Tax Realty Consultant

When we invest in junior mortgage loans, junior participation in existing loans or mezzanine loans, the collateral securing our loan is subordinate to the liens of senior mortgages or senior participation. At September 30, 2007, approximately 6% of our real estate mortgages, or $14 million in principal amount, were represented by junior mortgages, junior participation or mezzanine loans. In certain cases, we may find it advisable to make additional payments in order to maintain the current status of prior liens or to discharge them entirely or to make working capital advances to support current operations. It is possible that the amount which may be recovered by us in cases in which we hold a junior position may be less, or significantly less, than our total investment, less allowances for possible loan losses.

We make loans to multiple borrowing entities that are controlled by the same individual. At September 30, 2007, we had six loans outstanding with an aggregate principal amount of $64.0 million to six borrowing entities controlled by one individual. In fiscal 2007 loans to borrowing entities controlled by this individual accounted for approximately 51% of the loans originated by us and 34.1% of loans originated by us and the CIT joint venture. The individual controlling these borrowing entities became incapacitated in May 2007, is not able to manage his business or to make business decisions and is not expected to be actively engaged in business in the future and, therefore, neither he nor any entity controlled by him is expected to obtain any additional loans from us. A guardian appointed by the Court to oversee the affairs of this individual and the management group of our borrowers are seeking to complete an orderly sale of the assets securing our loans.

For tax purposes, we report on a calendar year basis. For financial reporting purposes our fiscal year is September 30th. We distributed substantially all of our taxable income for calendar 2006 by October 2007. We estimate taxable income for calendar 2007 will be approximately $39.7 million, of which approximately $20.6 million is expected to represent capital gain income. Let’s do some quick math. Only $19.1 million of expected taxable income is sustainable ordinary income from business activities. That level of taxable income only supports a quarterly dividend of $0.39/share. Therefore BRT will have to continue selling assets to maintain its dividend, which represents an unsustainable long-term strategy.

With lowered origination’s, shaky second liens, and a concentration of credit risk in loans whose collateral is being liquidated regardless of market conditions, BRT’s future doesn’t seem very bright.

http://seekingalpha.com/article/57637-what-s-buried-in-brt-realty-trust-s-10-k

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