficial interest.

 

76

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NOTE 15- Selected Quarterly Financial Data (unaudited)

 
|                                                                                                            |   | **(Dollars in thousands)  (Unaudited)** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                            |   | **2003  Quarter Ended**                 |   |
|                                                                                                            |   | **March 31**                            |   | **June 30** |   | **September  30** |   | **December  31** |   |
| Revenues:                                                                                                       |   |                                    |   |   |   |   |   |   |   |
| Revenue  bonds interest income                                                                                  |   | $                                       | 26,250 |   | $ | 26,925 |   | $ | 30,353 |   | $ | 30,127 |   |
| Fee income:                                                                                                     |   |                                    |   |   |   |   |   |   |   |
| Mortgage banking fees                                                                                           |   | 3,067                                   |   | 3,473 |   | 3,171 |   | 4,001 |   |
| Fund management                                                                                                 |   | —                                  |   | — |   | — |   | 12,643 |   |
| Other income                                                                                                    |   | 2,604                                   |   | 2,810 |   | 2,324 |   | 4,462 |   |
| Total revenues                                                                                                  |   | 31,921                                  |   | 33,208 |   | 35,848 |   | 51,233 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Expenses:                                                                                                       |   |                                    |   |   |   |   |   |   |   |
| Interest expense                                                                                                |   | 3,816                                   |   | 4,887 |   | 4,889 |   | 6,267 |   |
| Interest expense-distributions to preferred  shareholders of subsidiary                                         |   | —                                  |   | — |   | 4,724 |   | 4,724 |   |
| Recurring fees - securitizations                                                                                |   | 963                                     |   | 1,019 |   | 1,039 |   | 1,007 |   |
| General and administrative                                                                                      |   | 7,054                                   |   | 5,935 |   | 7,673 |   | 20,284 |   |
| Depreciation and amortization                                                                                   |   | 1,687                                   |   | 2,915 |   | 2,242 |   | 5,082 |   |
| Loss on impairment of assets                                                                                    |   | —                                  |   | — |   | 1,758 |   | — |   |
| Total expenses                                                                                                  |   | 13,520                                  |   | 14,756 |   | 22,325 |   | 37,364 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before gain (loss) on repayment of revenue  bonds, gain on sale of loans and equity in earnings of ARCap |   | 18,401                                  |   | 18,452 |   | 13,523 |   | 13,869 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Equity in earnings of ARCap                                                                                     |   | 555                                     |   | 555 |   | 555 |   | 554 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Gain on sale of loans                                                                                           |   | 2,139                                   |   | 411 |   | 444 |   | 2,538 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Gain (loss) on repayment of revenue bonds                                                                       |   | (412                                    | )      | 2,652 |   | 557 |   | (846 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before allocation to preferred shareholders  of subsidiary and minority interest                         |   | 20,683                                  |   | 22,070 |   | 15,079 |   | 16,115 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income allocated to preferred stockholders of  subsidiary                                                       |   | (4,724                                  | )      | (4,725 | ) | — |   | — |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income allocated to SCUs                                                                                        |   | —                                  |   | — |   | — |   | (4,038 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income (loss) allocated to minority interest                                                                    |   | (28                                     | )      | 67 |   | 147 |   | (132 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before provision for income taxes                                                                        |   | 15,931                                  |   | 17,412 |   | 15,226 |   | 11,945 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Provision for income taxes                                                                                      |   | 1,976                                   |   | 788 |   | 689 |   | 2,619 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Net income                                                                                                      |   | $                                       | 17,907 |   | $ | 18,200 |   | $ | 15,915 |   | $ | 14,564 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Allocation of net income to:                                                                                    |   |                                    |   |   |   |   |   |   |   |
| Special distribution to Manager                                                                                 |   | $                                       | 1,411  |   | $ | 1,459 |   | $ | 1,583 |   | $ | 879 |   |
| Manager                                                                                                         |   | $                                       | 2      |   | $ | 1 |   | $ | 2 |   | $ | 1 |   |
| Common shareholders                                                                                             |   | $                                       | 15,089 |   | $ | 15,316 |   | $ | 12,727 |   | $ | 11,476 |   |
| Convertible CRA shareholders                                                                                    |   | 1,405                                   |   | 1,424 |   | 1,603 |   | 2,208 |   |
| Total for shareholders                                                                                          |   | $                                       | 16,494 |   | $ | 16,740 |   | $ | 14,330 |   | $ | 13,684 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Net income per share                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | $                                       | 0.37   |   | $ | 0.37 |   | $ | 0.31 |   | $ | 0.27 |   |
| Diluted                                                                                                         |   | $                                       | 0.37   |   | $ | 0.37 |   | $ | 0.31 |   | $ | 0.27 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                                                                            |   |                                    |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | 45,013,292                              |   | 45,090,477 |   | 46,331,385 |   | 50,121,357 |   |
| Diluted                                                                                                         |   | 45,070,595                              |   | 45,130,042 |   | 46,366,342 |   | 50,256,026 |   |

 

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|                                                                                                            |   | **(Dollars in thousands)  (Unaudited)** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                            |   | **2002  Quarter Ended**                 |   |
|                                                                                                            |   | **March 31**                            |   | **June 30** |   | **September  30** |   | **December  31** |   |
| Revenues:                                                                                                       |   |                                    |   |   |   |   |   |   |   |
| Revenue bonds interest income                                                                                   |   | $                                       | 22,920 |   | $ | 22,025 |   | $ | 22,819 |   | $ | 24,917 |   |
| Fee income:                                                                                                     |   |                                    |   |   |   |   |   |   |   |
| Mortgage banking fess                                                                                           |   | 3,509                                   |   | 3,403 |   | 2,644 |   | 4,125 |   |
| Other income                                                                                                    |   | 2,374                                   |   | 2,632 |   | 2,621 |   | 2,424 |   |
| Total revenues                                                                                                  |   | 28,803                                  |   | 28,060 |   | 28,084 |   | 31,466 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Expenses:                                                                                                       |   |                                    |   |   |   |   |   |   |   |
| Interest expense                                                                                                |   | 3,991                                   |   | 3,793 |   | 3,850 |   | 4,189 |   |
| Recurring fees relating to the Private  Label Tender Option Program                                             |   | 727                                     |   | 751 |   | 811 |   | 892 |   |
| General and Administrative                                                                                      |   | 6,365                                   |   | 6,052 |   | 5,041 |   | 7,048 |   |
| Depreciation and amortization                                                                                   |   | 2,240                                   |   | 1,760 |   | 2,024 |   | 2,867 |   |
| Loss on impairment of assets                                                                                    |   | —                                  |   | — |   | 532 |   | 388 |   |
| Total expenses                                                                                                  |   | 13,323                                  |   | 12,356 |   | 12,258 |   | 15,384 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before gain (loss) on repayment of  revenue bonds, gain on sale of loans and equity in earnings of ARCap |   | 15,480                                  |   | 15,704 |   | 15,826 |   | 16,082 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Equity in earnings of ARCap                                                                                     |   | 547                                     |   | 563 |   | 555 |   | 554 |   |
| Gain on sale of loans                                                                                           |   | 3,287                                   |   | 3,119 |   | 1,465 |   | 2,812 |   |
| Gain (loss) on repayment of revenue bonds                                                                       |   | 3,757                                   |   | 222 |   | — |   | (94 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before allocation to preferred  shareholders of subsidiary and minority interest                         |   | 23,071                                  |   | 19,608 |   | 17,846 |   | 19,354 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income allocated to preferred shareholders  of subsidiary                                                       |   | (3,764                                  | )      | (4,053 | ) | (4,724 | ) | (4,725 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income allocated to minority interest                                                                           |   | (302                                    | )      | 49 |   | (124 | ) | (119 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Income before (provision) benefit for  income taxes                                                             |   | 19,005                                  |   | 15,604 |   | 12,998 |   | 14,510 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| (Provision) benefit for income taxes                                                                            |   | (181                                    | )      | (1,457 | ) | 656 |   | (302 | ) |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Net income                                                                                                      |   | $                                       | 18,824 |   | $ | 14,147 |   | $ | 13,654 |   | $ | 14,208 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Allocation of net income to:                                                                                    |   |                                    |   |   |   |   |   |   |   |
| Special distribution to Manager                                                                                 |   | $                                       | 1,088  |   | $ | 1,240 |   | $ | 1,294 |   | $ | 1,250 |   |
| Manager                                                                                                         |   | $                                       | 18     |   | $ | 13 |   | $ | 12 |   | $ | 13 |   |
| Common shareholders                                                                                             |   | $                                       | 16,866 |   | $ | 12,350 |   | $ | 11,439 |   | $ | 11,861 |   |
| Convertible CRA shareholders                                                                                    |   | 852                                     |   | 544 |   | 909 |   | 1,084 |   |
| Total shareholders                                                                                              |   | $                                       | 17,718 |   | $ | 12,894 |   | $ | 12,348 |   | $ | 12,945 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Net income per share:                                                                                           |   |                                    |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | $                                       | 0.45   |   | $ | 0.30 |   | $ | 0.28 |   | $ | 0.29 |   |
| Diluted                                                                                                         |   | $                                       | 0.45   |   | $ | 0.30 |   | $ | 0.28 |   | $ | 0.29 |   |
|                                                                                                            |   |                                    |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                                                                            |   |                                    |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | 38,781,464                              |   | 43,035,102 |   | 44,209,982 |   | 44,676,079 |   |
| Diluted                                                                                                         |   | 38,845,985                              |   | 43,107,175 |   | 44,282,733 |   | 44,752,197 |   |

 

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NOTE 16 - Commitments and Contingencies

 

*PW Funding Inc.*

 

Through PWF, we originate and service multi-family mortgage loans forFannie Mae, Freddie Mac and FHA.  PWFand its subsidiaries’ mortgage lending business is subject to variousgovernmental and quasi-governmental regulation.  PWF and/or its subsidiaries, collectively, are licensed orapproved to service and/or originate and sell loans under Fannie Mae, FreddieMac, Ginnie Mae and FHA programs.  FHAand Ginnie Mae are agencies of the Federal government and Fannie Mae andFreddie Mac are federally-chartered investor-owned corporations.  These agencies require PWF and its subsidiariesto meet minimum net worth and capital requirements and to comply with otherrequirements.  Mortgage loans made underthese programs are also required to meet the requirements of theseprograms.  In addition, under FannieMae’s DUS program, PWF has the authority to originate loans without a priorreview by Fannie Mae and is required to share in the losses on loans originatedunder this program.

 

The DUS program is Fannie Mae’s principal loan program.  Under the Fannie Mae DUS Product Line, PWForiginates, underwrites and services mortgage loans on multi-family residentialproperties and sells the project loans directly to Fannie Mae.  PWF assumes responsibility for a portion ofany loss that may result from borrower defaults, based on the Fannie Mae losssharing formulas, Levels I, II or III. At December 31, 2003, all of PWF’s loans consisted of Level Iloans.  For such loans, PWF isresponsible for the first 5% of the unpaid principal balance and a portion ofany additional losses to a maximum of 20% of the original principalbalance.  Level II and Level III loanscarry a higher loss sharing percentage. Fannie Mae bears any remaining loss.

 

Under the terms of the Master Loss Sharing Agreement between Fannie Maeand PWF, PWF is responsible for funding 100% of mortgagor delinquency(principal and interest) and servicing (taxes, insurance and foreclosure costs)advances until the amounts advanced exceed 5% of the unpaid principal balanceat the date of default.  Thereafter, forLevel I loans, we may request interim loss sharing adjustments which allow usto fund 25% of such advances until final settlement under the Master LossSharing Agreement.  No interim losssharing adjustments are available for Level II and Level III loans.

 

We maintain an allowance for loan losses for loans originated under theFannie Mae DUS product line at a level that, in management’s judgment, isadequate to provide for estimated losses. At December 31, 2003, that reserve was approximately $6.7 million, whichwe believe represents its maximum liability at this time.  Unlike loans originated for Fannie Mae, PWFdoes not share the risk of loss for loans it originates for Freddie Mac or FHA.

 

Inconnection with the PWF warehouse line, both CharterMac and CM Corp. haveentered into guarantees for the benefit of Fleet National Bank (“Fleet”), guaranteeingthe total advances drawn under the line, up to the maximum of $100 million,together with interest, fees, costs, and charges related to the PWF warehouseline.

 

PWFmaintains, as of December 31, 2003, treasury notes of approximately $4.7million and a money market account of approximately $1.3 million, which isincluded in cash and cash equivalents-restricted in the consolidated balancesheet, to satisfy the Fannie Mae collateral requirements of $6.0 million.

 

Dueto the nature of PWF’s mortgage banking activities, PWF is subject tosupervision by certain regulatory agencies. Among other things, these agencies require PWF to meet certain minimumnet worth requirements, as defined.  PWFmet these requirements for all agencies, as applicable, as of December 31,2003.

 

AtDecember 31, 2003, PWF had commitments of approximately $49.8 million to fiveborrowers.

 

*Credit EnhancementTransaction*

 

In December 2001, CM Corp. completed a credit enhancement transactionwith Merrill Lynch Capital Services, Inc. (“MLCS”), as described previously. Pursuant to the terms of the transaction, CM Corp. assumes MLCS’s $46.9 millionfirst loss position on a $351.9 million pool of tax-exempt weekly variable ratemulti-family mortgage loans.  TheRelated Companies, L.P.  has provided CM Corp. with an indemnity covering 50%of any losses that are incurred by CMCorp. as part of this transaction. As the loans mature or prepay, the first loss exposure and the fees paidto CM Corp. will both bereduced.  The latest maturity date onany loan in the portfolio occurs in 2009. The remainder of the real estate exposure after the $46.9 million firstloss position has been assumed by Fannie Mae and Freddie Mac.  In connection with the transaction,CharterMac has guaranteed the obligations of CM Corp., and as security therefore,have posted collateral, initially in an amount equal to 50% of the first lossamount, which may be reduced to 40% if certain post closing conditions aremet.  Our maximum exposure under theterms of this transaction is approximately $23.5 million.  During 2003, two of the tax-exempt weeklyvariable rate multi-family mortgage loans were repaid in the amount of $8.9million.  These repayments reduced thefirst loss position to $38 million and the pool of multi-family mortgage loansto $288.6 million.  This reduced our maximumexposure under the terms of the transaction to approximately $19 million.

 

CMCorp. performed due diligence on each property in the pool, including anexamination of loan-to-value and debt service coverage both on a current and“stressed” basis.  CM Corp. analyzed the portfolio on a“stressed” basis by increasing capitalization rates and assuming an increase inthe low floater bond rate.  As ofDecember 31, 2003, the credit enhanced pool of properties are performingaccording to their contractual obligations

 

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and we do not anticipate any losses to be incurred on itsguaranty.  Should our analysis of riskof loss change in the future, a provision for probable loss might be required;such provision could be material.

 

Fees related to the credit enhancement transaction for the years endedDecember 31, 2003 and 2002, included in other income, was approximately$1,131,000 and $1,251,000, respectively. Income is recognized monthly as the fees are received.

 

*Yield Guarantee Transaction*

 

On October 31, 2003, we entered into two agreements with Merrill Lynch(the “Primary Guarantor”) to guarantee an agreed upon rate of return for a poolof seven multi-family properties owned by RCGCP II, an investment fundsponsored by Related prior to our acquisition of Related.

 

The transaction was structured as two separate guarantees, oneprimarily guaranteeing the return through the lease-up phase of the propertiesand the other guaranteeing the return through the operating phase of theproperties.  The fee for the firstguarantee, in the amount of approximately $2.0 million, was paid in October2003 at closing.  The fee for the secondguarantee will be paid in two installments. The first installment, in the amount of approximately $1.0 million, willbe paid in October 2004, and the final installment, in the amount of approximately$341,000, will be paid in April 2005. These fees will be recognized in income on a straight line basis overthe period of the respective guarantees.

 

In connection with the transaction, we posted $3.9 million in bonds forapproximately ten years and $4.8 million in bonds until the earlier of lease-upto 90% occupancy or LIHTC Certification. The release of the $4.8 million in collateral can occur in two stepswith 50% being released when at least 50% of the assets in the fund havereached the occupancy or certification hurdle and with the remaining 50% beingreleased when all of the properties have met the hurdle.

 

In addition, we agreed to subordinate approximately 50% of theapproximately $112.3 million in bonds it acquired that are secured by theproperties in this fund.  The Class ACertificates, which total approximately $56.15 million in par value, have beensecuritized through the P-Floats/RITES program.  The Class B Certificates, which total approximately $56.15million in par value, are currently being held at CharterMac as excess collateralto support our obligations to the Primary Guarantor.

 

OnSeptember 24, 2003, we entered into two agreements with Primary Guarantor toguarantee an agreed-upon rate of return for a pool of 14 multi-family properties each owned by a localpartnership which in turn, is majority-owned by RCGCP — Series B, an investmentfund sponsored by Related prior to our acquisition of Related for which we willreceive two guarantee fees totaling approximately $5.9 million.

 

The transaction was structured as two separate guarantees, oneprimarily guaranteeing the return through the lease-up phase of the propertiesand the other guaranteeing the return through the operating phase of theproperties.  The fee for the firstguarantee, in the amount of approximately $3.6 million, was paid in September2003 at closing.  The fee for the secondguarantee will be paid in two installments. The first installment, in the amount of approximately $1.7 million, willbe paid in July 2004, and the final installment, in the amount of approximately$562,000, will be paid in January 2005. These fees will be recognized in income on a straight line basis overthe period of the respective guarantees.

 

Ofthe 14 local partnerships, 13 financed their properties with the proceeds ofrevenue bonds acquired by an affiliate of CharterMac.  In connection with the transaction, the Primary Guarantorrequired that those revenue bonds be deposited into a trust pursuant to whichthe revenue bonds were divided into senior and subordinated interests with 50%of each revenue bond being subordinated. We have financed the senior trust interest as part of the Merrill LynchP-FloatsSM/RitesSM program.  Thesubordinate trust interests are being used as collateral in other of our financingprograms.

 

Inconnection with the transaction, we posted $14.5 million of revenue bonds ascollateral to the Primary Guarantor in the form of either cash or Revenuebonds.

 

On July 18, 2002, we entered into two agreements with Primary Guarantorto guarantee an agreed-upon rate of return for a pool of 11 multi-familyproperties owned by RCGCP, an investment fund sponsored by Related prior to ouracquisition of Related.

 

In connection with the transaction, we posted $18.2 million of revenuebonds as collateral to the Primary Guarantor, which will be reduced to $1.4million over a period of up to 20 years as the properties reach certainoperating benchmarks.  In addition, weagreed to subordinate 25% of each of the bonds it acquired that are secured bythe properties and to not use the subordinated portion of such bonds as collateralin connection with any borrowings.

 

The total potential liability to us pursuant to these guarantees isapproximately $228 million.  We haveanalyzed the expected operations of the Underlying Properties and believe thereis no risk of loss at this time.  Shouldour analysis of risk of loss change in the future, a provision for probablelosses might be required; such provision could be material.

 

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*Other*

 

During December 2002, we entered into three transactions related tothree properties, Coventry Place, Canyon Springs and Arbor Ridge.  Pursuant to the terms of these deals, wewill provide credit support to the construction lender for project completionand Fannie Mae conversion and acquire subordinated bonds to the extent theconstruction period bonds do not fully convert.

 

Up until the point of completion, we will guaranty the constructionlender reimbursement of any draw on its construction letter of credit up to 40%of the stated amount of the Letter of Credit. Following completion, up until the project loan converts to permanentloan status, we will guarantee the full amount of the letter of credit.

 

The developer has also issued several guarantees to the constructionlender, each of which would be called upon before our guarantees, and each ofwhich would be assigned to us should its guarantees are called.

 

Once the construction loans convert to permanent loans, we areobligated to acquire subordinated loans for the amount by which eachconstruction loan exceeds the corresponding permanent loan, if any.  The subordinated bonds will bear interest at10%.  Under FNMA guidelines, the size ofthe subordinated bonds will be limited to a 1.0x debt service coverage based on75% of the cash flow after the senior debt.

 

Our maximum exposure, related to these three transactions, is 40% ofthe stated amount of the Letter of Credit of approximately $27 million.

 

Wehave entered into six transactions to purchase revenue bonds pursuant toagreements which require us, at the earlier of stabilization or conversion topermanent financing to acquire Series A and Series B revenue bonds at apredetermined price and interest rates. We are obligated to purchase the revenue bonds only if construction iscompleted.  We are obligated to buy theSeries B revenue bonds only if, at the date the Series A bonds are stabilized,the property’s cash flow is sufficient to provide debt service coverage of1.15x for both the Series A and B bonds. An unrelated third party lender will advance funds to the developer, asneeded during the construction period, at a floating rate.  These forward commitments create derivativeinstruments under SFAS No. 133, which have been designated as a cash flow hedgeof the anticipated funding of the revenue bonds, and are recorded at fairvalue, with changes in fair value recorded in accumulated other comprehensiveincome until the revenue bonds are funded. The total potential amount we could possibly be required to fund is$84.4 million.

 

We are subject to routine litigation and administrative proceedingsarising in the ordinary course of business. Management does not believe that such matters will have a materialadverse impact on our financial position, results of operations or cash flows.

 

In connection with the PWF warehouse line, both the CharterMac and CMCorp. have entered into guarantees for the benefit of Fleet, guaranteeing thetotal advances drawn under the line, up to the maximum of $100 million, togetherwith interest, fees, costs, and charges related to the PWF warehouse line.

 

PWF maintains, as of December 31, 2003, treasury notes of approximately$4.7 million and a money market account of approximately $1.3 million, which isincluded in restricted cash and securities in the consolidated balance sheet,to satisfy the Fannie Mae collateral requirements of $6.0 million.

 

Due to the nature of our mortgage banking activities, we are subject tosupervision by certain regulatory agencies. Among other things, these agencies require us to meet certain minimumnet worth requirements, as defined.  Wemet these requirements for all agencies, as applicable, as of December 31,2003.

 

NOTE 17 - Acquisition of PW Funding, Inc.

 

OnDecember 31, 2001, CM Corp. acquired 80% of the outstanding capital stock ofPWF, for approximately $34.9 million, of which, approximately  $21.6 million was financed and $7.6 millionwas paid in cash.  Additionally, werepaid a $5.7 million loan on behalf of PWF. It is anticipated that CM Corp. will acquire the remaining 13% of theissued and outstanding capital stock of PWF over the next 12 months.  Under the agreement, the stockholders of PWFwere granted the right to put their remaining 20% stock interest to CM Corp. afteran initial period of 24 to 36 months. The agreement also grants CM Corp. the right to call the remaining 20%stock interest of PWF from PWF’s stockholders after the same initial period of24 to 36 months.

 

CharterMacis entitled to a cumulative preferential distribution from PWF’s cash availablefor distribution equal to 10% of its invested capital.  The remaining cash available fordistribution will be distributed approximately 87% to CharterMac and 13% to theother stockholders.  CharterMac willalso be entitled to an additional cumulative priority return equal to 4.3% ofits invested capital prior to the purchase payments to PWF’s stockholders onexercise of the put or call options. The fee income generated by PWF will be taxable income.  However, CM Corp. incurs tax-deductibleexpenses which will be used to offset a portion of this taxable income.

 

Theacquisition of PWF was accounted for using the purchase method of accounting,with approximately $7.9 million of the purchase price allocated to mortgageservice rights, based on their estimated fair value.

 

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During2002 and the first quarter of 2003, CM Corp. made additional payments to theoriginal shareholders of PWF of approximately $3.6 million (“the True-Uppayments”) pursuant to the original acquisition agreement.  The True-Up payments were based on i) theincrease in value of servicing rights due to certain loans closing, ii)positive changes in the audited balance sheets used for the initial purchaseprice and the audited balance sheet at December 31, 2001, iii) payments ofcertain servicing fees, and iv) forward conversions of loans previouslycommitted.  The acquisition agreementstipulates additional true-up payments to be made periodically for a period ofup to three years from the acquisition date.

 

Aspart of the PWF acquisition, the purchase agreement provided that CharterMachas the right to purchase the remaining 20% of PWF shares within the 37 monthsfollowing the close of the acquisition, (the “Call Option”).  The agreement also gives the owners of theremaining 20% of PWF’s shares the right to put those shares to CharterMac (the“Put Option”), within the 34 months following the close of the acquisition.  We consider these two options to be a singleunit (a forward contract), due to the fact the Put Option and Call Option wereentered into at the same time, have the same counter parties, have the samerisk, and could have been accomplished in a single transaction.  The price at which the shares of stock areto be repurchased is based on many factors, determined in the future includingthe performance of the underlying revenues of PWF, the value of PWF’s servicingportfolio and other factors which are not currently determinable.  We determined the forward contract shouldnot be recorded until the contract is settled and the associated sharestransferred to our Company.  During theperiod of the forward contract, we will allocate subsidiary income or loss tothe minority interest on a pro-rata basis, determined by its ownership percentage.

 

NOTE 18 - Financial Risk Management and Derivatives

 

Ourrevenue bonds generally bear fixed rates of interest, but the P-FLOATS and TOPfinancing programs incur interest expense at variable rates re-set weekly, sowe are exposed to interest rate risks. Various financial vehicles exist which allow our management to hedgeagainst the impact of interest rate fluctuations on our cash flows and earnings.

 

We currentlymanage a portion of our interest rate risk through the use of The Bond MarketAssociation (“TBMA”) indexed interest rate swaps.  Under each interest rate swap agreement, for a specified periodof time we are required to pay a fixed rate of interest on a specified notionalamount to the transaction counterparty and we receive a floating rate of interestequivalent to the TBMA index, which is the most widely used tax-exempt floatingrate index.  As of December 31, 2003, wehave entered into two such swaps with MLCS as counterparty: the first has a notionalamount of $50 million fixed at an annual rate of 3.98%, which expires inJanuary 2006.  The second has a notionalamount of $100 million fixed at an annual rate of 3.64%, which expires inFebruary 2004.  We have also enteredinto two interest rate swaps with Fleet as the counterparty.  One has a notional amount of $100 millionfixed at an annual rate of 2.56% beginning in January 2005 and expiring inDecember 2007.  The other swap withFleet has a notional amount of $50 million and fixed rates of 2.00%, 2.78%, and3.27% for the twelve months beginning January 2005, 2006, and 2007,respectively.

 

Theaverage BMA rates for 2003 and 2002, were 1.03% and 1.38%, respectively.  Net swap payments received by us, if any,will be taxable income to our Company and, accordingly, to shareholders.  A possible risk of such swap agreements isthe possible inability of the Counterparty to meet the terms of the contractswith us; however, there is no current indication of such an inability.

 

Weadopted SFAS No. 133, as amended and interpreted, on January 1, 2001.  Accordingly, we have established a policyfor risk management and our objectives and strategies for the use of derivativeinstruments to potentially mitigate such risks.  We evaluate our interest rate risk on an ongoing basis todetermine whether or not it would be advantageous to engage in any furtherhedging transactions.  At inception, wedesignated these interest rate swaps as cash flow hedges on the variableinterest payments on our floating rate securitizations.  Two of the interest rate swaps do not becomeeffective until 2005.  The two interestrate swaps that are currently in place are recorded at their respective fairmarket value each accounting period, with changes in market value beingrecorded in accumulated other comprehensive income to the extent that thehedges are effective in achieving offsetting cash flows.  We assess, both at the inception of thehedge and on an ongoing basis whether the swap agreements are perfectlyeffective in offsetting changes in the cash flows of the hedged financing.  Any ineffectiveness in the hedgingrelationship is recorded in earnings. There was no ineffectiveness in the hedging relationship during 2002 or2003, and we expect that these hedging relationships will be highly effectivein achieving offsetting changes in cash flow throughout their terms.  Net amounts payable or receivable under theswap agreements are recorded as adjustments to interest expense.

 

AtDecember 31, 2003, the first two interest rate swaps were recorded as aliability with a combined fair market value of approximately $2.4 million,included in accounts payable, accrued expenses and other liabilities on theconsolidated balance sheets.  Interestpaid or payable under the terms of the swaps, of approximately $4.1 million, isincluded in interest expense.  The twonew interest rate swaps were recorded as an asset with a fair market value of$1.7 million, included in other assets on the consolidated balance sheets.

 

Weestimate that approximately $3.3 million of the net derivative loss included inaccumulated other comprehensive income will be reclassed into interest expensewithin the next twelve months.

 

DuringJanuary 2002, we entered into an interest rate cap agreement with Fleet, with acap of 8% on a notional amount of $30 million. Although this transaction is designed to mitigate our exposure to risinginterest rates, we have not designated this interest rate cap as a hedgingderivative.  As of December 31, 2003,this interest rate cap was recorded as an asset with a fair market value of$34,004 included in other assets in the consolidated balance sheets.  Because we have not designated thisderivative as a hedge, the change in fair market value flows through theconsolidated statements of income, where it is included in interest income, inthe amount of $27,050 for the year ended December 31, 2003.

 

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NOTE 19 – Business Segments

 

We have threereportable business segments with include portfolio investing, mortgagebanking, and fund management.

 

The portfolioinvesting segment consists primarily of subsidiaries holding investments inrevenue bonds producing primarily tax-exempt interest income and includes ourcredit enhancement activities.

 

The mortgagebanking segment consists of subsidiaries which originate mortgages on behalf ofthird parties and receive mortgage origination and mortgage servicing feesgenerated by those activities.

 

The fundmanagement segment consists of subsidiaries that generate fee income from theasset management, underwriting, originating and other services provided to thereal estate equity investment programs Related sponsors, and the management andrelated services provided to us and a publicly-traded real estate investmenttrust.

 

Segmentresults include all direct and contractual revenues and expenses of eachsegment and allocations of indirect expenses based on specific methodologies.  These reportable segments are strategicbusiness units that primarily generate revenue streams that are distinctlydifferent and are generally managed separately.

 

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Thefollowing table provides more information regarding our Company’s segments:

 
|                                                                                                            |   | **December  31, 2003**   |      | **December  31, 2002 (1)** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|----------------------------|--------|
| **(Dollars in thousands)**                                                                                      |   | **Portfolio  Investing** |      | **Mortgage  Banking**      |   | **Fund  Management** |   | **Total** |   | **Portfolio  Investing** |   | **Mortgage  Banking (2)** |   | **Total** |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                       |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Revenue bonds interest income                                                                                   |   | $                        | 113,655   |                       | $      | — |   | $ | — |   | $ | 113,655 |   | $ | 92,681 |   | $ | — |   | $ | 92,681 |   |
| Fee income:                                                                                                     |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage banking fees                                                                                           |   | —                   |      | 13,712                     |   | — |   | 13,712 |   | — |   | 13,681 |   | 13,681 |   |
| Fund management                                                                                                 |   | —                   |      | —                     |   | 12,643 |   | 12,643 |   | — |   | — |   | — |   |
| Other income                                                                                                    |   | 7,120                    |      | 3,978                      |   | 1,102 |   | 12,200 |   | 5,527 |   | 4,524 |   | 10,051 |   |
| Total revenues                                                                                                  |   | 120,775                  |      | 17,690                     |   | 13,745 |   | 152,210 |   | 98,208 |   | 18,205 |   | 116,413 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Expenses:                                                                                                       |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                |   | 18,794                   |      | 799                        |   | 266 |   | 19,859 |   | 14,558 |   | 1,265 |   | 15,823 |   |
| Interest expense-distributions to preferred shareholders of subsidiary                                          |   | 9,448                    |      | —                     |   | — |   | 9,448 |   | — |   | — |   | — |   |
| Recurring fees - securitizations                                                                                |   | 4,028                    |      | —                     |   | — |   | 4,028 |   | 3,181 |   | — |   | 3,181 |   |
| General and administrative                                                                                      |   | 11,746                   |      | 16,635                     |   | 12,564 |   | 40,945 |   | 8,621 |   | 15,885 |   | 24,506 |   |
| Depreciation and amortization                                                                                   |   | 3,370                    |      | 6,426                      |   | 2,130 |   | 11,926 |   | 1,131 |   | 7,760 |   | 8,891 |   |
| Loss on impairment of assets                                                                                    |   | 1,759                    |      | —                     |   | — |   | 1,759 |   | 920 |   | — |   | 920 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Total expenses                                                                                                  |   | 49,145                   |      | 23,860                     |   | 14,960 |   | 87,965 |   | 28,411 |   | 24,910 |   | 53,321 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income before gain (loss) on repayment of revenue bonds, gain on sale  of loans and equity in earnings of ARCap |   | 71,630                   |      | (6,170                     | )      | (1,215 | ) | 64,245 |   | 69,797 |   | (6,705 | ) | 63,092 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Equity in earnings of ARCap                                                                                     |   | 2,219                    |      | —                     |   | — |   | 2,219 |   | 2,219 |   | — |   | 2,219 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Gain on sale of loans                                                                                           |   | —                   |      | 5,532                      |   | — |   | 5,532 |   | — |   | 10,683 |   | 10,683 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Gain on repayment of revenue bonds                                                                              |   | 1,951                    |      | —                     |   | — |   | 1,951 |   | 3,885 |   | — |   | 3,885 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before allocation to preferred shareholders of  subsidiary and minority interest                  |   | 75,800                   |      | (638                       | )      | (1,215 | ) | 73,947 |   | 75,901 |   | 3,978 |   | 79,879 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income allocated to preferred shareholders of subsidiary                                                        |   | (9,449                   | )         | —                     |   | — |   | (9,449 | ) | (17,266 | ) | — |   | (17,266 | ) |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income allocated to SCUs                                                                                        |   | —                   |      | —                     |   | (4,038 | ) | (4,038 | ) | — |   | — |   | — |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) allocated to minority interest                                                                    |   | 54                       |      | —                     |   | — |   | 54 |   | (496 | ) | — |   | (496 | ) |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before provision for income taxes                                                                 |   | 66,405                   |      | (638                       | )      | (5,253 | ) | 60,514 |   | 58,139 |   | 3,978 |   | 62,117 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Benefit (Provision) for income taxes                                                                            |   | 5,763                    |      | 309                        |   | — |   | 6,072 |   | 213 |   | (1,497 | ) | (1,284 | ) |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                               |   | $                        | 72,168    |                       | $      | (329 | ) | $ | (5,253 | ) | $ | 66,586 |   | $ | 58,352 |   | $ | 2,481 |   | $ | 60,833 |   |
|                                                                                                            |   |                     |      |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                                    |   | $                        | 2,102,755 |                       | $      | 90,094 |   | $ | 390,425 |   | $ | 2,583,274 |   | $ | 1,729,194 |   | $ | 123,674 |   | $ | 1,852,868 |   |

 

----

(1)   The Fund Management segment began with ouracquisition of Related on November 17, 2003.

(2)   The Mortgage Banking segment began January 1, 2002.

 

NOTE 20 – Goodwill and Intangible Assets

 

Weadopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002.  We have determined that the amountspreviously capitalized as goodwill relating to our initial formation and to themerger of American Tax Exempt Bond Trust, meet the criteria in SFAS 141 forrecognition as intangible assets apart from goodwill, and accordingly willcontinue to be amortized over their remaining useful lives, subject toimpairment testing.

 

Duringthe quarter ended June 30, 2002, PWF engaged a third party valuation firm toevaluate PWF’s licenses with Fannie Mae, Freddie Mac, FHA, Ginnie Mae andvarious private investors.  As a resultof this process approximately $8.6 million has been reclassified from goodwillto

 

84

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intangibleassets, representing the estimated market value of PWF’s licenses.  These licenses have an indefinite life and,as a result, are not being amortized.

 

During2002 and the nine months ended September 30, 2003, pursuant to the originalacquisition agreement, we paid approximately $3.0 and $.7 million,respectively, in “true-up” payments representing payments due to the originalPWF stockholders which was recorded as additional goodwill during the fourthquarter of 2002 and the first nine months of 2003.  These true-up payments were based on i) the increase in the valueof MSRs due to certain loans closing, ii) positive changes between PWF’s audited balance sheet used for theinitial purchase price and the audited balance sheet at December 31, 2001, iii)payments of certain servicing fees, and iv) forward conversions of loanspreviously committed.  The acquisitionagreement stipulates additional true-up payments to be made periodically for aperiod of up to three years from the acquisition date.

 

Inconjunction with our purchase of Related, we acquired additional intangibleassets and goodwill.  The value of theintangible assets was verified via third party valuation.  The excess of the total paid over the fairvalue of the assets and liabilities was classified as goodwill.  (See Note 2).

 

Thefollowing table provides further information regarding our intangible assets:

 

 
|                                                         |   | **(Dollars in thousands)**                  |       |
|--------------------------------------------------------------|--------|---------------------------------------------|------------|
|                                                         |   | **Other  Identifiable  Intangible  Assets** |       | **PWF  Licenses** |   | **Related  Intangible  Assets** |   | **Total  Identifiable  Intangible  Assets** |   | **GoodWill** |   |
|                                                         |   |                                        | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Balance at December 31, 2002                                 |   | $                                           | 4,427      |   | $ | 8,639 |   | $ | — |   | $ | 13,066 |   | $ | 4,793 |   |
| Accumulated amortization                                     |   | (1,750                                      | )          | — | ** ** | **—** |   | (1,750 | ) | — | ** ** |
| Net balance at December 31, 2002                             |   | 2,677                                       |       | 8,639 | ** ** | **—** |   | 11,316 |   | 4,793 | ** ** |
| Additions (see Note 2)                                       |   | —                                      |       | — |   | 185,300 |   | 185,300 |   | 209,951 | ** ** |
| Amortization expense                                         |   | (477                                        | )          | — |   | (1,936 | ) | (2,413 | ) | — | ** ** |
| Balance at December 31, 2003                                 |   | $                                           | 2,200      |   | $ | 8,639 |   | $ | 183,364 |   | $ | 194,203 |   | $ | 214,744 |   |
|                                                         |   |                                        |       |   |   |   |   |   |   |   |   |
| Amortization expense for the year ended December  31, 2003   |   | $                                           | 477        |   | $ | — |   | $ | 1,936 |   | $ | 2,413 |   | $ | — |   |
| Estimated amortization expense per year for next  five years |   | $                                           | 477        |   | $ | — |   | $ | 16,207 |   | $ | 16,684 |   | $ | — |   |

 

Theamortization is included as a reduction to revenue bond interest income.

 

Theamounts indicated as goodwill in the accompanying consolidated financialstatements as of December 31, 2003 are related to the acquisition, on December31, 2001 of PWF and on November 17, 2003 of Related.  These amounts represent goodwill under SFAS 142, and therefore,are not being amortized.  In accordancewith SFAS 142, we have concluded that no impairment exists at December 31,2003.  We  will perform the required annual impairment tests in the fourthquarter of 2004.

 

Note 21 – Dividends and Restricted Assets

 

CharterMacmay not receive any distributions from our consolidated subsidiary, EquityIssuer, until Equity Issuer has either paid all accrued but unpaid distributionsrelated to its preferred shares, or in the case of the next followingdistribution payment date, set aside funds sufficient for payment.  The distributions related to the preferred sharesare payable only from Equity Issuer’s quarterly net income, defined as thetax-exempt income (net of expenses) for the particular calendar quarter.  Equity Issuer is required, under the termsof its preferred share issuance, to meet certain leverage ratios calculated asits total obligations divided by the gross fair value of investments.  This could limit the ability of EquityIssuer to distribute cash or revenue bonds to us or to make loans or advancesto us.

 

EquityIssuer and its subsidiaries hold revenue bonds which at December 31, 2003, hadan aggregate carrying amount of approximately $1.71 billion that serve ascollateral for securitized borrowings or are securitized.  The total securitized borrowings at December31, 2003 were approximately $517 million. Equity Issuer’s net assets at December 31, 2003 were approximately $455million.

 

CharterMacmay not receive any distributions from CCC, until CCC has paid alldistributions related to the SCUs. These distributions are payable first from CCC and then to the extentCCC lacks sufficient cash flow to pay the distributions, from CharterMac,except for all but $5 million of these distributions.  Any such remaining shortfall will earn interest at a market rateand will be payable from time to time as CCC has sufficient cash flow.  Dividends are payable to the holders of SCUsonly if dividends are declared and paid to common shareholders.

 

85

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NOTE 22 –Mortgage ServicingRights

 

PWFrecognizes as assets the rights to service mortgage loans for others, whetherthe MSRs are acquired through a separate purchase or through loan origination,by allocating total costs incurred between the loan and the MSRs retained basedon their relative fair value.  MSRs arebeing carried at their adjusted cost basis. MSRs are amortized in proportion to, and over the period of, estimatednet servicing income.

 

Wehave two areas of loss exposure related to its lending activities.  First, while a loan is recorded on the balancesheet, there is exposure to potential loss if a loan becomes impaired anddefaults.  Second, we have exposure toloss due to the retention of a portion of credit risk within PWF’s servicingcontract under the Fannie Mae DUS program.

 

Whena loan is owned by PWF and recorded on the balance sheet, PWF identifies loansthat are impaired and evaluates the allowance for loss on a specific loan basisfor losses believed to currently exist in the recorded loan portfolio.  An impaired loan is defined, as noted withinaccounting guidance, when we determine it is probable that not all requiredcontractual payments will be made when due. PWF’s primary tool for determining which loans are likely to currentlyhave a loss associated with them is to evaluate the debt service coverage ratiobased on PWF’s historical experience of similar properties and the frequency ofsuch losses.  Loans that are impairedand specific loans that are not impaired but have debt service coverage ratiosbelow a certain threshold, which indicates a high likelihood of future foreclosureand currently have an existing loss, are evaluated.  The estimate of currently existing loss includes the estimatedseverity of the loss which would include any advances made or existing propertyloss.  Property maintenance costs (whenforeclosure occurs) are expensed when incurred and not included in the lossestimate.  However, as most loans aresold very quickly after origination, there typically is not a significantamount of loan loss allowance recorded.

 

We have exposure to lossdue to our retention of a portion of credit risk within PWF’s servicingcontract under the Fannie Mae DUS program. For loans which have been sold as commercial mortgage-backed securitiesfor which PWF retains the servicing under Fannie Mae’s DUS program, PWF’s shareof loss is associated with the servicing contract and determined in accordancewith the loss sharing provisions under the program.  Prior to the issuance of Interpretation No. 45, “Guarantors’Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”), because the loss sharing onthese serviced loans was associated with the servicing contract, they werevalued within the servicing right and the anticipated cash flows that are associatedwith such servicing activities.  We havedetermined that these potential losses are guarantees under the definition ofFIN 45 and therefore, record an asset and a corresponding liability based onour estimate of the portion of the servicing cash flows deemed to representcompensation for our guarantee for loans originated on/or after January 1,2003.  On an ongoing basis, we willaccount for the asset by offsetting cash received for the guarantee against theasset and crediting interest income for the change in asset due to the passageof time.  The portion of the liabilityrepresenting an accrual for probable losses under SFAS No. 5, “Accounting forContingencies” (“FAS 5”) is adjusted as loss estimates change; the portionrepresenting our willingness to stand by as guarantor will be amortized overthe expected life of the guarantee.

 

NOTE 23 – Subsequent Events

 

New Acquisitions

 

Subsequentto December 31, 2003, CharterMac has acquired eight revenue bonds with a totalaggregate face amount of approximately $70.2 million, secured by 1,321multi-family units.

 

InterestRate Swap Transactions

 

OnJanuary 15, 2004, CharterMac entered into two interest rate swap agreementswith Fleet as the counterparty.  One hasa notional amount of $50 million fixed at an annual rate of 2.86% beginning inJanuary 2005 and expiring in January 2008. The other swap has the same notional amount of $50 million fixed at anannual rate 3.08% beginning in January 2005 and expiring in January 2009.  On February 13, 3004, CharterMac alsoentered into two interest rate swaps with RBC Capital Markets and Fleet ascounterparties, respectively.  Both havea notional amount of $100 million.  Theone with RBC has a fixed annual rate of 3.075% beginning in January 2005 andexpiring in January 2009.  The otherswap with Fleet has a fixed annual rate of 3.265% beginning in January 2005 andexpiring in January 2010.

 

86

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| Item 9.  | Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 9A. | Disclosure Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (a)      | *Evaluation of Disclosure Controls and  Procedures*.   Our Chief Executive Officer and Chief Financial Officer have evaluated  the effectiveness of our disclosure controls and procedures (as such term is  defined in Rule 15(e) under the Securities Exchange Act of 1934, as amended  (the “Exchange Act”)) as of the end of the period covered by this  report.  Based on such evaluation, such  officers have concluded that, as of the end of such period, our disclosure  controls and procedures are effective. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (b)      | *Internal Control over Financial  Reporting. *There  have been no changes in our internal control over financial reporting during  the fiscal quarter to which this report relates that have materially  affected, or are reasonably likely to materially affect, our internal control  over financial reporting.                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 10. | Directors and Executive Officers of our Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | The information required by this item is incorporated herein by  reference to our definitive proxy statement to be filed pursuant to Regulation  14A under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 11. | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | The information required by this item is incorporated herein by  reference to our definitive proxy statement to be filed pursuant to Regulation  14A under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | The information required by this item is incorporated herein by  reference to our definitive proxy statement to be filed pursuant to Regulation  14A under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 13. | Certain Relationships and Related Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | The information required by this item is incorporated herein by  reference to our definitive proxy statement to be filed pursuant to Regulation  14A under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                 |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Item 14. | Principal Accountant Fees and Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     | Incorporated by reference to our definitive proxy statement to be  filed pursuant to Regulation 14A under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

87

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PART IV

 

Item 15.  Exhibits, Financial StatementSchedules and Reports on Form 8-K.

 
| (a) 1. | Financial Statements                                                                                                                                                                                                |   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                |   |
|   | Independent Auditors’ Report                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                |   |
|   | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                                                                                        |   |
|   |                                                                                                                                                                                                                |   |
|   | Consolidated Statements of Income for the  years ended December 31, 2003, 2002 and 2001                                                                                                                             |   |
|   |                                                                                                                                                                                                                |   |
|   | Consolidated Statements of Changes in  Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001                                                                                               |   |
|   |                                                                                                                                                                                                                |   |
|   | Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                                                                                                                         |   |
|   |                                                                                                                                                                                                                |   |
|   | Notes to Consolidated Financial Statements                                                                                                                                                                          |   |
|   |                                                                                                                                                                                                                |   |
| (a) 2. | Financial Statement Schedules                                                                                                                                                                                       |   |
|   |                                                                                                                                                                                                                |   |
|   | Schedule I – Condensed Financial Information of Registrant                                                                                                                                                     |   |
|   |                                                                                                                                                                                                                |   |
|   | All other schedules have been omitted because they are not applicable  or the required information is included in the financial statements and the notes  thereto.                                                  |   |
|   |                                                                                                                                                                                                                |   |
| (b).   | Reports on Form 8-K                                                                                                                                                                                                 |   |
|   |                                                                                                                                                                                                                |   |
|   | Current report on Form 8-K relating to our Company’s press release  announcing its intent to acquire Related Company, dated and filed December  20, 2002.                                                      |   |
|   |                                                                                                                                                                                                                |   |
| (c).   | Exhibits                                                                                                                                                                                                            |   |
|   |                                                                                                                                                                                                                |   |
| 3.1(a) | Certificate of Business Trust dated as of August 12, 1996  (incorporated by reference to our Registration Statement on Form 10, File No.  001-13237)                                                                |   |
|   |                                                                                                                                                                                                                |   |
| 3.1(b) | Certificate of Amendment of the Restated Certificate of Business  Trust (incorporated by reference to our Registration Statement on Form S-8,  filed on November 24, 2003 File No. 001-13237)                       |   |
|   |                                                                                                                                                                                                                |   |
| 3.1(c) | Second Amended and Restated Trust Agreement dated as of November 17,  2003 (incorporated by reference to our Registration Statement on Form S-8,  filed with the Commission on November 24, 2003)                   |   |
|   |                                                                                                                                                                                                                |   |
| 3.2    | Amended and Restated Bylaws (incorporated by reference to our  Registration Statement on Form S-8, filed with the Commission on November 24,  2003)                                                                 |   |
|   |                                                                                                                                                                                                                |   |
| 4.1    | Specimen Copy of Share Certificate for shares of our beneficial interest  (incorporated by reference to our Company’s Form S-8, filed with the  Commission on November 24, 2003                                |   |
|   |                                                                                                                                                                                                                |   |
| 4.2    | Certificate of Designation of Special Preferred Voting Shares, dated  November 17, 2003 (incorporated by reference to our Company’s Current Report  on Form 8K, filed with the Commission on December 1, 2003) |   |

 

88

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| 10(a)  | Management Agreement dated as of November 17, 2003, between us and  Related Capital Company LLC Filed herewith                                                                                                                                                                                                                                                                                                                                                            |   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(b)  | Insurance Agreement among MBIA, CharterMac, Origination Trust, Owner  Trust, CharterMac Floater Certificate Trust (“Floater Certificate Trust”),  First Tennessee Bank National Association (“First Tennessee”), Related  Charter LP, and Bayerische Landesbank Girozentrale, New York Branch  (“Bayerische”) dated as of May 21, 1998 (incorporated by reference to Exhibit  10 (aaay) in our June 30, 1998 Quarterly Report on Form 10-Q) |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(c)  | Liquidity Agreement among Owner Trust, Floater Certificate Trust,  First Tennessee, MBIA and Bayerische dated as of May 21, 1998 (incorporated  by reference to Exhibit 10 (aaaz) in our June 30, 1998 Quarterly Report on  Form 10-Q)                                                                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(d)  | Liquidity Pledge and Security Agreement among Origination Trust,  Owner Trust, Floater Certificate Trust, MBIA, First Tennessee and Bayerische  dated as of May 21, 1998 (incorporated by reference to Exhibit 10 (aaaaa) in  our June 30, 1998 Quarterly Report on Form 10-Q)                                                                                                                                                                                            |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(e)  | Fee Agreement among Wilmington Trust Company, Floater Certificate  Trust and CharterMac dated as of May 21, 1998 (incorporated by reference to  Exhibit 10 (aaaab) in our June 30, 1998 Quarterly Report on Form 10-Q)                                                                                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(f)  | Certificate Placement Agreement (incorporated by reference to Exhibit  10 (aaaac) in our June 30, 1998 Quarterly Report on Form 10-Q)                                                                                                                                                                                                                                                                                                                                     |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10(g)  | Remarketing Agreement (incorporated by reference to Exhibit 10  (aaaad) in our June 30, 1998 Quarterly Report on Form 10-Q)                                                                                                                                                                                                                                                                                                                                               |   |

 

89

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| 10(h)  | Contribution Agreement dated as of December 17, 2002 (incorporated by  reference to our Preliminary Proxy Statement on Schedule 14A filed on  February 2, 2003)                                                                                                                                                                                                                                                 |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(i)  | Amended and  Restated Operating Agreement of CharterMac Capital Company LLC, dated as of  November 17, 2003 (incorporated by reference to our Company’s Current Report  on Form 8-K, filed with the Commission on December 1, 2003 Commission File  No. 001-13237)                                                                                                                                         |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(j)  | Special  Preferred Voting Shares Purchase Agreement, dated as of November 17, 2003, by  and among the Company and APH Associates L.P., DLK Associates L.P., Marc  Associates, L.P., Related General II, L.P. and SJB Associates L.P.  (incorporated by reference to our Company’s Current Report on Form 8-K, filed  with the Commission on December 1, 2003 Commission File No. 001-13237)                |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(k)  | Standstill  Agreement, dated as of November 17, 2003, by and among the Company and APH  Associates L.P., DLK Associates L.P., Marc Associates, L.P., Related General  II, L.P. and SJB Associates L.P. (incorporated by reference to our Company’s  Current Report on Form 8-K, filed with the Commission on December 1, 2003  Commission File No. 001-13237)                                              |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(l)  | Voting  Agreement, dated as of November 17, 2003, by and among the Company and APH  Associates L.P., DLK Associates L.P., Marc Associates, L.P., Related General  II, L.P. and SJB Associates L.P. (incorporated by reference to our Company’s  Current Report on Form 8-K, filed with the Commission on December 1, 2003  Commission File No. 001-13237)                                                  |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(m)  | Exchange  Rights Agreement, dated as of November 17, 2003, by and among CharterMac  Capital Company, LLC, CharterMac Corporation, APH Associates L.P., DLK  Associates L.P, Marc Associates, L.P., Related General II, L.P. and SJB  Associates L.P.(incorporated by reference to our Company’s Current Report on  Form 8-K, filed with the Commission on December 1, 2003 Commission File No.  001-13237) |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(n)  | Lock-up  Agreement of Denise L. Kiley, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                      |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(o)  | Lock-up  Agreement of Alan P. Hirmes, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                       |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(p)  | Lock-up  Agreement of Marc D. Schnitzer, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(q)  | Lock-up  Agreement of Stuart J. Boesky, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                     |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(r)  | Lock-up  Agreement of Stephen M. Ross, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                      |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(s)  | Employment  Agreement of Denise L. Kiley, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(t)  | Employment  Agreement of Alan P. Hirmes, dated November 17, 2003 (incorporated by reference  to our Company’s Current Report on Form 8-K, filed with the Commission on  December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(u)  | Employment  Agreement of Mare D. Schnitzer, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(v)  | Employment  Agreement of Stuart J. Boesky, dated November 17, 2003 (incorporated by  reference to our Company’s Current Report on Form 8-K, filed with the  Commission on December 1, 2003 Commission File No. 001-13237)                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(w)  | Future  Relations Agreement, dated as of November 17, 2003, by and among Stephen  Ross, Related General II L.P., RCMP Management Inc., the Related Companies,  L.P., and CharterMac Capital Company, LLLC (incorporated by reference to our  Company’s Current Report on Form 8-K, filed with the Commision on Decemebr 1,  2003. Commission File No. 001-13237)                                           |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(x)  | Ross  Non-Qualified Share Option Agreement (incorporated by reference to our  Company’s registration statement on Form S-8, filed on November 24, 2003  (Commission File No. 001-13237)).                                                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(y)  | Registration  Rights Agreement, dated as of November 17, 2003, by and among our Company and  APH Associates L>P>, DLK Associates L>P>, Mare Associates, L.P.,  Related General II, L.P. and SJB Associates L.P. (incorporated by reference  to our Company’s registration statement on Form S-8, filed on November 24,  2003 (Commission File No. 001-13237)).                                 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(z)  | Shared  Services Agreement, dated as of November 17, 2003, by and among The Related  Companies, L.P., Related Management Company, and CharterMac Capital Company  (incorporated by reference to our Company’s Current Report on Form 8-K, filed  with the Commission on December 1, 2003, Commission File No. 001-13237)                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(aa) | Other  Services Agreement, dated November 17, 2003, by and between Relcap Holding  Company LLC and CharterMac Capital Companay, LLC (incorporated by reference  to our Company’s Current Report on Form 8-K, filed with the Commission on  December 1, 2003, Commission File No. 001-13237)                                                                                                                |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(ab) | Trade Namae  License Agreement and Acknowledgement, dated as of November 17, 2003, by and  between The Related Companies, L.P. and CharterMac Capital Company, LLC  (incorporated by reference to our Company’s Current Report on Form 8-K, filed  with the Commission on December 1, 2003, Commission File No. 001-13237)                                                                                 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(ac) | CharterMac  Guaranty, dated December 17, 2002 (incorporated by reference to our Company’s  Current Report on Form 8-K, filed with the Commission on December 1, 2003,  Commission File No. 001-13237)                                                                                                                                                                                                      |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(ad) | The  Company’s Restricted Share Plan (previously filed with the Company’s  registration statement on Form S-8, filed with the Commission on November 24,  2003 Commission File No. 001-13237).                                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10(ae) | The  Company’s Amended and Restated Incentive Share Plan (incorporated by  reference to the Company’s Form S-8/A, filed with the Commission on March 2,  2004 Commission File No. 001-13237).                                                                                                                                                                                                         |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 12     | Ratio  of earnings to fixed charges and preferred share dividends of subsidiary                                                                                                                                                                                                                                                                                                                                 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 21     | Subsidiaries of our Company (filed herewith)                                                                                                                                                                                                                                                                                                                                                                    |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 31.1   | Chief  Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                               |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 31.2   | Chief  Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                               |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 32.1   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 32.2   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                        |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| (b)    | Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | Schedule I – Condensed Financial Information of Registrant                                                                                                                                                                                                                                                                                                                                                 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | All other schedules have been omitted because they are not applicable  or the required information is included in the financial statements and the  notes thereto.                                                                                                                                                                                                                                              |   |

 

***Lisa Gans, Attorney at Law***Paul. Hastings, Janofsky & Walker LLP 75 East 55th Street, New York, NY100221 direct 212 318-68721 main: 212 318-6000 direct fax: 212 230-78131 lisagans@paulhastings.com

 

The information transmittedis  intended only for the person ofentity to which it is addressed and may contain confidential and/or priviledgedmaterial.  Any review, retransmission,dissemination or other use of, or taking of any action in reliance upon, thisinformation by persons or

 

90

----

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, we have duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
| CHARTERMAC  (COMPANY)      |
|----------------------------|
|                       |   |   |
|                       |   |   |
| Date:  March 15, 2004 | By: |   |   |
|                       |   | Stuart J. Boesky |
|                       |   | Managing Trustee |
|                       |   | and Chief Executive Officer |
|                       |   |   |
|                       |   |   |
| Date:  March 15, 2004 | By: |   |   |
|                       |   | Stuart A. Rothstein |
|                       |   | Executive Vice President |
|                       |   | and Chief Financial Officer |

 

91

----

 

POWER OF ATTORNEY

 

Each person whose signature appears below hereby constitutes andappoints Stuart J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each oreither of them, his true and lawful attorney-in-fact with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Annual Report,and to cause the same to be filed, with all exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,hereby granting to said attorneys-in-fact and agents, and each of them, fullpower and authority to do and perform each and every act and thing whatsoeverrequisite or desirable to be done in and about the premises, as fully to allintents and purposes as the undersigned might or could do in person, herebyratifying and confirming all acts and things that said attorneys-in-fact and agents,or either of them, or their substitutes or substitute, may lawfully do or causeto be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed by the following persons on behalf of usand in the capacities and on the dates indicated:

 
| **Signature**       |   | **Title**                   |   | **Date**       |
|---------------------|--------|-----------------------------|--------|----------------|
|                |   |                        |   |           |
|                |   | Managing Trustee and        |   |           |
| Stuart J. Boesky    |   | Chief Executive Officer     |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   | Managing Trustee and        |   |           |
| Stephen M. Ross     |   | Chairman of the Board       |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   | Managing Trustee and        |   |           |
| Alan P. Hirmes      |   | Chief Operating Officer     |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   | Chief Financial Officer and |   |           |
| Stuart A. Rothstein |   | Chief Accounting Officer    |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Peter T. Allen      |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Arthur P. Fisch     |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Thomas M. White     |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Charles L. Edson    |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   | Managing Trustee,           |   |           |
| Mark D. Schnitzer   |   | President                   |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   | Managing Trustee,           |   |           |
| Denise L. Kiley     |   | Chief Credit Officer        |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Jeff T. Blau        |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Robert A. Meister   |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Jerome V. Halperin  |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Janice Cook Roberts |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Nathan Gantcher     |   | Managing Trustee            |   | March 15, 2004 |
|                |   |                        |   |           |
|                |   |                        |   |           |
| Robert L. Lorerd    |   | Managing Trustee            |   | March 15, 2004 |

 

92

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, we have duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| CHARTERMAC  (COMPANY)      |
|----------------------------|
|                       |   |   |
|                       |   |   |
| Date:  March 15, 2004 | By: | /s/ Stuart J. Boesky |   |
|                       |   | Stuart J. Boesky |
|                       |   | Managing Trustee |
|                       |   | and Chief Executive Officer |
|                       |   |   |
|                       |   |   |
| Date:  March 15, 2004 | By: | /s/ Stuart A. Rothstein |   |
|                       |   | Stuart A. Rothstein |
|                       |   | Executive Vice President |
|                       |   | and Chief Financial Officer |

 

93

----

 

POWER OF ATTORNEY

 

Each person whose signature appears below hereby constitutes andappoints Stuart J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each oreither of them, his true and lawful attorney-in-fact with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Annual Report,and to cause the same to be filed, with all exhibits thereto and otherdocuments in connection therewith, with the Securities and Exchange Commission,hereby granting to said attorneys-in-fact and agents, and each of them, fullpower and authority to do and perform each and every act and thing whatsoeverrequisite or desirable to be done in and about the premises, as fully to allintents and purposes as the undersigned might or could do in person, herebyratifying and confirming all acts and things that said attorneys-in-fact andagents, or either of them, or their substitutes or substitute, may lawfully door cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed by the following persons on behalf of usand in the capacities and on the dates indicated:

 

 
| **Signature**           |   | **Title**                   |   | **Date**       |
|-------------------------|--------|-----------------------------|--------|----------------|
|                    |   |                        |   |           |
| /s/ Stuart J. Boesky    |   | Managing Trustee and        |   |           |
| Stuart J. Boesky        |   | Chief Executive Officer     |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Stephen M. Ross     |   | Managing Trustee and        |   |           |
| Stephen M. Ross         |   | Chairman of the Board       |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Alan P. Hirmes      |   | Managing Trustee and        |   |           |
| Alan P. Hirmes          |   | Chief Operating Officer     |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Stuart A. Rothstein |   | Chief Financial Officer and |   |           |
| Stuart A. Rothstein     |   | Chief Accounting Officer    |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Peter T. Allen      |   |                        |   |           |
| Peter T. Allen          |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Arthur P. Fisch     |   |                        |   |           |
| Arthur P. Fisch         |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Thomas M. White     |   |                        |   |           |
| Thomas M. White         |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Charles L. Edson    |   |                        |   |           |
| Charles L. Edson        |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Mark D. Schnitzer   |   | Managing Trustee,           |   |           |
| Mark D. Schnitzer       |   | President                   |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Denise L. Kiley     |   | Managing Trustee,           |   |           |
| Denise L. Kiley         |   | Chief Credit Officer        |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Jeff T. Blau        |   |                        |   |           |
| Jeff T. Blau            |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Robert A. Meister   |   |                        |   |           |
| Robert A. Meister       |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Jerome V. Halperin  |   |                        |   |           |
| Jerome V. Halperin      |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Janice Cook Roberts |   |                        |   |           |
| Janice Cook Roberts     |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Nathan Gantcher     |   |                        |   |           |
| Nathan Gantcher         |   | Managing Trustee            |   | March 15, 2004 |
|                    |   |                        |   |           |
| /s/ Robert L. Lorerd    |   |                        |   |           |
| Robert L. Lorerd        |   | Managing Trustee            |   | March 15, 2004 |

 

94

----

 

CHARTERMAC

SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(Dollars in thousands)

 

Summarized condensed financial information ofregistrant (not including its consolidated subsidiaries)

 

CONDENSED BALANCE SHEETS

 
|                                                                                                                                                                                                                       |   | **December  31,** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                                                                                       |   | **2003**          |    | **2002** |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| ASSETS                                                                                                                                                                                                                     |   |              |    |   |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Revenue bonds-at fair value                                                                                                                                                                                                |   | $                 | 93,293  |   | $ | 166,477 |   |
| Cash and cash equivalents                                                                                                                                                                                                  |   | 16,763            |    | 4,374 |   |
| Deferred costs – net of amortization of  $4,442 and $7,349                                                                                                                                                            |   | 10,017            |    | 34,683 |   |
| Due from subsidiaries                                                                                                                                                                                                      |   | 101,265           |    | — |   |
| Investment in subsidiaries                                                                                                                                                                                                 |   | 538,719           |    | 494,352 |   |
| Other assets                                                                                                                                                                                                               |   | 28,347            |    | 36,816 |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Total Assets                                                                                                                                                                                                               |   | $                 | 788,404 |   | $ | 736,702 |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                 |   |              |    |   |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Liabilities:                                                                                                                                                                                                               |   |              |    |   |   |
| Accounts payable, accrued expenses and  other liabilities                                                                                                                                                                  |   | $                 | 1,987   |   | $ | 4,526 |   |
| Deferred income                                                                                                                                                                                                            |   | 1,819             |    | 2,639 |   |
| Due to subsidiaries                                                                                                                                                                                                        |   | —            |    | 41,304 |   |
| Distributions payable                                                                                                                                                                                                      |   | 18,851            |    | 14,296 |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Total liabilities                                                                                                                                                                                                          |   | 22,657            |    | 62,765 |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Commitments and contingencies                                                                                                                                                                                              |   |              |    |   |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Shareholder’s equity                                                                                                                                                                                                  |   |              |    |   |   |
| Beneficial owners equity – convertible CRA  shareholders (8,179,761 and 3,835,002 shares issued and outstanding in 2003  and 2002, respectively)                                                                      |   | 160,618           |    | 58,174 |   |
| Beneficial owners equity – manager                                                                                                                                                                                    |   | —            |    | 1,126 |   |
| Beneficial owners equity – special  preferred voting shares (16,164,905 shares authorized and issued as par $.01)                                                                                                     |   | 161               |    | — |   |
| Beneficial owners equity – other common  shareholders (100,000,000 shares authorized; 42,726,232 issued and 42,703,600  outstanding and 41,168,618 issued and 41,160,218 outstanding in 2003 and  2002, respectively) |   | 622,771           |    | 604,496 |   |
| Deferred compensation                                                                                                                                                                                                      |   | (19,385           | )       | — |   |
| Treasury shares of beneficial interest  (22,632 and 8,400 shares in 2003 and 2002, respectively)                                                                                                                           |   | (378              | )       | (103 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                                       |   | 1,960             |    | 10,244 |   |
| Total shareholders’ equity                                                                                                                                                                                            |   | 765,747           |    | 673,937 |   |
|                                                                                                                                                                                                                       |   |              |    |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                            |   | $                 | 788,404 |   | $ | 736,702 |   |

 

See accompanying notes to financial statements

 

----

 

CHARTERMACSCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS

 
|                                                                                                                    |   | **Years  Ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                                    |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                                                                    |   | **(Dollars  in thousands)**   |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Revenues:                                                                                                               |   |                          |   |   |   |   |   |
| Revenue bonds interest income                                                                                           |   | $                             | 8,309  |   | $ | 4,701 |   | $ | 1 |   |
| Other income                                                                                                            |   | 4,191                         |   | 1,219 |   | 1,640 |   |
| Total revenues                                                                                                          |   | 12,500                        |   | 5,920 |   | 1,641 |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Expenses:                                                                                                               |   |                          |   |   |   |   |   |
| Interest expense                                                                                                        |   | —                        |   | 3 |   | 412 |   |
| General and administrative                                                                                              |   | 7,146                         |   | 4,574 |   | 2,673 |   |
| Amortization                                                                                                            |   | 1,140                         |   | 876 |   | 727 |   |
| Total expenses                                                                                                          |   | 8,286                         |   | 5,453 |   | 3,812 |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Income (loss) before loss on repayment of  revenue bonds, sale of loans, income from sub-sidiaries in earnings of ARCap |   | 4,214                         |   | 467 |   | (2,171 | ) |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Income from subsidiaries                                                                                                |   | 60,604                        |   | 59,637 |   | 40,920 |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Equity in earnings of ARCap                                                                                             |   | 2,219                         |   | 1,116 |   | 456 |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Loss on repayment of revenue bonds                                                                                      |   | (451                          | )      | (387 | ) | (220 | ) |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Net income                                                                                                              |   | $                             | 66,586 |   | $ | 60,833 |   | $ | 38,985 |   |
|                                                                                                                    |   |                          |   |   |   |   |   |
| Allocation of net income to:                                                                                            |   |                          |   |   |   |   |   |
| Special distribution to Manager                                                                                         |   | $                             | 5,332  |   | $ | 4,872 |   | $ | 3,621 |   |
| Manager                                                                                                                 |   | $                             | 6      |   | $ | 56 |   | $ | 354 |   |
| Common shareholders                                                                                                     |   | $                             | 54,608 |   | $ | 52,516 |   | $ | 32,555 |   |
| Convertible CRA shareholders                                                                                            |   | 6,640                         |   | 3,389 |   | 2,455 |   |
| Total for shareholders                                                                                                  |   | $                             | 61,248 |   | $ | 55,905 |   | $ | 35,010 |   |

 

See accompanying notes to financialstatements

 

----

 

CHARTERMACSCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

 
|                                                                               |   | **Years  Ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2003**                      |   | **2002** |   | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                          |   |   |   |   |   |
| Net income                                                                         |   | $                             | 66,586 |   | $ | 60,833 |   | $ | 38,985 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                          |   |   |   |   |   |
| Loss on repayment of revenue bonds                                                 |   | 451                           |   | 387 |   | 220 |   |
| Other Amortization                                                                 |   | 1,235                         |   | 3,493 |   | 727 |   |
| Amortization of bond selection costs                                               |   | 1,094                         |   | 1,781 |   | 2,511 |   |
| Amortization of intangible assets                                                  |   | 345                           |   | 345 |   | 182 |   |
| Income from investment in subsidiaries                                             |   | (60,604                       | )      | (59,637 | ) | (40,920 | ) |
| Equity in earnings of ARCap, in excess of  distributions received                  |   | —                        |   | (105 | ) | (456 | ) |
| Deferred Compensation                                                              |   | (19,385                       | )      | — |   | — |   |
| Contribution  of revenue bonds to subsidiaries                                     |   | 69,266                        |   | — |   | — |   |
| Contribution of deferred costs to subsidiaries                                     |   | 25,112                        |   | — |   | — |   |
| Interest receivable                                                                |   | (192                          | )      | (976 | ) | 101 |   |
| Other assets                                                                       |   | 2,278                         |   | (2,500 | ) | (181 | ) |
| Accounts payable, accrued expenses and other  liabilities                          |   | (2,509                        | )      | 1,450 |   | 1,124 |   |
| Deferred Income                                                                    |   | (820                          | )      | 22 |   | — |   |
| Due to / from subsidiaries                                                         |   | (59,961                       | )      | 30,229 |   | 4,308 |   |
| Net cash provided by operating activities                                          |   | 22,896                        |   | 35,322 |   | 6,601 |   |
|                                                                               |   |                          |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                          |   |   |   |   |   |
| Proceeds from repayment of revenue bonds                                           |   | 17,090                        |   | 200 |   | — |   |
| Periodic principal payments of revenue bonds                                       |   | 916                           |   | 353 |   | 85 |   |
| Purchase of revenue bonds                                                          |   | (12,708                       | )      | (16,101 | ) | (7,075 | ) |
| Decrease in bond selection costs                                                   |   | (390                          | )      | (10,702 | ) | (7,899 | ) |
| Investment in subsidiaries                                                         |   | (67,501                       | )      | (82,009 | ) | (82,763 | ) |
| Purchase of temporary investments                                                  |   | —                        |   | — |   | (18,493 | ) |
| Decrease in promissory notes                                                       |   | (3,629                        | )      | (4,547 | ) | — |   |
| Loans made to properties                                                           |   | —                        |   | (861 | ) | (11,971 | ) |
| Principal payments received from loans made to  properties                         |   | —                        |   | 784 |   | 99 |   |
| Net cash used in investing activities                                              |   | (66,222                       | )      | (112,883 | ) | (128,017 | ) |
|                                                                                    |        |                               |        |  |  |  |  |  |  |  |

 

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|                                                       |   | **Years Ended December 31,** |   |
|------------------------------------------------------------|--------|------------------------------|--------|
|                                                       |   | **2003**                     |   | **2002** |   | **2001** |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                      |   |                         |   |   |   |   |   |
| Distributions paid to the Manager and Common  shareholders |   | (60,050                      | )      | (53,741 | ) | (33,456 | ) |
| Distributions paid to Convertible CRA shareholders         |   | (5,071                       | )      | (2,700 | ) | (2,334 | ) |
| Repayment of note payable                                  |   | —                       |   | — |   | 6,226 |   |
| Label Tender Option Program                                |   | (2,456                       | )      | (921 | ) | (873 | ) |
| Issuance of common shares                                  |   | 21,252                       |   | 92,353 |   | 168,264 |   |
| Issuance of convertible preferred shares of  subsidiary    |   | 102,532                      |   | 32,523 |   | — |   |
| Increase in treasury stock                                 |   | (275                         | )      | — |   | (8,987 | ) |
| Issuance of special preferred voting shares                |   | 161                          |   | — |   | — |   |
| Increase in other deferred costs                           |   | (378                         | )      | (2,955 | ) | — |   |
|                                                       |   |                         |   |   |   |   |   |
| Net cash provided by financing activities                  |   | 55,715                       |   | 64,559 |   | 128,840 |   |
|                                                       |   |                         |   |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents      |   | 12,389                       |   | (13,002 | ) | 7,424 |   |
|                                                       |   |                         |   |   |   |   |   |
| Cash and cash equivalents at the beginning of the  period  |   | 4,374                        |   | 17,376 |   | 9,952 |   |
|                                                       |   |                         |   |   |   |   |   |
| Cash and cash equivalents at the end of the period         |   | $                            | 16,763 |   | $ | 4,374 |   | $ | 17,376 |   |
|                                                       |   |                         |   |   |   |   |   |
| Supplemental information                                   |   |                         |   |   |   |   |   |
| Interest paid                                              |   | $                            | — |   | $ | 3 |   | $ | 412 |   |
|                                                       |   |                         |   |   |   |   |   |
| Supplemental disclosure of noncash activities:             |   |                         |   |   |   |   |   |
| Contribution of revenue bonds to subsidiaries              |   | $                            | 69,266 |   | $ | — |   | $ | 8,345 |   |
| Contribution of notes receivable to subsidiaries           |   | $                            | — |   | $ | — |   | $ | 12,498 |   |
|                                                       |   |                         |   |   |   |   |   |
| Distribution of revenue bonds from subsidiaries            |   | $                            | — |   | $ | 128,693 |   | $ | — |   |
| Distribution of notes receivable from subsidiaries         |   | $                            | — |   | $ | 4,503 |   | $ | — |   |

 

Seeaccompanying notes to financial statements

 

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CHARTERMACSCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TOCONDENSED FINANCIAL STATEMENTS

1.  Introduction and Basis ofPresentation

 

Basis of Financial Information

 

The accompanying condensed financial statements (the “Parent CompanyFinancial Statements”) are for CharterMac (not including its consolidatedsubsidiaries).

 

The Parent Company Financial Statements, including the notes thereto,should be read in conjunction with our consolidated financial statements andthe notes thereto which are included in this Form 10-K.

 

2.  Cash Dividends received fromsubsidiaries

 

The table below reflects the cash dividends received for each of thelast three fiscal years from consolidated subsidiaries and 50% or less ownedpersons accounted for under the equity method.

 

| **(In thousands)**            |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Consolidated subsidiaries PWF |   | $        | 1,942  |     | $      | 400      |   | $ | — |   |
| Equity method ARCap           |   | $        | 2,219  |     | $      | 2,219    |   | $ | 456 |   |

 

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