Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE)

The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

The Company has entered into resecuritization or financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in accordance with ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. The Company evaluated the following resecuritization and financing transactions: 1) its Residential CDOs; 2) its multi-family CMBS re-securitization transaction and 3) its distressed residential mortgage loan securitization transaction (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company continues to consolidate the Financing VIEs as of December 31, 2018.

The Company invests in multi-family CMBS consisting of POs that represent the first loss of the Freddie Mac-sponsored multi-family loan K-Series securitizations from which they were issued, and certain IOs and mezzanine CMBS securities issued from those securitizations. The Company has evaluated these CMBS investments to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that nine and seven Freddie Mac-sponsored multi-family loan K-Series securitization trusts are VIEs as of December 31, 2018 and December 31, 2017, respectively. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying consolidated financial statements (see Notes 2 and 7). Of the multi-family CMBS investments owned by the Company that are included in the Consolidated K-Series, eight and six of these investments are not included as collateral to any Financing VIE as of December 31, 2018 and December 31, 2017, respectively.

In analyzing whether the Company is the primary beneficiary of the Consolidated K-Series and the Financing VIEs, the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:


•	whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and


•	whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.

On May 16, 2016, the Company acquired the remaining outstanding membership interests in RBDHC, resulting in the Company's 100% ownership of RBDHC. RBDHC owns 50% of KRVI, a limited liability company that owns developed land and residential homes under development in Kiawah Island, SC, for which RiverBanc is the manager. The Company has evaluated KRVI to determine if it is a VIE and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that KRVI is a VIE for which RBDHC is the primary beneficiary as the Company, collectively through its wholly-owned subsidiaries, RiverBanc and RBDHC, has both the power to direct the activities that most significantly impact the economic performance of KRVI and has a right to receive benefits or absorb losses of KRVI that could be potentially significant to KRVI. Accordingly, the Company has consolidated KRVI in its consolidated financial statements with a non-controlling interest for the third-party ownership of KRVI membership interests.

The Company evaluates the home pricing and lot values of the real estate under development that is owned by KRVI, which is included in other assets on the Company's consolidated balance sheets, on a quarterly basis. Based on evaluations during the year ended December 31, 2018, the Company determined that the real estate under development with a carrying amount of $24.8 million was no longer fully recoverable and was impaired. The Company recognized a $2.8 million impairment loss which is included in other income in the Company's consolidated statements of operations for the year ended December 31, 2018. For the year ended December 31, 2018, $1.4 million of this impairment loss is included in net income attributable to non-controlling interest in consolidated variable interest entities on the accompanying consolidated statements of operations, resulting in a net loss to the Company of $1.4 million. Fair value was determined based on the sales comparison approach which derives a value indication by comparing the subject property to similar properties that have been recently sold and assumes a purchaser will not pay more for a particular property than a similar substitute property.

On March 31, 2017 (the "Changeover Date"), the Company reconsidered its evaluation of its variable interests in Riverchase Landing and The Clusters, two VIEs that each own a multi-family apartment community and in each of which the Company held a preferred equity investment. The Company determined that it gained the power to direct the activities, and became primary beneficiary, of Riverchase Landing and The Clusters on the Changeover Date. Prior to the Changeover Date, the Company accounted for Riverchase Landing as an investment in an unconsolidated entity and for The Clusters as a preferred equity investment.

On the Changeover Date, the Company consolidated Riverchase Landing and The Clusters into its consolidated financial statements. These transactions were accounted for by applying the acquisition method for business combinations.

The estimated Changeover Date fair value of the consideration transferred totaled $12.5 million, which consisted of the estimated fair value of the Company's preferred equity investments in both Riverchase Landing and The Clusters. The Company determined the estimated fair value of its preferred equity investments in Riverchase Landing and The Clusters using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

The following table summarizes the estimated fair values of the assets and liabilities of Riverchase Landing and The Clusters at the Changeover Date (dollar amounts in thousands).



Cash	$	112
Operating real estate ⁽¹⁾	62,322
Lease intangibles ⁽¹⁾	5,340
Receivables and other assets	2,260
Total assets	70,034

Mortgages payable	51,570
Accrued expenses and other liabilities	1,519
Total liabilities	53,089

Non-controlling interest ⁽²⁾	4,462
Net assets consolidated	$	12,483


⁽¹⁾	Reclassified to real estate held for sale in consolidated variable interest entities on the consolidated balance sheets in the year ended December 31, 2017 (see Note 11).


⁽²⁾	Represents third party ownership of membership interests in Riverchase Landing and The Clusters. The fair value of the non-controlling interests in Riverchase Landing and The Clusters, both private companies, was estimated using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

In March 2018, Riverchase Landing completed the sale of its multi-family apartment community and redeemed the Company's preferred equity investment. The Company de-consolidated Riverchase Landing as of the date of the sale. Prior to March 2018, the Company did not have any claims to the assets or obligations for the liabilities of Riverchase Landing. As of December 31, 2018, the Company does not have any claims to the assets or obligations for the liabilities of The Clusters.

The Consolidated K-Series, the Financing VIEs, KRVI, Riverchase Landing (as of December 31, 2017) and The Clusters are collectively referred to in this footnote as "Consolidated VIEs".

The following tables present a summary of the assets and liabilities of these Consolidated VIEs as of December 31, 2018 and December 31, 2017, respectively. Intercompany balances have been eliminated for purposes of this presentation.

Assets and Liabilities of Consolidated VIEs as of December 31, 2018 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization⁽¹⁾		Distressed Residential Mortgage Loan Securitization⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	708	$	708
Investment securities available for sale, at fair value held in securitization trusts	52,700		—		—		—		—		52,700
Residential mortgage loans held in securitization trusts, net	—		—		56,795		—		—		56,795
Distressed residential mortgage loans held in securitization trusts, net	—		88,096		—		—		—		88,096
Multi-family loans held in securitization trusts, at fair value	1,107,071		—		—		10,572,776		—		11,679,847
Real estate held for sale in consolidated variable interest entities	—		—		—		—		29,704		29,704
Receivables and other assets	4,243		10,287		1,061		37,679		23,254		76,524
Total assets	$	1,164,014	$	98,383	$	57,856	$	10,610,455	$	53,666	$	11,984,374

Residential collateralized debt obligations	$	—	$	—	$	53,040	$	—	$	—	$	53,040
Multi-family collateralized debt obligations, at fair value	1,036,604		—		—		9,985,644		—		11,022,248
Securitized debt	30,121		12,214		—		—		—		42,335
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		31,227		31,227
Accrued expenses and other liabilities	4,228		444		26		37,022		1,166		42,886
Total liabilities	$	1,070,953	$	12,658	$	53,066	$	10,022,666	$	32,393	$	11,191,736

⁽¹⁾

The Company classified the multi-family CMBS issued by two securitizations included in the Consolidated K-Series and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one securitization included in the Consolidated K-Series that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 7).

⁽²⁾

The Company engaged in this transaction for the purpose of financing certain distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of re-performing and, to a lesser extent, non-performing and other delinquent mortgage loans secured by first liens on one- to four family properties. Balances as of December 31, 2018 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the Class A Notes issued as part of this securitization transaction, which were eliminated in consolidation.


⁽³⁾	Eight of the securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2018.

Assets and Liabilities of Consolidated VIEs as of December 31, 2017 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re-securitization⁽¹⁾		Distressed Residential Mortgage Loan Securitization⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	808	$	808
Investment securities available for sale, at fair value held in securitization trusts	47,922		—		—		—		—		47,922
Residential mortgage loans held in securitization trusts, net	—		—		73,820		—		—		73,820
Distressed residential mortgage loans held in securitization trusts, net	—		121,791		—		—		—		121,791
Multi-family loans held in securitization trusts, at fair value	1,157,726		—		—		8,499,695		—		9,657,421
Real estate held for sale in consolidated variable interest entities	—		—		—		—		64,202		64,202
Receivables and other assets	4,333		15,428		935		29,301		25,507		75,504
Total assets	$	1,209,981	$	137,219	$	74,755	$	8,528,996	$	90,517	$	10,041,468

Residential collateralized debt obligations	$	—	$	—	$	70,308	$	—	$	—	$	70,308
Multi-family collateralized debt obligations, at fair value	1,094,044		—		—		8,095,415		—		9,189,459
Securitized debt	29,164		52,373		—		—		—		81,537
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		57,124		57,124
Accrued expenses and other liabilities	4,316		2,957		24		28,969		1,727		37,993
Total liabilities	$	1,127,524	$	55,330	$	70,332	$	8,124,384	$	58,851	$	9,436,421

⁽¹⁾

The Company classified the multi-family CMBS issued by two securitizations included in the Consolidated K-Series and held by the Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one securitization included in the Consolidated K-Series that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 7).

⁽²⁾

The Company engaged in this transaction for the purpose of financing certain distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of re-performing and, to a lesser extent, non-performing and other delinquent mortgage loans secured by first liens on one- to four family properties. Balances as of December 31, 2017 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the Class A Notes issued as part of this securitization transaction, which have been eliminated in consolidation.


⁽³⁾	Six of the securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2017.

The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS or distressed residential mortgage loans (dollar amounts in thousands):



	Multi-family CMBS Re-securitization⁽¹⁾			Distressed Residential Mortgage Loan Securitizations
Principal Amount at December 31, 2018	$	33,177		$	12,381
Principal Amount at December 31, 2017	$	33,350		$	53,089
Carrying Value at December 31, 2018⁽²⁾	$	30,121		$	12,214
Carrying Value at December 31, 2017⁽²⁾	$	29,164		$	52,373
Pass-through rate of Notes issued	5.35		%	4.00		%

⁽¹⁾

The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-family CMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note issued in this re-securitization transaction have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations and warranties. The Company will receive all remaining cash flow, if any, through its retained ownership. On February 21, 2019, the Company directed the trustee of this re-securitization transaction to exercise its right to redeem the re-securitization. On February 22, 2019, the trustee delivered a notice of the optional redemption of the re-securitization with a redemption date of March 14, 2019 (see Note 26).


⁽²⁾	Classified as securitized debt in the liability section of the Company’s accompanying consolidated balance sheets.

The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of December 31, 2018 and December 31, 2017, respectively (dollar amounts in thousands):



Scheduled Maturity (principal amount)	December 31, 2018			December 31, 2017
Within 24 months	$	12,381		$	53,089
Over 24 months to 36 months	—			—
Over 36 months	33,177			33,350
Total	45,558			86,439
Discount	(2,983		)	(4,232		)
Debt issuance cost	(240		)	(670		)
Carrying value	$	42,335		$	81,537

There is no guarantee that the Company will receive any cash flows from these securitization trusts.

Residential Mortgage Loan Securitization Transaction

The Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussed above) since inception; the first three were accounted for as permanent financings and have been included in the Company’s accompanying consolidated financial statements. The fourth was accounted for as a sale and accordingly, is not included in the Company's accompanying consolidated financial statements.

Unconsolidated VIEs

The Company has evaluated its multi-family CMBS investments in two Freddie Mac-sponsored multi-family loan K-Series securitizations and its mezzanine loan, preferred equity and other equity investments as of December 31, 2018 and 2017, respectively, to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that, except for The Clusters as of December 31, 2018 and both Riverchase Landing and The Clusters as of December 31, 2017, it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. The following tables present the classification and carrying value of unconsolidated VIEs as of December 31, 2018 and 2017 (dollar amounts in thousands):



	December 31, 2018
	Investment securities available for sale, at fair value, held in securitization trusts		Receivables and other assets		Preferred equity and mezzanine loan investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	52,700	$	72	$	—	$	—	$	52,772
Preferred equity investment on multi-family properties	—		—		154,629		40,472		195,101
Mezzanine loan on multi-family properties	—		—		10,926		—		10,926
Equity investments in entities that invest in residential properties	—		—		—		10,954		10,954
Total assets	$	52,700	$	72	$	165,555	$	51,426	$	269,753



	December 31, 2017
	Investment securities available for sale, at fair value, held in securitization trusts		Receivables and other assets		Preferred equity and mezzanine loan investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	47,922	$	73	$	—	$	—	$	47,995
Preferred equity investment on multi-family properties	—		—		132,009		8,320		140,329
Mezzanine loan on multi-family properties	—		—		6,911		—		6,911
Equity investments in entities that invest in multi-family and residential properties	—		—		—		25,562		25,562
Total assets	$	47,922	$	73	$	138,920	$	33,882	$	220,797

Our maximum loss exposure on the multi-family CMBS investments, mezzanine loan, preferred equity and other equity investments is approximately $269.8 million and $220.8 million at December 31, 2018 and December 31, 2017, respectively. The Company’s maximum exposure does not exceed the carrying value of its investments.