DESCRIPTION OF DEBT SECURITIES
As used in this prospectus, debt securities means the debentures, notes, bonds and other evidences of indebtedness that we may issue from time
to time. The debt securities will either be senior debt securities or subordinated debt securities. Senior debt securities will be issued under an indenture between us and a "Senior Indenture
Trustee," referred to as the "Senior Indenture," and subordinated debt securities will be issued under an indenture between us and a "Subordinated Indenture Trustee," referred to as the "Subordinated
Indenture." This prospectus sometimes refers to the Senior Indenture and the Subordinated Indenture, collectively, as the "Indentures." The Senior Indenture Trustee and the Subordinated Indenture
Trustee are both referred to, individually, as the Trustee.
The
forms of Indentures are filed as exhibits to the registration statement of which this prospectus forms a part. The statements and descriptions in this prospectus or in any
prospectus supplement regarding provisions of the Indentures and debt securities are summaries thereof, do not purport to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the Indentures (and any amendments or supplements we may enter into from time to time which are permitted under each Indenture) and the debt securities,
including the definitions therein of certain terms.
General
Unless otherwise specified in a prospectus supplement, the debt securities will be our direct unsecured obligations. The senior debt securities
will rank equally with any of our other senior and unsubordinated debt. The subordinated debt securities will be subordinate and junior in right of payment to any senior indebtedness.
The
Indentures do not limit the aggregate principal amount of debt securities that we may issue and provide that we may issue debt securities from time to time in one or more series, in
each case with the same or various maturities, at par or at a discount. Unless indicated in a prospectus supplement, we may issue additional debt securities of a particular series without the consent
of the holders of the debt securities of such series outstanding at the time of the issuance. Any such additional debt securities,
together with all other outstanding debt securities of that series, will constitute a single series of debt securities under the applicable Indenture.
Each
prospectus supplement will describe the terms relating to the specific series of debt securities being offered. These terms will include some or all of the
following:
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the title of debt securities and whether they are subordinated debt securities or senior debt securities;
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any limit on the aggregate principal amount of the debt securities;
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the ability to issue additional debt securities of the same series;
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the price or prices at which we will sell the debt securities;
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the maturity date or dates of the debt securities;
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the rate or rates of interest, if any, which may be fixed or variable, at which the debt securities will bear interest, or the method of
determining such rate or rates, if any;
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the date or dates from which any interest will accrue or the method by which such date or dates will be determined;
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the right, if any, to extend the interest payment periods and the duration of any such deferral period, including the maximum consecutive
period during which interest payment periods may be extended;
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whether the amount of payments of principal of (and premium, if any) or interest on the debt securities may be determined with reference to any
index, formula or other method, such as one or more currencies, commodities, equity indices or other indices, and the manner of determining the amount of such payments;
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the dates on which we will pay interest on the debt securities and the regular record date for determining who is entitled to the interest
payable on any interest payment date;
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the place or places where the principal of (and premium, if any) and interest on the debt securities will be payable, where any securities may
be surrendered for registration of transfer, exchange or conversion, as applicable, and notices and demands may be delivered to or upon us pursuant to the Indenture;
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if we possess the option to do so, the periods within which and the prices at which we may redeem the debt securities, in whole or in part,
pursuant to optional redemption provisions, and the other terms and conditions of any such provisions;
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our obligation, if any, to redeem, repay or purchase debt securities by making periodic payments to a sinking fund or through an analogous
provision or at the option of holders of the debt securities, and the period or periods within which and the price or prices at which we will redeem, repay or purchase the debt securities, in whole or
in part, pursuant to such obligation, and the other terms and conditions of such obligation;
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the denominations in which the debt securities will be issued, if other than denominations of $1,000 and integral multiples of $1,000;
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the portion, or methods of determining the portion, of the principal amount of the debt securities which we must pay upon the acceleration of
the maturity of the debt securities in connection with an Event of Default (as described below), if other than the full principal amount;
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the currency, currencies or currency unit in which we will pay the principal of (and premium, if any) or interest, if any, on the debt
securities, if not United States dollars;
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provisions, if any, granting special rights to holders of the debt securities upon the occurrence of specified events;
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any deletions from, modifications of or additions to the Events of Default or our covenants with respect to the applicable series of debt
securities, and whether or not such Events of Default or covenants are consistent with those contained in the applicable Indenture;
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any limitation on our ability to incur debt, redeem stock, sell our assets or other restrictions;
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the application, if any, of the terms of the Indenture relating to defeasance and covenant defeasance (which terms are described below) to the
debt securities;
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whether the subordination provisions summarized below or different subordination provisions will apply to the debt securities;
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the terms, if any, upon which the holders may convert or exchange the debt securities into or for our common stock, preferred stock or other
securities or property;
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whether any of the debt securities will be issued in global form and, if so, the terms and conditions upon which global debt securities may be
exchanged for certificated debt securities;
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any change in the right of the Trustee or the requisite holders of debt securities to declare the principal amount thereof due and payable
because of an Event of Default;
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the depositary for global or certificated debt securities;
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any special tax implications of the debt securities;
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any trustees, authenticating or paying agents, transfer agents or registrars or other agents with respect to the debt securities;
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any other terms of the debt securities not inconsistent with the provisions of the Indentures, as amended or supplemented;
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to whom any interest on any debt security shall be payable, if other than the person in whose name the security is registered, on the record
date for such interest, the extent to which, or the manner in which, any interest payable on a temporary global debt security will be paid if other than in the manner provided in the applicable
Indenture;
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if the principal of or any premium or interest on any debt securities of the series is to be payable in one or more currencies or currency
units other than as stated, the currency, currencies or currency units in which it shall be paid and the periods within and terms and conditions upon which such election is to be made and the amounts
payable (or the manner in which such amount shall be determined);
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the portion of the principal amount of any securities of the series which shall be payable upon declaration of acceleration of the maturity of
the debt securities pursuant to the applicable Indenture if other than the entire principal amount; and
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if the principal amount payable at the stated maturity of any debt security of the series will not be determinable as of any one or more dates
prior to the stated maturity, the amount which shall be deemed to be the principal amount of such securities as of any such date for any purpose, including the principal amount thereof which shall be
due and payable upon any maturity other than the stated maturity or which shall be deemed to be outstanding as of any date prior to the stated maturity (or, in any such case, the manner in which such
amount deemed to be the principal amount shall be determined).
Unless
otherwise specified in the applicable prospectus supplement, the debt securities will not be listed on any securities exchange.
Unless
otherwise specified in the applicable prospectus supplement, debt securities will be issued in fully-registered form without coupons.
Debt
securities may be sold at a substantial discount below their stated principal amount, bearing no interest or interest at a rate which at the time of issuance is below market rates.
The applicable prospectus supplement will describe the U.S. federal income tax consequences and special considerations applicable to any such debt securities. The debt securities may also be issued as
indexed securities or securities denominated in foreign currencies, currency units or composite currencies, as described in more detail in the prospectus supplement relating to any of the particular
debt securities. The prospectus supplement relating to specific debt securities will also describe any special considerations and certain additional tax considerations applicable to such debt
securities.
Subordination
The prospectus supplement relating to any offering of subordinated debt securities will describe the specific subordination provisions. However,
unless otherwise noted in the prospectus supplement, subordinated debt securities will be subordinate and junior in right of payment to any existing Senior Indebtedness.
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Under
the Subordinated Indenture, "Senior Indebtedness" means all amounts due on obligations in connection with any of the following, whether outstanding at the date of execution of the
Subordinated Indenture or thereafter incurred or created:
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the principal of (and premium, if any) and interest due on our indebtedness for borrowed money and indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by us;
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all of our capital lease obligations;
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any of our obligations as lessee under leases required to be capitalized on the balance sheet of the lessee under generally accepted accounting
principles;
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all of our obligations for the reimbursement on any letter of credit, banker's acceptance, security purchase facility or similar credit
transaction;
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all of our obligations in respect of interest rate swap, cap or other agreements, interest rate future or options contracts, currency swap
agreements, currency future or option contracts and other similar agreements;
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all obligations of the types referred to above of other persons for the payment of which we are responsible or liable as obligor, guarantor or
otherwise; and
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all obligations of the types referred to above of other persons secured by any lien on any property or asset of ours (whether or not such
obligation is assumed by us).
However,
Senior Indebtedness does not include:
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any indebtedness which expressly provides that such indebtedness shall not be senior in right of payment to the subordinated debt securities,
or that such indebtedness shall be subordinated to any other of our indebtedness, unless such indebtedness expressly provides that such indebtedness shall be senior in right of payment to the
subordinated debt securities;
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any of our indebtedness in respect of the subordinated debt securities;
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any indebtedness or liability for compensation to employees, for goods or materials purchased in the ordinary course of business or for
services;
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any of our indebtedness to any subsidiary; and
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any liability for federal, state, local or other taxes owed or owing by us.
Senior
Indebtedness shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any
term of such Senior Indebtedness.
Unless
otherwise noted in the accompanying prospectus supplement, if we default in the payment of any principal of (or premium, if any) or interest on any Senior Indebtedness when it
becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, then, unless and until such default is cured or waived or ceases to exist, we will make
no direct or indirect payment (in cash, property, securities, by set-off or otherwise) in respect of the principal of or interest on the subordinated debt securities or in respect of any redemption,
retirement, purchase or other requisition of any of the subordinated debt securities.
In
the event of the acceleration of the maturity of any subordinated debt securities, the holders of all senior debt securities outstanding at the time of such acceleration, subject to
any security interest, will first be entitled to receive payment in full of all amounts due on the senior debt securities before the holders of the subordinated debt securities will be entitled to
receive any payment of principal (and premium, if any) or interest on the subordinated debt securities.
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If
any of the following events occurs, we will pay in full all Senior Indebtedness before we make any payment or distribution under the subordinated debt securities, whether in cash,
securities or other property, to any holder of subordinated debt securities:
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any dissolution or winding-up or liquidation or reorganization of Arbor Realty Trust, Inc., whether voluntary or involuntary or in
bankruptcy, insolvency or receivership;
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any general assignment by us for the benefit of creditors; or
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any other marshaling of our assets or liabilities.
In
such event, any payment or distribution under the subordinated debt securities, whether in cash, securities or other property, which would otherwise (but for the subordination
provisions) be payable or deliverable in respect of the subordinated debt securities, will be paid or delivered directly to the holders of Senior Indebtedness in accordance with the priorities then
existing among such holders until all Senior Indebtedness has been paid in full. If any payment or distribution under the subordinated debt securities is received by the Trustee of any subordinated
debt securities in contravention of any of the terms of the Subordinated Indenture and before all the Senior Indebtedness has been paid in full, such payment or distribution or security will be
received in trust for the benefit of, and paid over or delivered and transferred to, the holders of the Senior Indebtedness at the time outstanding in accordance with the priorities then existing
among such holders for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all such Senior Indebtedness in full.
The
Subordinated Indenture does not limit the issuance of additional Senior Indebtedness.
Consolidation, Merger, Sale of Assets and Other Transactions
We may not (i) merge with or into or consolidate with another corporation or sell, assign, transfer, lease or convey all or substantially
all of our properties and assets to, any other corporation other than a direct or indirect wholly-owned subsidiary of ours, and (ii) no corporation may merge with or into or consolidate with us
or, except for any direct or indirect wholly-owned subsidiary of ours, sell, assign, transfer, lease or convey all or substantially all of its properties and assets to us,
unless:
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the corporation formed by or surviving such merger or consolidation or to which such sale, assignment, transfer, lease or conveyance has been
made, if other than us, has expressly assumed by supplemental indenture all of our obligations under the Indentures or we are the surviving corporation;
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immediately after giving effect to such transaction, no default or Event of Default has occurred and is continuing; and
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we deliver to the Trustee an officers' certificate and an opinion of counsel, each stating that the supplemental indenture complies with the
applicable Indenture.
Events of Default, Notice and Waiver
Unless an accompanying prospectus supplement states otherwise, the following shall constitute "Events of Default" under the Indentures with
respect to each series of debt securities:
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our failure to pay any interest on any debt security of such series when due and payable, continued for 30 days;
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our failure to pay principal (or premium, if any) on any debt security of such series when due, regardless of whether such payment became due
because of maturity, redemption, acceleration or otherwise, or is required by any sinking fund established with respect to such series;
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our failure to observe or perform any other of our covenants or agreements with respect to such debt securities for 60 days after we
receive notice of such failure;
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certain events of bankruptcy, insolvency or reorganization of Arbor Realty Trust, Inc.; and
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any other Event of Default provided with respect to Securities of that series.
If
an Event of Default with respect to any debt securities of any series outstanding under either of the Indentures shall occur and be continuing, the Trustee under such Indenture or the
holders of at least 25% in aggregate principal amount of the debt securities of that series outstanding may declare, by notice as provided in the applicable Indenture, the principal amount (or such
lesser amount as may be provided for in the debt securities of that series) of all the debt securities of that series outstanding to be due and payable immediately; provided that, in the case of an
Event of Default involving certain events in bankruptcy, insolvency or reorganization, acceleration is automatic; and, provided further, that after such acceleration, but before a judgment or decree
based on acceleration, the holders of a majority in aggregate principal amount of the outstanding debt securities of that series may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the nonpayment of accelerated principal, have been cured or waived. Upon the acceleration of the maturity of original issue discount securities, an amount less
than the principal amount thereof will become due and payable. Reference is made to the prospectus supplement relating to any original issue discount securities for the particular provisions relating
to acceleration of maturity thereof.
Any
past default under either Indenture with respect to debt securities of any series, and any Event of Default arising therefrom, may be waived by the holders of a majority in principal
amount of all debt securities of such series outstanding under such Indenture, except in the case of (i) default in the payment of the principal of (or premium, if any) or interest on any debt
securities of such series or (ii) default in respect of a covenant or provision which may not be amended or modified without the consent of the holder of each outstanding debt security of such
series affected.
The
Trustee is required within 90 days after the occurrence of a default (which is known to the Trustee and is continuing), with respect to the debt securities of any series
(without regard to any grace period or notice requirements), to give to the holders of the debt securities of such series notice of such default.
The
Trustee, subject to its duties during default to act with the required standard of care, may require indemnification by the holders of the debt securities of any series with respect
to which a default has occurred before proceeding to exercise any right or power under the Indentures at the request of the holders of the debt securities of such series. Subject to such right of
indemnification and to certain other limitations, the holders of a majority in principal amount of the outstanding debt securities of any series under either Indenture may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the debt securities of such series, provided that
such direction shall not be in conflict with any rule of law or with the applicable Indenture and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such
direction.
No
holder of a debt security of any series may institute any action against us under either of the Indentures (except actions for payment of overdue principal of (and premium, if any) or
interest on such debt security or for the conversion or exchange of such debt security in accordance with its terms) unless (i) the holder has given to the Trustee written notice of an Event of
Default and of the continuance thereof with respect to the debt securities of such series specifying an Event of Default, as required under the applicable Indenture, (ii) the holders of at
least 25% in aggregate principal amount of the debt securities of that series then outstanding under such Indenture shall have requested the Trustee to institute such action and offered to the Trustee
indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (iii) the Trustee shall
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have instituted such action within 60 days of such request and (iv) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the
holders of a majority in principal amount of the debt securities of that series.
We
are required to furnish annually to the Trustee statements as to our compliance with all conditions and covenants under each Indenture.
Discharge, Defeasance and Covenant Defeasance
We may discharge or defease our obligations under the Indenture as set forth below, unless otherwise indicated in the applicable prospectus
supplement.
We
may discharge certain obligations to holders of any series of debt securities issued under either the Senior Indenture or the Subordinated Indenture which have not already been
delivered to the Trustee for cancellation and which have either become due and payable or are by their terms due and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee money in an amount sufficient to pay and discharge the entire indebtedness on such debt securities not previously delivered to the Trustee for cancellation, for
principal and any premium and interest to the date of such deposit (in the case of debt securities which have become due and payable) or to the stated maturity or redemption date, as the case may be
and we have paid all other sums payable under the applicable indenture.
If
indicated in the applicable prospectus supplement, we may elect either (i) to defease and be discharged from any and all obligations with respect to the debt securities of or
within any series (except as otherwise provided in the relevant Indenture) ("defeasance") or (ii) to be released from our obligations with respect to certain covenants applicable to the debt
securities of or within any series ("covenant defeasance"), upon the deposit with the relevant Indenture Trustee, in trust for such purpose, of money and/or government obligations which through the
payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) or interest on such debt securities to
maturity or redemption, as the case may be, and any mandatory sinking fund or analogous payments thereon. As a condition to defeasance or covenant defeasance, we must deliver to the Trustee an opinion
of counsel to the effect that the holders of such debt securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to U.S. federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred. Such
opinion of counsel, in the case of defeasance under clause (i) above, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable U.S. federal income tax
law occurring after the date of the relevant Indenture. In addition, in the case of either defeasance or covenant defeasance, we shall have delivered to the Trustee (i) an officers' certificate
to the effect that the relevant debt securities exchange(s) have informed us that neither such debt securities nor any other debt securities of the same series, if then listed on any securities
exchange, will be delisted as a result of such deposit and (ii) an officers' certificate and an opinion of counsel, each stating that all conditions precedent with respect to such defeasance or
covenant defeasance have been complied with.
We
may exercise our defeasance option with respect to such debt securities notwithstanding our prior exercise of our covenant defeasance option.
Modification and Waiver
Under the Indentures, we and the applicable Trustee may supplement the Indentures for certain purposes which would not materially adversely
affect the interests or rights of the holders of debt securities of a series without the consent of those holders. We and the applicable Trustee may also modify the Indentures or any supplemental
indenture in a manner that affects the interests or rights of
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holders of debt securities with the consent of the holders of at least a majority in aggregate principal amount of the outstanding debt securities of each affected series issued under the
Indenture. However, the Indentures require the consent of each holder of debt securities that would be affected by any modification which would:
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change the fixed maturity of any debt securities of any series, or reduce the principal amount thereof, or reduce the rate or extend the time
of payment of interest thereon, or reduce any premium payable upon the redemption thereof;
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reduce the amount of principal of an original issue discount debt security or any other debt security payable upon acceleration of the maturity
thereof;
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change the currency in which any debt security or any premium or interest is payable;
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impair the right to enforce any payment on or with respect to any debt security;
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reduce the percentage in principal amount of outstanding debt securities of any series, the consent of whose holders is required for
modification or amendment of the Indentures or for waiver of compliance with certain provisions of the Indentures or for waiver of certain defaults; or
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modify any of the above provisions.
The
Indentures permit the holders of at least a majority in aggregate principal amount of the outstanding debt securities of any series issued under the Indenture which is affected by
the modification or amendment to waive our compliance with certain covenants contained in the Indentures.
Payment and Paying Agents
Unless otherwise indicated in the applicable prospectus supplement, payment of interest on a debt security on any interest payment date will be
made to the person in whose name a debt security is registered at the close of business on the record date for the interest.
Unless
otherwise indicated in the applicable prospectus supplement, principal, interest and premium on the debt securities of a particular series will be payable at the office of such
paying agent or paying agents as we may designate for such purpose from time to time. Notwithstanding the foregoing, at our option, payment of any interest may be made by check mailed to the address
of the person entitled thereto as such address appears in the security register.
Unless
otherwise indicated in the applicable prospectus supplement, a paying agent designated by us will act as paying agent for payments with respect to debt securities of each series.
All paying agents initially designated by us for the debt securities of a particular series will be named in the applicable prospectus supplement. We may at any time designate additional paying agents
or rescind the designation of any paying agent or approve a change in the office through which any paying agent acts, except that we will be required to maintain a paying agent in each place of
payment for the debt securities of a particular series.
All
moneys paid by us to a paying agent for the payment of the principal, interest or premium on any debt security which remain unclaimed at the end of two years after such principal,
interest or premium has become due and payable will be repaid to us upon request, and the holder of such debt security thereafter may look only to us for payment thereof.
Denominations, Registrations and Transfer
Unless an accompanying prospectus supplement states otherwise, debt securities will be represented by one or more global certificates registered
in the name of a nominee for The Depository
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Company, or DTC. In such case, each holder's beneficial interest in the global securities will be shown on the records of DTC and transfers of beneficial interests will only be effected through
DTC's records.
A
holder of debt securities may only exchange a beneficial interest in a global security for certificated securities registered in the holder's name
if:
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DTC notifies us that it is unwilling or unable to continue serving as the depositary for the relevant global securities or DTC ceases to
maintain certain qualifications under the Exchange Act and no successor depositary has been appointed for 90 days; or
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we determine, in our sole discretion, that the global security shall be exchangeable.
If
debt securities are issued in certificated form, they will only be issued in the minimum denomination specified in the accompanying prospectus supplement and integral multiples of
such denomination. Transfers and exchanges of such debt securities will only be permitted in such minimum denomination. Transfers of debt securities in certificated form may be registered at the
Trustee's corporate office or at the offices of any paying agent or trustee appointed by us under the Indentures. Exchanges of debt securities for an equal aggregate principal amount of debt
securities in different denominations may also be made at such locations.
Governing Law
The Indentures and debt securities will be governed by, and construed in accordance with, the internal laws of the State of New York, without
regard to its principles of conflicts of laws.
Trustee
The Trustee shall be named in the applicable prospectus supplement.
Conversion or Exchange Rights
The prospectus supplement will describe the terms, if any, on which a series of debt securities may be convertible into or exchangeable for our
common stock, preferred stock or other debt securities. These terms will include provisions as to whether conversion or exchange is mandatory, at the option of the holder or at our option. These
provisions may allow or require the number of shares of our common stock or other securities to be received by the holders of such series of debt securities to be adjusted.
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DESCRIPTION OF CAPITAL STOCK
The following description of the terms of our stock is only a summary. For a complete description, we refer you to the Maryland General
Corporation Law (the "MGCL"), our charter and our bylaws. Copies of our charter and bylaws are available upon request. The following description discusses the general terms of the
common stock and preferred stock that we may issue.
The
prospectus supplement relating to a particular class or series of preferred stock will describe certain other terms of such class or series of preferred stock. If so indicated in the
prospectus supplement relating to a particular class or series of preferred stock, the terms of any such class or series of preferred stock may differ from the terms set forth below. The description
of preferred stock set forth below and the description of the terms of a particular class or series of preferred stock set forth in the applicable prospectus supplement are not complete and are
qualified in their entirety by reference to our charter, particularly to the articles supplementary relating to that class or series of preferred stock.
General
Our charter provides that we may issue up to 500,000,000 shares of common stock, $0.01 par value per share, and up to 100,000,000 shares of
preferred stock, $.01 par value per share. As of June 8, 2018, 68,562,235 shares of common stock were issued and outstanding. As of June 8, 2018, 1,551,500 shares of 8.250%
Series A cumulative redeemable preferred stock (the "Series A Preferred Stock"), 1,260,000 shares of 7.75% Series B cumulative redeemable preferred stock (the "Series B
Preferred Stock"), 900,000 shares of 8.50% Series C cumulative redeemable preferred stock (the "Series C Preferred Stock") and 21,230,769 shares of Special Voting Preferred Stock, par
value $0.01 per share (the "Special Voting Preferred Stock"), were issued and outstanding. As of June 8, 2018, there were 18,720 holders of record of our common stock. Under Maryland law, our
stockholders generally are not liable for our debts or obligations.
Common Stock
Subject to the preferential rights of any other class or series of stock, including our Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and to the provisions of the charter regarding the restrictions on transfer and ownership of stock, holders of shares of our common stock are
entitled to receive dividends on such stock when, as and if authorized by our board of directors out of funds legally available therefor and declared by us and to share ratably in the assets of our
company legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of
our company, including the preferential rights on dissolution of any class or series of preferred stock.
Subject
to the provisions of our charter regarding the restrictions on transfer and ownership of stock, each outstanding share of common stock entitles the holder to one vote on all
matters submitted to the vote of stockholders, including the election of directors. There is no cumulative voting in the election of our board of directors, which means that the holders of outstanding
shares of our common stock entitled to cast a majority of the votes in the election of directors can elect all of the directors then standing for election and the holders of the remaining shares of
our common stock may not be able to elect any directors.
Holders
of shares of our common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities
of our company. Subject to the provisions of the charter regarding the restrictions on transfer and ownership of stock, shares of our common stock have equal dividend, liquidation and other rights.
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Under
the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge or consolidate with another entity, convert, sell all or substantially all of its assets or
engage in a statutory share exchange unless declared advisable by the board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled
to be cast on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. Subject to the
voting rights of any other class or series of our stock, including our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Special Voting Preferred
Stock, our charter provides for approval of these matters, except with respect to certain charter amendments relating to the classification and removal of our directors and the vote required to amend
such provisions (which must be approved by the affirmative vote of two-thirds of all the votes entitled to be cast on the amendment), by an affirmative vote of stockholders entitled to cast a majority
of the votes entitled to be cast on the matter.
Our
charter authorizes our board of directors to amend our charter to increase the number of authorized shares of common stock, to authorize us to issue additional authorized but
unissued shares of our common stock, to reclassify any unissued shares of our common stock into other classes or series of stock and to establish the number of shares in each class or series and to
set or change, subject to the restrictions on transfer and ownership of stock contained in our charter and the terms of any outstanding class or series of stock, including our Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Special Voting Preferred Stock, the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series without stockholder approval.
Preferred Stock
Our board of directors may authorize the issuance of preferred stock in one or more classes or series and may determine, with respect to any
such class or series, the powers, preferences and rights of such class or series, and its qualifications, limitations and restrictions, including, without
limitation:
-
-
the number of shares to constitute such class or series and the designations thereof;
-
-
the voting power, if any, of holders of shares of such class or series and, if voting power is limited, the circumstances under which such
holders may be entitled to vote;
-
-
the rate of dividends, if any, and the extent of further participation in dividend distributions, if any, and whether dividends shall be
cumulative or non-cumulative;
-
-
whether or not such class or series will be redeemable, and, if so, the terms and conditions upon which shares of such class or series will be
redeemable;
-
-
the extent, if any, to which such class or series will have the benefit of any sinking fund provision for the redemption or purchase of shares;
-
-
the rights, if any, of such class or series, in the event of the dissolution of the corporation, or upon any distribution of the assets of the
corporation; and
-
-
whether or not the shares of such class or series will be convertible, and, if so, the terms and conditions upon which shares of such class or
series will be convertible.
You
should refer to the articles supplementary and prospectus supplement relating to the class or series of preferred stock being offered for the specific terms of that class or series,
including:
-
-
the title or designation of the class or series and the number of shares in the class or series;
-
-
the price at which the preferred stock will be offered;
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-
-
the dividend rate or rates or method of calculating the rates, the dates on which the dividends will be payable, whether or not dividends will
be cumulative or noncumulative and, if cumulative, the dates from which dividends on the preferred stock being offered will cumulate;
-
-
the voting rights, if any, of the holders of shares of the preferred stock being offered;
-
-
the provisions for a sinking fund, if any, and the provisions for redemption, if applicable, of the preferred stock being offered;
-
-
the liquidation preference per share;
-
-
the terms and conditions, if applicable, upon which the preferred stock being offered will be convertible into our common stock, including the
conversion price, or the manner of calculating the conversion price, and the conversion period;
-
-
the terms and conditions, if applicable, upon which the preferred stock being offered will be exchangeable for debt securities, including the
exchange price, or the manner of calculating the exchange price, and the exchange period;
-
-
any listing of the preferred stock being offered on any securities exchange;
-
-
whether interests in the shares of the class or series will be represented by depositary shares;
-
-
a discussion of any material U.S. federal income tax considerations applicable to the preferred stock being offered;
-
-
the relative ranking and preferences of the preferred stock being offered as to dividend rights and rights upon liquidation, dissolution or the
winding up of our affairs;
-
-
any limitations on the issuance of any class or series of preferred stock ranking senior or equal to the class or series of preferred stock
being offered as to dividend rights and rights upon liquidation, dissolution or the winding up of our affairs; and
-
-
any additional rights, preferences, qualifications, limitations and restrictions of the class or series.
Upon
issuance, the shares of preferred stock will be fully paid and nonassessable, which means that its holders will have paid their purchase price in full and we may not require them to
pay additional funds. Holders of preferred stock will not have any preemptive rights.
Preferred Stock Dividend Rights
Holders of preferred stock will be entitled to receive, when, as and if authorized by the board of directors out of funds legally available
therefor and declared by us, dividends in additional shares of preferred stock or cash dividends at the rates and on the dates set forth in the related articles supplementary and prospectus
supplement. Dividend rates may be fixed or variable or both. Different classes or series of preferred stock may be entitled to dividends at different dividend rates or based upon different methods of
determination. Each dividend will be payable to the holders of record as they appear on our stock books on record dates determined by the board of directors. Dividends on preferred stock may be
cumulative or noncumulative, as specified in the related articles supplementary and prospectus supplement. If the board of directors fails to authorize or we fail to declare a dividend on any
preferred stock for which dividends are noncumulative, then the right to receive that dividend will be lost, and we will have no obligation to pay the dividend for that dividend period, whether or not
dividends are declared for any future dividend period.
No
full dividends will be declared or paid on any preferred stock unless full dividends for the dividend period commencing after the immediately preceding dividend payment date and any
cumulative dividends still owing have been or contemporaneously are declared and paid on all other series of preferred stock which have the same rank as, or rank senior to, that series of preferred
stock.
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When
those dividends are not paid in full, dividends will be declared pro rata, so that the amount of dividends declared per share on that class or series of preferred stock and on each other class or
series of preferred stock having the same rank as that class or series of preferred stock will bear the same ratio to each other that accrued dividends per share on that class or series of preferred
stock and the other classes or series of preferred stock bear to each other. In addition, generally, unless full dividends including any cumulative dividends still owing on all outstanding shares of
any class or series of preferred stock have been paid, no dividends will be declared or paid on the common stock and
generally we may not redeem or purchase any common stock. No interest will be paid in connection with any dividend payment or payments which may be in arrears.
Unless
otherwise set forth in the related articles supplementary and prospectus supplement, the dividends payable for each dividend period will be computed by annualizing the applicable
dividend rate and dividing by the number of dividend periods in a year, except that the amount of dividends payable for the initial dividend period or any period shorter than a full dividend period
will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than a full month, the actual number of days elapsed in the period.
Preferred Stock Rights Upon Liquidation
If we liquidate, dissolve or wind up our affairs, either voluntarily or involuntarily, the holders of each class and series of preferred stock
will be entitled to receive liquidating distributions in the amount set forth in the articles supplementary and prospectus supplement relating to the class or series of preferred stock. If the amounts
payable with respect to preferred stock of any class or series and any stock having the same rank as that class or series of preferred stock are not paid in full, the holders of the preferred stock
will share ratably in any such distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After the holders of each class or series of preferred stock
having the same rank are paid in full, they will have no right or claim to any of our remaining assets. Neither the sale of all or substantially all of our property or business nor a merger or
consolidation by us with any other corporation will be considered a dissolution, liquidation or winding up by us of our business or affairs.
Preferred Stock Redemption
Any class or series of preferred stock may be redeemable in whole or in part at our option. In addition, any class or series of preferred stock
may be subject to mandatory redemption pursuant to a sinking fund. The redemption provisions that may apply to a class or series of preferred stock, including the redemption dates and the redemption
prices for that class or series, will be set forth in the related articles supplementary and prospectus supplement.
If
a class or series of preferred stock is subject to mandatory redemption, the related articles supplementary and prospectus supplement will specify the year we can begin to redeem
shares of the preferred stock, the number of shares of the preferred stock we can redeem each year and the redemption price per share. We may pay the redemption price in cash, stock or other
securities of our
company or of third parties, as specified in the related articles supplementary and prospectus supplement. If the redemption price is to be paid only from the proceeds of the sale of our capital
stock, the terms of the class or series of preferred stock may also provide that if no capital stock is sold or if the amount of cash received is insufficient to pay in full the redemption price then
due, the class or series of preferred stock will automatically be converted into shares of the applicable capital stock pursuant to conversion provisions specified in the related prospectus
supplement.
If
fewer than all the outstanding shares of any class or series of preferred stock are to be redeemed, whether by mandatory or optional redemption, the board of directors will determine
the method for selecting the shares to be redeemed, which may be by lot or pro rata by any other method
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determined
to be equitable. From and after the redemption date, dividends will cease to accrue on the shares of preferred stock called for redemption and all rights of the holders of those shares
other than the right to receive the redemption price will cease.
Preferred Stock Conversion Rights
The related articles supplementary and prospectus supplement will state any conversion rights under which shares of preferred stock are
convertible into shares of common stock or another class or series of preferred stock or other property. As described under "Redemption" above, under some circumstances preferred stock may be
mandatorily converted into common stock or another class or series of preferred stock.
Preferred Stock Voting Rights
The related articles supplementary and prospectus supplement will state any voting rights of that class or series of preferred stock. Unless
otherwise indicated in the related articles supplementary and prospectus supplement, if we issue full shares of any class or series of preferred stock, each share will be entitled to one vote on
matters on which holders of that class or series of preferred stock are entitled to vote. Because each full share of any class or series of preferred stock
will be entitled to one vote, unless otherwise provided in the related articles supplementary, the voting power of that class or series will depend on the number of shares in that class or series, and
not on the aggregate liquidation preference or initial offering price of the shares of that class or series of preferred stock.
Permanent Global Preferred Securities
A class or series of preferred stock may be issued in whole or in part in the form of one or more global securities that will be deposited with
a depositary or its nominee identified in the related prospectus supplement. For most classes and series of preferred stock, the depositary will be DTC. A global security may not be transferred except
as a whole to the depositary, a nominee of the depositary or their successors unless it is exchanged in whole or in part for preferred stock in individually certificated form. Any additional terms of
the depositary arrangement with respect to any class or series of preferred stock and the rights of and limitations on owners of beneficial interests in a global security representing class or a
series of preferred stock may be described in the related prospectus supplement.
Power To Reclassify Unissued Shares Of Common And Preferred Stock
Our charter authorizes our board of directors to classify and reclassify any unissued shares of our common stock or preferred stock into other
classes or series of stock, including one or more classes or series of stock that have priority over our common stock with respect to voting rights, dividends or upon liquidation. Prior to issuance of
shares of each class or series, our board of directors is required by the MGCL and by our charter to set, subject to our charter restrictions on transfer and ownership of stock and to the terms of any
outstanding class or series of stock, including our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Special Voting Preferred Stock, the terms,
preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series.
Subject to the rights of holders of any other class or series of our stock, including our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Special
Voting Preferred Stock, our board of directors may take these actions without stockholder approval unless stockholder approval is required by applicable law or the rules of any stock exchange or
automatic quotation system on which our securities are listed or traded. Therefore, our board of directors could authorize the issuance of shares of common or preferred stock with terms and conditions
that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best
interest.
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Power to Increase or Decrease Authorized Shares of Stock and Issue Additional Shares of Common Stock
and Preferred Stock
We believe that the power of our board of directors to amend our charter to increase or decrease the number of authorized shares of stock, to
authorize us to issue additional shares of common stock or preferred stock and to classify or reclassify unissued shares of common stock or preferred stock and thereafter to authorize us to issue the
classified or reclassified shares provides us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise. These actions can be
taken without common stockholder approval, unless such approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or
traded. Although we have no present intention of doing so, we could issue a class or series of stock that could delay, defer or prevent a transaction or a change in control of us that might involve a
premium price for holders of common stock or otherwise be in their best interest.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of U.S. federal income tax consequences generally applicable to the ownership and disposition of common stock of
Arbor Realty. This summary does not discuss the consequences of an investment in shares of our preferred stock, debt securities, warrants, depositary shares or other securities. For purposes of this
section under the heading "U.S. Federal Income Tax Considerations," references to "Arbor Realty," "we," "our" and "us" mean only Arbor Realty Trust, Inc. and not its subsidiaries or other
lower-tier entities, except as otherwise required by the
context. However, our indirect subsidiary, SR Inc., like Arbor Realty, has also elected to be taxed as a REIT. To the extent that the discussion below relates to the tax requirements for, and
consequences of, qualifying as a REIT, it also applies to SR Inc.'s election to be taxed as a REIT.
This
summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS and judicial
decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not
assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed
in this prospectus. The summary is also based upon the assumption that the operation of Arbor Realty, and of its subsidiaries and other lower-tier and affiliated entities, will in each case be in
accordance with its applicable organizational documents or partnership agreement. This summary is for general information only and is not tax advice. The Code provisions governing the U.S. federal
income tax treatment of REITs and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury
regulations promulgated thereunder and administrative and judicial interpretations thereof. Moreover, this summary does not purport to discuss all aspects of U.S. federal income taxation that may be
relevant to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, such as:
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-
financial institutions;
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-
insurance companies;
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-
broker-dealers;
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-
regulated investment companies;
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-
persons who hold our stock on behalf of another person as a nominee;
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-
persons who receive Arbor Realty stock through the exercise of employee stock options or otherwise as compensation;
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-
persons holding Arbor Realty stock as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or other integrated
investment;
-
-
U.S. expatriates;
-
-
persons whose functional currency is not the U.S. dollar;
-
-
persons subject to the mark-to-market method of accounting for their securities;
-
-
persons who own (actually or constructively) more than 10% of our stock;
and,
except to the extent discussed below:
-
-
partnerships, other pass-through entities and trusts;
-
-
tax-exempt organizations; and
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-
foreign investors.
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This
summary assumes that investors will hold our stock as a capital asset, which generally means as property held for investment.
THE
U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF ARBOR REALTY STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL
INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING ARBOR REALTY STOCK TO ANY PARTICULAR INVESTOR WILL DEPEND ON THE INVESTOR'S
PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR INVESTMENT
OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, EXCHANGING OR OTHERWISE DISPOSING OF ARBOR REALTY STOCK.
Taxation of Arbor Realty
Arbor Realty and SR Inc. have each elected to be taxed as a REIT, commencing with their initial taxable years, which ended on
December 31, 2003 and December 31, 2005, respectively. We believe that such entities were organized and have operated in such a manner as to qualify for taxation as a REIT, and intend to
continue to operate in such a manner.
In
connection with this prospectus, we have received an opinion of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that, commencing with Arbor
Realty's initial taxable year
ended December 31, 2003, Arbor Realty was organized in conformity with the requirements for qualification as a REIT under the Code, and its actual method of operation through the date hereof
has enabled, and its proposed method of operation will enable, it to meet the requirements for qualification and taxation as a REIT. It must be emphasized that the opinion of Skadden, Arps, Slate,
Meagher & Flom LLP is expressed as of the date given, is based on various assumptions relating to the organization and operation of Arbor Realty and its affiliates, and is conditioned
upon fact-based representations and covenants made by the management of Arbor Realty and affiliated entities regarding their organization, assets and income, and the past, present and future conduct
of their business operations.
While
we intend to operate so as to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility
of future changes in circumstances, no assurance can be given by Skadden, Arps, Slate, Meagher & Flom LLP or by us that we will so qualify for any particular year. Skadden, Arps, Slate,
Meagher & Flom LLP will have no obligation to advise us or the holders of our stock of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in
the applicable law. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions.
Qualification
and taxation as a REIT depends on the ability to meet on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership,
various qualification requirements imposed upon REITs by the Code and the Treasury regulations issued thereunder, including requirements relating to the nature and composition of our assets and
income, the compliance with which will not be reviewed by Skadden, Arps, Slate, Meagher & Flom LLP. Our ability to qualify as a REIT also requires that we satisfy certain asset tests,
some of which depend upon the fair market values of assets that we own directly or indirectly. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given
that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.
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Taxation of REITs in General
As indicated above, our qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, various qualification
requirements imposed upon REITs by the Code. The material qualification requirements are summarized below under "Requirements for QualificationGeneral." While we intend to
operate so as to qualify as a REIT, no assurance can be given that the IRS will not challenge our qualification,
or that we will be able to operate in accordance with the REIT requirements in the future. See "Failure to Qualify" below.
Provided
that we qualify as a REIT, we will generally be entitled to a deduction for dividends that we pay and therefore will not be subject to U.S. federal corporate income tax on our
taxable income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" at the corporate and stockholder levels that generally results from
investment in a corporation. In general, the income that we generate is taxed only at the stockholder level upon a distribution of dividends to our stockholders.
Currently,
most U.S. holders that are individuals, trusts or estates are taxed on corporate dividends at a reduced maximum U.S. federal income tax rate (the same as long-term capital
gains). With limited exceptions, however, dividends from us or from other entities that are taxed as REITs are generally not eligible for this rate, and will continue to be taxed at rates applicable
to ordinary income. However, for taxable years that begin after December 31, 2017, and before January 1, 2026, stockholders that are individuals, trusts or estates are entitled to a
deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT, subject to certain limitations. See "Taxation of StockholdersTaxation of
Taxable U.S. HoldersDistributions."
Any
net operating losses, foreign tax credits and other tax attributes generally do not pass through to our stockholders, subject to special rules for certain items such as capital gains
that we recognize. See "Taxation of StockholdersTaxation of Taxable U.S. HoldersDistributions."
Even
if we qualify as a REIT, we will nonetheless be subject to U.S. federal tax in the following circumstances:
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-
We will be taxed at regular corporate rates on any undistributed net taxable income, including undistributed net capital gains.
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-
If we have net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See "Prohibited Transactions," and "Foreclosure
Property," below.
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-
If we elect to treat property acquired in connection with a foreclosure of a mortgage loan or certain leasehold terminations as "foreclosure
property," we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the
property may be subject to corporate-level U.S. federal income tax at the highest applicable rate.
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-
If we derive "excess inclusion income" from an interest in certain mortgage loan securitization structures (i.e., a "taxable mortgage
pool" or a residual interest in a real estate mortgage investment conduit, or "REMIC"), we could be subject to corporate level federal income tax at the highest applicable rate to the extent that such
income is allocable to specified types of tax exempt stockholders known as "disqualified organization" that are not subject to unrelated business income tax. See "Taxable Mortgage Pools
and Excess Inclusion Income" below.
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If we fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintain our qualification as
a REIT because we satisfy other requirements, we
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In
addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income, property and other taxes on our assets and
operations. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for QualificationGeneral
The Code defines a REIT as a corporation, trust or association:
-
(1)
-
that
is managed by one or more trustees or directors;
-
(2)
-
the
beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
-
(3)
-
that
would be taxable as a domestic corporation but for the Code provisions applicable to REITs;
-
(4)
-
that
is neither a financial institution nor an insurance company subject to specific provisions of the Code;
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-
(5)
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the
beneficial ownership of which is held by 100 or more persons;
-
(6)
-
in
which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer
"individuals" (as defined in the Code to include specified tax-exempt entities); and
-
(7)
-
which
meets other tests described below, including with respect to the nature of its income and assets.
The
Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a shorter taxable year. Arbor Realty's charter provides restrictions regarding the ownership and transfer of its shares, which are
intended to assist in satisfying the share ownership requirements described in conditions (5) and (6) above. For purposes of condition (6), an "individual" generally includes a
supplemental unemployment compensation benefit plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified
pension plan or profit sharing trust.
To
monitor compliance with the share ownership requirements, we are generally required to maintain records regarding the actual ownership of our shares. To do so, we must demand written
statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must disclose the actual owners of the stock (i.e., the persons
required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand must be maintained as part of our records. We could be
subject to monetary penalties if we fail to comply with these record-keeping requirements. If you fail or refuse to comply with the demands, you will be required by Treasury regulations to submit a
statement with your tax return disclosing the actual ownership of our stock and other information.
In
addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We satisfy this requirement.
Effect of Subsidiary Entities
Ownership of Partnership Interests.
In the case of a REIT that is a partner in an entity that is treated as a partnership for U.S.
federal income tax
purposes, Treasury regulations provide that the REIT is deemed to own its proportionate share of the partnership's assets, and to earn its proportionate share of the partnership's income, for purposes
of the asset and gross income tests applicable to REITs as described below. In addition, the assets and gross income of the partnership are deemed to retain the same character in the hands of the
REIT. Thus, the proportionate share of the assets and items of income of partnerships in which we own an equity interest (including SR Inc.'s preferred equity interests in certain lower-tier
partnerships), are treated as assets and items of income of the relevant REIT for purposes of applying the REIT requirements described below. The REIT's proportionate share is generally determined,
for these purposes, based upon its percentage interest in the partnership's equity capital, except that for purposes of the value prong of the 10% asset test described below, the percentage interest
also takes into account certain debt securities issued by the partnership. If we are a limited partner or non-managing member in any partnership or limited liability company and such entity takes or
expects to take actions that could jeopardize our status as a REIT, or require us to pay tax, we may be forced to dispose of our interests in such entity. In addition, it is possible that a
partnership or limited liability company could take an action which could cause us to fail a gross income or asset test, and that we would not become aware of such action in time to dispose of our
interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to qualify as a REIT, unless we were entitled to relief as
described below. A summary of certain rules governing the U.S. federal income taxation of partnerships and their partners is provided below in "Tax Aspects of Investments in Partnerships."
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Disregarded Subsidiaries.
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary," the separate existence of that
subsidiary is
disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income,
deduction and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs as summarized below. A qualified REIT subsidiary is any corporation, other than
a TRS as described below, that is wholly owned by a REIT, either directly or through one or more other disregarded subsidiaries. Other entities that are wholly owned by a REIT (either directly or
through other disregarded entities), including single member limited liability companies, are also generally disregarded as separate entities for U.S. federal income tax purposes,
including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with partnerships in which Arbor Realty holds an equity interest, are sometimes referred to herein as
"pass-through subsidiaries."
In
the event that a disregarded subsidiary of a REIT ceases to be wholly ownedfor example, if any equity interest in the subsidiary is acquired by a person other than the
REIT or another disregarded subsidiary of the REITthe subsidiary's separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, it would have multiple
owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross
income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See
"Asset Tests" and "Income Tests" below.
Taxable Subsidiaries.
A REIT, in general, may jointly elect with subsidiary corporations, whether or not wholly owned, to treat the
subsidiary
corporation as a TRS. A REIT generally may not own more than 10% of the securities of a taxable corporation, as measured by voting power or value, unless the REIT and such corporation elect to treat
such corporation as a TRS. The separate existence of a TRS or other taxable corporation, unlike that of a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax
purposes. Accordingly, a TRS or other taxable corporation would generally be subject to U.S. federal corporate income tax on its earnings, which may have the effect of reducing the cash flow generated
by us and our subsidiaries in the aggregate, and our ability to make distributions to our stockholders.
A
REIT is not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by the taxable
subsidiary is taken into account as an asset of the REIT, and the REIT recognizes as income, the dividends, if any, that it receives from the TRS. This treatment can affect the income and asset test
calculations that apply to the REIT, as described below. Because a parent REIT does not include the assets and income of such TRSs or other taxable subsidiary corporations in determining the parent's
compliance with the REIT requirements, such entities may be used by the parent REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through
pass-through subsidiaries (for example, activities that give rise to certain categories of nonqualifying income such as management fees, certain mortgage servicing fees, or other service income, or
gains from the sale of inventory or dealer property).
The
deductibility of interest paid or accrued by a TRS to its parent REIT could be limited under the Code. Accordingly, if we lend money to a TRS, the TRS may be unable to deduct all or
a part of the interest paid on that loan, and the lack of an interest deduction could result in a material increase in the amount of tax paid by the TRS. Further, the rules impose a 100% excise tax on
certain transactions between a TRS and its parent REIT or the REIT's tenants that are not conducted on an arm's-length basis. We intend that all of our transactions with our TRSs, if any, will be
conducted on an arm's-length basis.
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We may hold a significant amount of assets in one or more TRSs, subject to the limitation that securities in TRSs may not represent more than 20% of our assets.
Subsidiary REITs.
In connection with a January 2005 financing that gave rise to a "taxable mortgage pool," the assets of our subsidiary
operating
partnership, Arbor Realty Limited Partnership, through which we conduct substantially all of our activities and operations, were transferred to SR Inc., which was a newly-formed subsidiary of
the operating partnership, and its subsidiaries. SR Inc. has elected and intends to be taxed as a REIT, which, in general, will allow us to avert certain adverse tax consequences that would
otherwise result from the presence of the taxable mortgage pool. See "Taxable Mortgage Pools and Excess Inclusion Income," below, for a discussion of certain issues relating to taxable
mortgage pools. Arbor Realty Limited Partnership is treated as a partnership for U.S. federal income tax purposes.
Arbor
Realty's interest in the stock of SR Inc. is treated as a qualifying real estate asset of Arbor Realty for purposes of the REIT asset requirements (see "Asset
Tests" below), and any
dividend income or gains derived by Arbor Realty from the stock of SR Inc. will generally be treated by Arbor Realty as income that qualifies for purposes of the REIT 95% and 75% income
requirements (see "Income Tests" below), provided, in each case, that SR Inc. is able to qualify as a REIT. Arbor Realty and SR Inc. are separate entities, each of which
intends to qualify as a REIT, and each of which must independently satisfy the various REIT qualification requirements as described herein. Substantially all of Arbor Realty's assets are currently
held indirectly through SR Inc., however, which effectively ensures that Arbor Realty will satisfy the asset and income requirements applicable to REITs provided that SR Inc. qualifies
as a REIT. If SR Inc. were to fail to qualify as a REIT, it would then be a regular taxable corporation, and its income would be subject to U.S. federal income tax. In addition, a failure of
SR Inc. to qualify as a REIT would likely have an adverse effect on Arbor Realty's ability to comply with the REIT asset and income requirements described below, and thus its ability to qualify
as a REIT.
Income Tests
In order to maintain qualification as a REIT, we must satisfy two gross income requirements each year. First, at least 75% of our gross income
for each taxable year (excluding gross income from sales of inventory or dealer property in "prohibited transactions," discharge of indebtedness, and certain hedging transactions) generally must be
derived from investments relating to real property or mortgages on real property, including "rents from real property," dividends received from other REITs, including SR Inc., provided that
SR Inc. is able to qualify as a REIT, interest income derived from mortgage loans secured by real property (including certain types of mortgage backed securities), and gains from the sale of
real property, mortgages on real property, and shares in other REITs, as well as specified income from temporary investments. Second, at least 95% of our gross income in each taxable year (excluding
gross income from prohibited transactions, discharge of indebtedness, and certain hedging transactions) must be derived from some combination of income that qualifies under the 75% gross income test
described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.
In
2009 through 2011, Arbor Realty did not report any gross income because SR Inc. did not pay any dividends on its common stock. Although there are no authorities addressing this
situation, we do not believe that Arbor Realty's lack of gross income will adversely affect its qualification as a REIT for U.S. federal income tax purposes. No assurance can be given, however, that
the IRS will not assert a contrary position.
Interest
income constitutes qualifying mortgage interest for purposes of the 75% income test (as described above) to the extent that the obligation is secured by a mortgage on real
property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other
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property,
and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired or originated the mortgage
loan, or are treated as having acquired the instrument if it is restructured in a manner that constitutes a significant modification of its terms, the interest income will generally be apportioned
between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% income test only to the extent that the interest is allocable to the real
property. (Similar apportionment rules apply for purposes of the REIT 75% asset test as described below under "Asset Tests".) In certain cases, personal property collateral securing a
loan that we hold may be treated as real property for purposes of the foregoing rules. Even if a loan is not secured by real property, or is undersecured, the income that it generates may nonetheless
qualify for purposes of the 95% income test.
To
the extent that the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan (a "shared appreciation
provision"), income attributable to the participation feature will be treated as gain from sale of the underlying property, which generally will be qualifying income for purposes of both the 75% and
95% gross income tests, provided that the property is not inventory or dealer property in the hands of the borrower or the REIT.
To
the extent that a REIT derives interest income from a mortgage loan or income from the rental of real property where all or a portion of the amount of interest or rental income
payable is contingent, such income generally will qualify for purposes of the gross income tests only if it is based upon the gross receipts or sales, and not the net income or profits, of the
borrower or lessee. This limitation does not apply, however, where the borrower or lessee leases substantially all of its interest in the property to tenants or subtenants, to the extent that the
rental income derived by the borrower or lessee, as the case may be, would qualify as rents from real property had it been earned directly by a REIT, as described below.
Among
the assets that we and our subsidiaries hold are mezzanine loans, which are loans secured by equity interests in an entity that directly or indirectly owns real property, rather
than by a direct mortgage of the real property. Revenue Procedure 2003-65 issued by the IRS provides a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in
the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests described below, and interest derived from it will be treated as qualifying mortgage
interest for purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. While we and
our advisors believe, on the basis of relevant regulations and IRS rulings, that our mezzanine loans qualify as real estate assets and give rise to qualifying mortgage interest for purposes of the
REIT asset and income requirements, or otherwise do not adversely affect our qualification as a REIT, such loans do not meet all of the requirements for reliance on the safe harbor, and there can be
no assurance that the IRS will not challenge the tax treatment of these loans.
We
also hold certain participation interests, or "B-Notes," in mortgage loans and mezzanine loans originated by other lenders. A B-Note is an interest created in an underlying loan by
virtue of a participation or similar agreement, to which the originator of the loan is generally a party, along with one or more participants. The borrower on the underlying loan is typically not a
party to the participation agreement. The performance of a participant's investment depends upon the performance of the underlying loan, and if the underlying borrower defaults, the participant
typically has no recourse against the originator of the loan. The originator often retains a senior position in the underlying loan, and grants junior participations, which will be a first loss
position in the event of a default by the borrower. We believe that our participation interests generally qualify as real estate assets for purposes of the REIT asset tests described below, and that
interest derived from such investments will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. The appropriate treatment
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of
participation interests for U.S. federal income tax purposes is not entirely certain, however, and no assurance can be given that the IRS will not challenge our treatment of such participation
interests.
Rents
that we derive, including as a result of our ownership of preferred or common equity interests in a partnership that owns rental properties, will qualify as "rents from real
property" in satisfying the gross income requirements described above, only if several conditions are met, including the following. If rent is partly attributable to personal property leased in
connection with a lease of real property, the portion of the total rent that is attributable to the personal property will not qualify as "rents from real property" unless it constitutes 15% or less
of the total rent received under the lease. In addition, the amount of rent must not be based in whole or in part on the income or profits of any person. Amounts received as rent, however, generally
will not be excluded from rents from real property solely by reason of being based on fixed percentages of gross receipts or sales. Moreover, for rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an "independent contractor" from which the REIT
derives no revenue. An independent contractor is generally a person that, after application of constructive ownership rules, does not own more than 35% of the shares of the REIT and, if it is a
corporation, partnership, or other entity, the REIT does not own more than 35% of its shares, assets or net profits. We and our affiliates are permitted, however, to perform services that are "usually
or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, we and our affiliates may
directly or indirectly provide non-customary services to tenants of properties without disqualifying all of the rent from the property if the payment for such services does not exceed 1% of the total
gross income from the property. For purposes of this test, the income received from such non-customary services is deemed to be at least 150% of the direct cost of providing the services. Moreover, we
are generally permitted to provide services to tenants or others through a TRS without disqualifying the rental income received from tenants for purposes of the REIT income requirements. Also, rental
income will generally qualify as rents from real property only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee's
equity.
We
may indirectly receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions generally are treated as dividend income to
the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not for purposes
of the 75% gross income test. Any dividends received from a REIT, including dividends derived by Arbor Realty from SR Inc. if SR Inc. qualifies as a REIT, will be qualifying income in
Arbor Realty's hands for purposes of both the 95% and 75% income tests.
Fees
will generally be qualifying income for purposes of both the 75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan
secured by real property and the fees are not determined by income and profits. Other fees generally will not be qualifying income for purposes of either gross income test and will not be favorably
counted for purposes of either gross income test. Any fees earned by a TRS will not be included for purposes of the gross income tests.
Any
income or gain that a REIT or its pass-through subsidiaries derives from instruments that hedge certain specified risks, such as the risk of changes in interest rates, will be
excluded from gross income for purposes of calculating the 75% and 95% gross income tests (i.e., will be excluded from both the numerator and the denominator), provided that specified
requirements are met. Such requirements include that the instrument be properly identified as a hedge along with the risk that it hedges within prescribed time periods. Income and gain from other
hedging transactions will generally not be qualifying income for either the 95% or 75% gross income test. See "Derivatives and Hedging Transactions."
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Certain
foreign currency gains are excluded from gross income for purposes of one or both of the gross income tests. "Real estate foreign exchange gain" will be excluded from gross
income for purposes of the 75% gross income test. Real estate foreign exchange gain generally includes foreign currency gain attributable to any item of income or gain that is qualifying income for
purposes of the 75% gross income test, foreign currency gain attributable to the acquisition or ownership of (or becoming or being the obligor under) obligations secured by mortgages on real property
or on interest in real property, and certain foreign currency gain attributable to certain "qualified business units" of a REIT. "Passive foreign exchange gain" will be excluded from gross income for
purposes of the 95% gross income test. Passive foreign exchange gain generally includes real estate foreign exchange gain as described above, and also includes foreign currency gain attributable to
any item of income or gain that is qualifying income for purposes of the 95% gross income test and foreign currency gain attributable to the acquisition or ownership of (or becoming or being the
obligor under) obligations. Because passive foreign exchange gain includes real estate foreign exchange gain, real estate foreign exchange gain is excluded from gross income for purposes of both the
75% and 95% gross income test. These exclusions for real estate foreign exchange gain and passive foreign exchange gain do not apply to foreign currency gain derived from dealing, or engaging in
substantial and regular trading, in securities. Such gain is treated as non-qualifying income for purposes of both the 75% and 95% gross income tests.
If
we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nonetheless qualify as a REIT for the year if we are entitled to relief under
applicable provisions of the Code. These relief provisions will generally be available if the failure to meet these tests was due to reasonable cause and not due to willful neglect, and we attach to
our tax return a schedule setting forth each item of our gross income for such taxable year in accordance with any Treasury regulations yet to be issued. It is not possible to state whether we would
be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we may not qualify as a REIT. As discussed
above under "Taxation of REITs in General," even where these relief provisions apply, a tax would be imposed that is based upon the amount by which we fail to satisfy the particular gross income test.
Under
the Housing and Economic Recovery Act of 2008, the Secretary of the Treasury has been given broad authority to determine whether particular items of gain or income recognized after
July 30, 2008, qualify or not under the 75% and 95% gross income tests, or are to be excluded from the measure of gross income for such purposes.
Asset Tests
At the close of each calendar quarter, a REIT must also satisfy five tests relating to the nature of its assets. First, at least 75% of the
value of the total assets must be represented by some combination of "real estate assets," cash, cash items (including certain money market funds), U.S. government securities, and, under some
circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property (such as land, buildings, leasehold interests in real
property and certain ancillary personal property), stock of other corporations that qualify as REITs, mortgage loans (to the extent secured by interests in real property), certain kinds of mortgage
backed securities, and debt instruments (whether or not secured by real property) that are issued by a "publicly offered REIT" (i.e., a REIT that is required to file annual and periodic reports
with the SEC under the Exchange Act). This would include stock of SR Inc. that is indirectly owned by Arbor Realty, provided that SR Inc. qualifies as a REIT. Assets that do not qualify
for purposes of the 75% asset test are subject to the additional asset tests described below.
Second,
the value of any one issuer's securities owned by the REIT may not exceed 5% of the value of the REIT's total assets.
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Third,
the REIT may not own more than 10% of any one issuer's outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities
of TRSs, and the value prong of the 10% asset test does not apply to "straight debt" having specified characteristics and to certain other securities described below.
Fourth,
the aggregate value of all securities of TRSs held by a REIT may not exceed 20% of the value of the REIT's total assets.
Fifth,
no more than 25% of the total value of a REIT's assets may be represented by "nonqualified publicly offered REIT debt instruments" (i.e., real estate assets that would
cease to be real estate assets if debt instruments issued by publicly offered REITs were not included in the definition of real estate assets).
Notwithstanding
the general rule, as noted above, that for purposes of the REIT income and asset tests, a REIT is treated as owning its proportionate share of the underlying assets of a
subsidiary partnership, if a REIT holds indebtedness issued by a partnership, the indebtedness will generally be subject to, and may cause a violation of the asset tests, unless the indebtedness is a
qualifying mortgage asset, satisfies the rules for "straight debt," or other conditions are met. Similarly, although stock of another REIT is a qualifying asset for purposes of the REIT asset tests,
any non-mortgage debt that is issued by a REIT that is not "publicly offered" may not so qualify (such debt, however, will not be treated as "securities" for purposes of the value prong of the 10%
asset test, as explained below).
Certain
securities will not violate the value prong of the 10% asset test described above. Such securities include instruments that constitute "straight debt," which term generally
excludes, among other things, securities having certain contingency features. A security does not qualify as "straight debt" where a REIT (or a controlled TRS of the REIT) owns other securities of the
same issuer which do not qualify as straight debt, unless the value of those other securities constitute, in the aggregate, 1% or less of the total value of that issuer's outstanding securities. In
addition to straight debt, the Code provides that certain other securities will not violate the value prong of the 10% asset test. Such securities include (a) any loan made to an individual or
an estate, (b) certain rental agreements in which one or more payments are to be made in subsequent years (other than agreements between a REIT and certain persons related to the REIT under
attribution rules), (c) any obligation to pay rents from real property, (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of (or
payments made by) a non-governmental entity, (f) any security (including debt securities) issued by another REIT, and (g) any debt instrument issued by a partnership if the partnership's
income is of a nature that it would satisfy the 75% gross income test described above under "Income Tests." In applying the value prong of the 10% asset test, a debt security issued by a
partnership is not taken into account to the extent, if any, of the REIT's proportionate interest in that partnership.
Any
interests held by a REIT in a real estate mortgage investment conduit, or "REMIC," are generally treated as qualifying real estate assets, and income derived by a REIT from interests
in REMICs is generally treated as qualifying income for purposes of the REIT income tests described above. If less than 95% of the assets of a REMIC are real estate assets, however, then only a
proportionate part of
the REIT's interest in the REMIC, and its income derived from the interest, qualifies for purposes of the REIT asset and income tests. Where a REIT holds a "residual interest" in a REMIC from which it
derives "excess inclusion income," the REIT will be required to either distribute the excess inclusion income or pay tax on it (or a combination of the two), even though the income may not be received
in cash by the REIT. To the extent that distributed excess inclusion income is allocable to a particular stockholder, the income (i) would not be allowed to be offset by any net operating
losses otherwise available to the stockholder, (ii) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt
from U.S. federal income tax, and (iii) would result in the application of U.S. federal income tax
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withholding
at the maximum rate (30%), without reduction for any otherwise applicable income tax treaty or other exemption, to the extent allocable to most types of foreign stockholders. See "Taxation
of Stockholders." Moreover, any excess inclusion income that we receive that is allocable to specified categories of tax-exempt investors which are not subject to unrelated business income tax, such
as government entities, may be subject to corporate-level income tax in our hands, whether or not it is distributed. See "Taxable Mortgage Pools and Excess Inclusion Income."
To
the extent that we hold mortgage participations or mortgage backed securities that do not represent REMIC interests, such assets may not qualify as real estate assets, and the income
generated from them might not qualify for purposes of either or both of the REIT income requirements, depending upon the circumstances and the specific structure of the investment.
We
believe that our holdings of securities and other assets will comply with the foregoing REIT asset requirements, and we intend to monitor compliance on an ongoing basis. Certain of
our mezzanine loans may qualify for the safe harbor in Revenue Procedure 2003-65, pursuant to which certain loans secured by a first priority security interest in ownership interests in a partnership
or limited liability company will be treated as qualifying real estate assets for purposes of the REIT asset tests, as well as for purposes of the gross income tests described above. See
"Income Tests." We may, however, hold some mezzanine loans that do not qualify for that safe harbor and that do not qualify as "straight debt" securities or for one of the other
exclusions from the definition of "securities" for purposes of the 10% value test. We intend to make such investments in such a manner as not to fail the asset tests described above, and we believe
that our existing investments satisfy such requirements.
Independent
appraisals generally are not obtained to support our conclusions as to the value of our total assets, or the value of any particular security or securities. Moreover, values
of some assets, including instruments issued in securitization transactions, may not be susceptible to a precise determination, and values are subject to change in the future. Furthermore, the proper
classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements.
Accordingly, there
can be no assurance that the IRS will not contend that our interests in our subsidiaries or in the securities of other issuers will not cause a violation of the REIT asset tests.
The
rules regarding REITs include relief provisions that make it easier for REITs to satisfy the asset test requirements, or to maintain REIT qualification notwithstanding certain
violations of the asset test and other requirements.
One
such provisions allows a REIT which fails one or more of the asset requirements to nevertheless maintain its REIT qualification if (a) it provides the IRS with a description
of each asset causing the failure, (b) the failure is due to reasonable cause and not willful neglect, (c) the REIT pays a tax equal to the greater of (i) $50,000 per failure, and
(ii) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate, and (d) the REIT either disposes of the assets
causing the failure within 6 months after the last day of the quarter in which it identifies the failure, or otherwise satisfies the relevant asset tests within that time frame.
A
second relief provision applies to
de minimis
violations of 10% and 5% asset tests. A REIT may maintain its qualification despite a
violation of such requirements if (a) the value of the assets causing the violation does not exceed the lesser of 1% of the REIT's total assets or $10,000,000, and (b) the REIT either
disposes of the assets causing the failure within 6 months after the last day of the quarter in which it identifies the failure or the relevant tests are otherwise satisfied within that time
frame.
If
we should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT qualification if we: (i) satisfied the asset
tests at the close of the preceding calendar quarter, and (ii) the discrepancy between the value of our assets and the asset requirement was not wholly or partially caused by an acquisition of
non-qualifying assets, but instead arose from
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changes
in the market value of our assets. If the condition described in (ii) were not satisfied, we could still avoid disqualification by eliminating any discrepancy within 30 days
after close of the calendar quarter in which it arose or by making use of the relief provisions described above. No assurances can be given that we would qualify for relief under the foregoing
provisions.
Loan Modifications and Distressed Debt
The IRS issued Revenue Procedures 2011-16 and 2014-51, which contain provisions that are relevant where a REIT holds a mortgage loan which is
modified in a transaction that is treated as the issuance of a new loan. In general, a modified loan will not be treated as less than fully secured by real property, and therefore will not give rise
to interest income that does not qualify for purposes of the 75% gross income test or cause a portion of the loan to be a non-qualifying asset for purposes of the 75% asset test applicable to REITs,
provided that the value of the real estate collateral was at least as great as the amount of the loan at the time it was originally acquired by the REIT and the modification was occasioned by default
or we reasonably believed at the time of the modification that there was a significant risk of default and the modified loan presented a substantially reduced risk of default. Moreover, for purposes
of the REIT asset tests, a loan, whether or not it is modified, will generally not be treated as less than fully secured by real property provided that the value of the real estate collateral, either
currently or at the time the loan was originally acquired by the REIT, is at least as great as the value of the loan.
Annual Distribution Requirements
In order to qualify as a REIT, an entity is required to distribute dividends, other than capital gain dividends, to its stockholders in an
amount at least equal to:
-
(a)
-
the
sum of:
-
(1)
-
90%
of its "REIT taxable income" (computed without regard to the deduction for dividends paid and excluding its net capital gains), and
-
(2)
-
90%
of the net income, if any, (after tax) from foreclosure property (as described below), minus
-
(b)
-
the
excess of the sum of specified items of non-cash income over 5% of its "REIT taxable income" computed without regard to the deduction for dividends paid and
excluding its net capital gains.
These
distributions generally must be paid in the taxable year to which they relate, or in the following taxable year if declared before the REIT timely files its tax return for the year
and if paid with or before the first regular dividend payment after such declaration. In addition, any dividend declared in October, November, or December of any year and payable to a stockholder of
record on a specified date in any such month may be treated as both paid by the REIT and received by the stockholder on December 31 of such year, so long as the dividend is actually paid before
the end of January of the next calendar year. In the case of a REIT that is not a "publicly offered REIT" (such as SR Inc.), in order for distributions to be counted as satisfying the annual
distribution requirement, and to give rise to a tax deduction by the REIT, distributions must not be "preferential dividends." A dividend is not a preferential dividend if it is pro rata among all
outstanding shares of stock within a particular class and is in accordance with the preferences among different classes of stock as set forth in the organizational documents.
To
the extent that a REIT distributes at least 90%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax at ordinary corporate tax rates on the
retained portion. It may elect to retain, rather than distribute, its net long-term capital gains and pay tax on such gains. In this case, the REIT could elect to have its stockholders include their
proportionate share of such
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undistributed
long-term capital gains in income and receive a corresponding credit for their share of the tax paid by the REIT. Stockholders would then increase the adjusted basis of their REIT stock
by the difference between the designated amounts of capital gains from the REIT that they include in their taxable income, and the tax paid on their behalf by the REIT with respect to that income.
To
the extent that a REIT has any net operating losses carried forward from prior tax years, such losses may, subject to limitations, reduce the amount of distributions that it must make
in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character, in the hands of stockholders, of any distributions that are actually made by
the REIT as ordinary dividends or capital gains. See "Taxation of StockholdersTaxation of Taxable U.S. Holders."
If
a REIT fails to distribute during each calendar year at least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net income
for such year and (c) any undistributed taxable income from prior periods, it will be subject to a 4% excise tax on the excess of
such required distribution over the sum of (x) the amounts actually distributed and (y) the amounts of income retained on which it has paid U.S. federal corporate income tax.
It
is possible that, from time to time, we may not have sufficient cash to meet the distribution requirements due to timing differences between (a) the actual receipt of cash,
including receipt of distributions from its subsidiaries, or the actual payment of deductible expenses, and (b) the inclusion by us of items in income or deduction, as applicable, for U.S.
federal income tax purposes. For example, the Code contains various limitations on the deductibility of interest and other expenses and various rules that may accelerate income before the receipt of
cash.
Potential
sources of non-cash taxable income include income from equity interests in taxable mortgage pools, income from loans or mortgage-backed securities held as assets that are
issued at a discount and require the accrual of taxable economic interest in advance of its receipt in cash, and income from loans on which the borrower is permitted to defer cash payments of interest
and distressed loans on which we may be required to accrue taxable interest income even though the borrower is unable to make current servicing payments in cash. Differences in timing between the
recognition of taxable income or deductions and the actual receipt or payment of cash could require us to (i) sell assets, (ii) borrow funds on a short-term or long-term basis, or
(iii) pay dividends in the form of taxable in-kind distributions of property, to meet the 90% distribution requirement. Alternatively, we may declare a taxable distribution payable in cash or
stock at the election of each stockholder, where the aggregate amount of cash to be distributed in such distribution may be subject to limitation. In such case, for U.S. federal income tax purposes,
the amount of the distribution paid in stock will be equal to the amount of cash that could have been received instead of stock.
Based
on IRS guidance concerning the classification of excess mortgage servicing rights ("Excess MSRs"), we intend to treat our Excess MSRs, which were transferred to us in connection
with the Acquisition, as ownership interests in the interest payments made on the underlying pool of mortgage loans, akin to an "interest only" strip. Under this treatment, for purposes of determining
the amount and timing of taxable income, each Excess MSR is treated as a bond that was issued with original issue discount on the date we acquired such Excess MSR. In general, we will be required to
accrue original issue discount based on the constant yield to maturity of each Excess MSR, and to treat such original issue discount as taxable income in accordance with the applicable U.S. federal
income tax rules. The constant yield of an Excess MSR will be determined, and we will be taxed based on, a prepayment assumption regarding future payments due on the mortgage loans underlying the
Excess MSR. If the mortgage loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of original issue discount will be either increased or
decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash collected in
respect of that
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Excess
MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we
collect on such Excess MSR. No assurance can be given that we will be entitled to an ordinary loss or deduction for such excess, meaning that we may not be able to use any such loss or deduction to
offset original issue discount recognized with respect to our Excess MSRs or other ordinary income recognized by us. As a result of this potential mismatch in character between the income and losses
generated by our Excess MSRs, our REIT taxable income may be higher than it otherwise would have been in the absence of that mismatch, in which case we would be required to distribute larger amounts
to our stockholders in order to maintain our status as a REIT.
A
REIT may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in the
REIT's deduction for dividends paid for the earlier year. In this case, the REIT may be able to avoid losing its REIT qualification or being taxed on amounts distributed as deficiency dividends.
However, the REIT will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.
Deferred Cancellation of Indebtedness Income and Net Operating Loss Carryforwards
SR Inc. has elected to defer the recognition of approximately $306 million of cancellation of indebtedness, or COD, income under
section 108(i) of the Code. The deferred COD income will be recognized ratably over the 2014 through 2018 taxable years. SR Inc. has generated net operating loss, or NOL, carryforwards
that are expected to fully offset the deferred COD income. However, SR Inc.'s ability to utilize NOL carryforwards to offset deferred COD or other income will be significantly limited in the
event that SR Inc. undergoes, or has undergone, an ownership change within the meaning of Section 382 of the Code. In general, an ownership change occurs with respect to a corporation if
5% stockholders increase their aggregate ownership interest in the corporation by more than 50 percentage points within a prescribed testing period (generally three years). We do not believe
that SR Inc. has experienced an "ownership change" to date. However, no assurance can be provided that SR Inc. will not experience an ownership change. In that event, SR Inc.
would be limited in its ability to offset its deferred COD income with its NOL carryforwards, which could result in SR Inc. or Arbor Realty not having sufficient cash from operations to satisfy
the 90% distribution requirement, or paying corporate-level tax with respect to some or all of the COD income in lieu of paying a deductible dividend.
Participation Interests in Excess Servicing Fees
On July 14, 2016, we completed the acquisition of the agency mortgage platform of Arbor Commercial Mortgage, LLC (the
"Acquisition"), a national commercial real estate finance company that originates, sells and services a range of multifamily finance products. However, as REITs, Arbor Realty and SR Inc. are
unable to hold directly certain of the acquired assets and operations in connection with the Acquisition. We therefore hold those assets and operations through one or more TRSs of SR Inc. As
described above, a TRS is subject to regular corporate income tax on its net income. As a result, the net income generated by those operations generally is subject to regular corporate income tax.
Moreover,
as described above, under the REIT asset tests (i) no more than 25% of our total gross assets may consist of nonqualifying assets, including the stock or other
securities of one or more TRSs and other nonqualifying assets (such as goodwill and similar assets we acquired as a result of the Acquisition), and (ii) for 2018 and subsequent taxable years,
no more than 20% of our total gross assets may consist of the stock or other securities of one or more TRSs. In addition, although dividends payable by TRSs constitute qualifying income for purposes
of the 95% REIT gross income test, they are nonqualifying income for purposes of the 75% REIT gross income test. Accordingly, if the value of
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the
business we acquired in connection with the Acquisition or the income generated thereby increases relative to the value of our other, REIT-compliant assets and income, Arbor Realty or
SR Inc. may fail to satisfy one or more of the requirements applicable to REITs. Although the Acquisition is not expected to adversely affect the ability of Arbor Realty or SR Inc. to
continue to qualify as a REIT, no assurances can be given in that regard.
In
connection with the Acquisition, Hunton & Williams LLP delivered an opinion to us to the effect that certain participation interests in excess servicing fees that were
transferred to SR Inc. will: (i) be classified as "stripped coupons" within the meaning of Section 1286(e)(3) of the Code; (ii) be classified as "interests in mortgages on
real property" and therefore "real estate assets" for purposes of the REIT asset tests set forth in Sections 856(c)(4) and (c)(5)(B) of the Code; and (iii) generate qualifying income for
purposes of the REIT income tests set forth in Sections 856(c)(2) and (c)(3) of the Code. It must be emphasized that the opinion of Hunton & Williams LLP is expressed as of the
date given, is based on various assumptions, and is conditioned upon representations and covenants made by the management of SR Inc. and affiliated entities. You should be aware that opinions
of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions. If the IRS were to successfully challenge the opinion
of Hunton & Williams LLP, then Arbor Realty or SR Inc. could fail to qualify as a REIT.
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business by a REIT, by a lower-tier partnership in which the
REIT holds an equity interest or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the REIT. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends on the particular facts and circumstances. Although we intend to structure any asset sales so that they are not treated as prohibited transactions, no
assurance can be given that any particular property in which we hold a direct or indirect interest will not be treated as property held for sale to customers, or that certain safe-harbor provisions of
the Code that could prevent such treatment will apply. The 100% tax will generally not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such
income will be subject to tax in the hands of the corporation at regular U.S. federal corporate income tax rates.
Foreclosure Property
Foreclosure property is real property and any personal property incident to such real property (i) that is acquired by a REIT as the
result of the REIT having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default
was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (ii) for which the related loan or lease was acquired by the REIT at a time when
default was not imminent or anticipated and (iii) for which such REIT makes a proper election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum
corporate rate on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income, such as certain rental income, that would otherwise
be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains
from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property in the hands of the selling REIT. If we receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income test, we expect
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to
make an election to treat the related property as foreclosure property, or to otherwise determine that the receipt of such non-qualifying income will not adversely affect our qualification as a
REIT.
Derivatives and Hedging Transactions
We and our subsidiaries may enter into hedging transactions with respect to interest rate exposure on one or more assets or liabilities. Any
such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, interest rate cap or floor contracts, futures or forward
contracts, and options. Except to the extent provided by Treasury regulations, any income from a hedging transaction (including gain from the sale, disposition, or termination of a position in such a
transaction) will not constitute gross income for purposes of the 75% or 95% gross income test if we properly identify the transaction as specified in applicable Treasury regulations and we enter into
such transaction (1) in the normal course of our business primarily to manage risk of interest rate changes or currency fluctuations with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets, (2) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be
qualifying income under the 75% or 95% gross income tests (or any asset that produces such income), or (3) in connection with the extinguishment of indebtedness with respect to which we have
entered into a qualified hedging position described in clause (1) or the disposition of property with respect to which we have entered into a qualified hedging position described in
clause (2), primarily to manage the risks of such hedging positions. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be
treated as non-qualifying income for purposes of both the 75% and the 95% gross income tests. Moreover, our position in a hedging contract or other derivative instrument, to the extent that it has
positive value, may not be treated favorably for purposes of the REIT asset tests.
We
intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT. We may conduct some or all of our hedging activities through a TRS or
other corporate entity, the income from which may be subject to U.S. federal income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries. No assurance
can be given, however, that our hedging activities will not give rise to income that does not qualify for purposes of either or both of the REIT gross income tests, or that our hedging activities will
not adversely affect our ability to satisfy the REIT qualification requirements.
Taxable Mortgage Pools and Excess Inclusion Income
An entity, or a portion of an entity, may be classified as a taxable mortgage pool ("TMP") under the Code
if:
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-
substantially all of its assets consist of debt obligations or interests in debt obligations,
-
-
more than 50% of those debt obligations are real estate mortgages or interests in real estate mortgages as of specified testing dates,
-
-
the entity has issued debt obligations (liabilities) that have two or more maturities, and
-
-
the payments required to be made by the entity on its debt obligations (liabilities) "bear a relationship" to the payments to be received by
the entity on the debt obligations that it holds as assets.
Under
Treasury regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise
"substantially all" of its assets, and therefore the entity would not be treated as a TMP. Our financing and securitization arrangements may give rise to TMPs, with the consequences described below.
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Where an entity, or a portion of an entity, is classified as a TMP, it is generally treated as a taxable corporation for U.S. federal income tax purposes. In the
case of a REIT, or a portion of a REIT, or a disregarded subsidiary of a REIT, that is a TMP, however, special rules apply. The TMP is not treated as a corporation that is subject to U.S. federal
corporate income tax, and the TMP classification does not directly affect the qualification of the REIT. Rather, the consequences of the TMP classification would, in general, except as described
below, be limited to the stockholders of the REIT.
A
portion of the REIT's income from the TMP arrangement could be treated as "excess inclusion income." The REIT's excess inclusion income, including any excess inclusion income from a
residual interest in a REMIC, must be allocated among its stockholders in proportion to dividends paid. The REIT is required to notify stockholders of the amount of "excess inclusion income" allocated
to them. A stockholder's share of excess inclusion income:
-
-
cannot be offset by any net operating losses otherwise available to the stockholder,
-
-
is subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from U.S.
federal income tax, and
-
-
results in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction for any otherwise applicable
income tax treaty or other exemption, to the extent allocable to most types of foreign stockholders.
See
"Taxation of Stockholders." To the extent that excess inclusion income is allocated to a tax-exempt stockholder of a REIT that is not subject to unrelated business
income tax (such as a government entity or charitable remainder trust), the REIT will be subject to tax on this income at the highest applicable corporate tax rate. In that case, the REIT could reduce
distributions to such stockholders by the amount of such tax paid by it that is attributable to such stockholder's ownership. Treasury regulations provide that such a reduction in distributions does
not give rise to a preferential dividend that could adversely affect the REIT's compliance with its distribution requirements. See "Annual Distribution Requirements." The manner in which
excess inclusion income is calculated, or would be allocated to stockholders, including allocations among shares of different classes of stock, is not clear under current law. As required by the IRS
guidance, we intend to make such determinations using a reasonable method. Tax-exempt investors, foreign investors and taxpayers with net operating losses should carefully consider the tax
consequences described above, and are urged to consult their tax advisors.
In
the case of a subsidiary partnership that is not wholly-owned by us or by another entity, such as SR Inc., that is taxed as a REIT, if the partnership were a TMP, the foregoing
rules would not apply. Rather, the partnership that is a TMP would be treated as a corporation for U.S. federal income tax purposes, and potentially could be subject to U.S. federal corporate income
tax or withholding tax. In addition, this characterization would alter our income and asset test calculations, and could adversely affect our compliance with those requirements. We intend to monitor
the structure of any TMPs in which we have an interest to ensure that they will not adversely affect our qualification as a REIT.
Failure to Qualify
If we fail to satisfy one or more requirements for REIT qualification other than the income or asset tests, we could avoid disqualification as a
REIT if our failure is due to reasonable
cause and not willful neglect and we pay a penalty of $50,000 for each such failure. Relief provisions are also available for failures of the income tests and asset tests, as described above in
"Income Tests" and "Asset Tests"
If
we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, we would be subject to tax on our taxable income at regular
corporate rates.
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Distributions
to stockholders in any year in which an entity fails to qualify as a REIT are not deductible by the entity, nor would they be required to be made. In this situation, to the extent of
current and accumulated earnings and profits, distributions to stockholders would generally be taxable in the case of U.S. holders who are individuals, trusts and estates, at capital gains rates, and,
subject to limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we would also be
disqualified from re-electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether, in all circumstances, we
would be entitled to this statutory relief.
Tax Aspects of Investments in Partnerships
General
Arbor Realty and SR Inc. may hold investments through entities that are classified as partnerships for U.S. federal income tax purposes.
In general, partnerships are "pass-through" entities that are not subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax on these items, without regard to whether the partners receive a distribution from the partnership. We will include in income
our proportionate share of items from partnerships in which we hold an equity interest for purposes of the various REIT income tests and in the computation of our REIT taxable income. Moreover, for
purposes of the REIT asset tests, we will generally include
our proportionate share of assets held by subsidiary partnerships. See "Taxation of Arbor RealtyEffect of Subsidiary EntitiesOwnership of Partnership Interests."
Consequently,
to the extent that we directly or indirectly hold a preferred or other equity interest in a partnership, the partnership's assets and operations may affect our ability to
qualify as a REIT, even though we may have no control, or only limited influence, over the partnership.
Entity Classification
Any investment in partnerships involves special tax considerations, including the possibility of a challenge by the IRS of the status of any
subsidiary partnership as a partnership, as opposed to an association taxable as a corporation, for U.S. federal income tax purposes (for example, if the IRS were to assert that a subsidiary
partnership is a TMP). See "Taxation of Arbor RealtyTaxable Mortgage Pools and Excess Inclusion Income." If any of these entities were treated as an association for U.S. federal income
tax purposes, it would be taxable as a corporation and therefore could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would
change and could preclude us from satisfying the REIT asset tests or the gross income tests as discussed in "Taxation of Arbor RealtyAsset Tests" and "Income Tests," and in
turn could prevent us from qualifying as a REIT, unless we are eligible for relief from the violation pursuant to relief provisions described above. See "Taxation of Arbor RealtyAsset
Tests," "Income Tests" and "Failure to Qualify," above, for discussion of the effect of failure to satisfy the REIT tests for a taxable year, and of the relief provisions. In
addition, any change in the status of any subsidiary partnership for tax purposes might be treated as a taxable event, in which case we could have taxable income that is subject to the REIT
distribution requirements, without receiving any cash.
Allocations of Income, Gain, Loss and Deduction
A partnership agreement will generally determine the allocation of partnership income and loss among partners. Generally, Section 704(b)
of the Code and the Treasury regulations thereunder require that partnership allocations respect the economic arrangement of the partners. If an allocation of partnership income or loss does not
comply with the requirements of Section 704(b) of the Code and
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the
Treasury regulations thereunder, the items subject to the allocation will be reallocated in accordance with the partners' interests in the partnership. This reallocation will be determined by
taking into account all the facts and circumstances relating to the economic arrangement of the partners with respect to such item. Our operating partnerships' allocations of taxable income and loss
are intended to comply with the requirements of Section 704(b) of the Code and the Treasury regulations thereunder.
New Partnership Audit Rules
The recently enacted Bipartisan Budget Act of 2015 changes the rules applicable to U.S. federal income tax audits of partnerships. Under the new
rules (which are generally effective for taxable years beginning after December 31, 2017), among other changes and subject to certain exceptions, any audit adjustment to items of income, gain,
loss, deduction, or credit of a partnership (and any partner's distributive share thereof) is determined, and taxes, interest, or penalties attributable thereto are assessed and collected, at the
partnership level. Although it is uncertain how these new rules will be implemented, it is possible that they could result in partnerships in which we directly or indirectly invest being required to
pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of those partnerships could be required to bear the economic burden of those
taxes, interest and penalties even though we, as a REIT, may not otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment. The changes created
by these new rules are sweeping and, in many respects, dependent on the promulgation of future regulations or other guidance by the U.S. Treasury. Investors are urged to consult with their tax
advisors with respect to those changes and their potential impact on their investment in our common stock.
Taxation of Stockholders
Taxation of Taxable U.S. Holders
This section summarizes the taxation of U.S. holders that are not tax-exempt organizations. For these purposes, a "U.S. holder" is a holder of
our stock that for U.S. federal income tax purposes is:
-
-
an individual who is a citizen or resident of the United States;
-
-
a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of
the United States, or of any state thereof, or the District of Columbia;
-
-
an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or
-
-
any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (2) it has a valid election in place to be treated as a U.S. person.
If
a partnership, including for this purpose any entity treated as a partnership for U.S. federal income tax purposes, holds stock issued by Arbor Realty, the tax treatment of a partner
in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult
their tax advisors about the U.S. federal income tax consequences of the acquisition, ownership and disposition of our stock.
Distributions.
As a REIT, the distributions that we make to our U.S. holders out of current or accumulated earnings and profits that we
do not
designate as capital gain dividends will generally be taken into account by such holders as ordinary income and will not be eligible for the dividends
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received
deduction for corporations. With limited exceptions, our dividends are not eligible for taxation at the preferential income tax rates for qualified dividends from taxable C corporations
received by U.S. holders that are individuals, trusts and estates. Such holders, however, are taxed at the preferential rates on dividends designated by and received from REITs to the extent that the
dividends are attributable to:
-
-
income retained by the REIT in the prior taxable year on which the REIT was subject to corporate level income tax (less the amount of tax),
-
-
dividends received by the REIT from TRSs or other taxable C corporations, or
-
-
income in the prior taxable year from the sale of "built-in gain" property acquired by the REIT from a C corporation in a carryover basis
transaction (less the amount of corporate tax borne by the REIT on such income).
In
addition, for taxable years that begin after December 31, 2017 and before January 1, 2026, stockholders that are individuals, trusts or estates are generally entitled to
a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT (not including capital gain dividends, as described below, or dividends eligible for the reduced
rates applicable to "qualified dividend income," as described above), subject to certain limitations.
Distributions
that we designate as capital gain dividends will generally be taxed to our U.S. holders as long-term capital gains, to the extent that such distributions do not exceed our
actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its stock. We may elect to retain and pay taxes on some or all
of our net long term capital gains, if any. In that case, we might elect to apply certain provisions of the Code that treat our U.S. holders as having received, solely for tax purposes, our
undistributed capital gains. The U.S. holders would be taxable on this income, but would also receive a corresponding credit for the taxes that we paid on such undistributed capital gains. The U.S.
holders would also be deemed to recontribute the after-tax amount of the income back to us, and would correspondingly increase the tax basis of their shares. See "Taxation of Arbor
RealtyAnnual Distribution Requirements." Corporate U.S. holders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally
taxable at reduced maximum federal rates in the case of U.S. holders that are individuals, trusts and estates, and ordinary income rates in the case of U.S. holders that are corporations. Capital
gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for taxpayers who are taxed as individuals, to
the extent of previously claimed depreciation deductions.
Distributions
in excess of our current and accumulated earnings and profits will generally represent a return of capital, and will not be taxable to a U.S. holder, to the extent that the
amount of such distributions does not exceed the adjusted tax basis of the holder's shares in respect of which the distributions were made. Rather, the distribution will reduce the adjusted basis of
the holder's shares. To the extent that such distributions exceed the adjusted basis of a U.S. holder's shares, the holder generally must include such distributions in income as long-term capital
gain, or as short-term capital gain if the shares have been held for one year or less. In addition, any dividend that we declare in October, November or December of any year and that is payable to a
holder of record on a specified date in any such month will be treated as both paid by us and received by the holder on December 31 of such year, provided that we actually pay the dividend
before the end of January of the following calendar year.
To
the extent that we have available net operating losses and capital losses carried forward from prior tax years, such losses may, subject to limitations, reduce the amount of
distributions that we must make in order to comply with the REIT distribution requirements. See "Taxation of Arbor RealtyAnnual Distribution Requirements." Such losses, however, are not
passed through to U.S. holders and
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do
not offset income of holders from other sources, nor would such losses affect the character of any distributions that we make, which are generally subject to tax in the hands of holders to the
extent that we have current or accumulated earnings and profits, as described above.
Dispositions of Stock.
Upon the sale or disposition of our stock, a U.S. holder will generally recognize capital gain or loss for U.S.
federal income
tax purposes in an amount equal to the difference between (i) the amount of cash and fair market value of any property received in the sale or disposition and (ii) the holder's adjusted
basis in the stock. In general, capital gains recognized by individuals, trusts and estates upon the sale or disposition of our stock will be subject to reduced U.S. federal income tax rates if the
stock is held for more than one year, and will be taxed at ordinary income rates if the stock is held for one year or less. Gains recognized by U.S. holders that are corporations are subject to U.S.
federal income tax at ordinary income rates, whether or not such gains are classified as long-term capital gains. Capital losses recognized by a U.S. holder upon the disposition of our stock that was
held for more than one year at the time of disposition will be considered long-term capital losses. Capital losses are generally available only to offset capital gain income of the U.S. holder but not
ordinary income (except in the case of individuals, who may apply up to $3,000 per year of the excess, if any, of capital losses over capital gains, to offset ordinary income). In addition, any loss
upon a sale or exchange of shares of our stock by a U.S. holder who has held the shares for six months or less will be treated as a long-term capital loss to the extent of distributions that we make
that are required to be treated by the holder as long-term capital gain.
If
an investor recognizes a loss upon a disposition of our stock or other securities in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury
regulations involving "reportable transactions" could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These regulations, though directed towards
"tax shelters," are broadly written, and apply to transactions that would not typically be considered tax shelters. The Code imposes significant penalties for failure to comply with these
requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our stock or securities, or transactions that we might
undertake directly or indirectly. Moreover, we and other participants in the transactions in which we are involved (including their advisors) might be subject to disclosure or other requirements
pursuant to these regulations.
Passive Activity Losses and Investment Interest Limitations.
Distributions that we make and gains arising from the sale or exchange by
a U.S. holder
of our stock will not be treated as passive activity income. As a result, U.S. holders will not be able to apply any "passive losses" against income or gain relating to our stock. To the extent that
distributions we make do not constitute a return of capital, they will be treated as investment income for purposes of computing the investment interest limitation.
Medicare Tax.
Certain U.S. stockholders who are individuals, estates or trusts and whose income exceeds certain thresholds will be
required to pay a
3.8% Medicare tax on all or a portion of their "net investment income," which includes dividends received from us and capital gains from the sale or other disposition of our stock.
Taxation of Non-U.S. Holders
The rules governing U.S. federal income taxation of the ownership and disposition of our stock that are applicable to non-U.S. holders of our
stock are complex, and no attempt is made herein to provide more than a brief summary of such rules. A "non-U.S. holder" is any person other than a U.S. holder, as defined above, or a partnership,
including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes. The discussion does not address all aspects of U.S. federal income tax law and does not
address state, local or foreign tax consequences that may be relevant to a non-U.S. holder in light of its particular circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that Arbor Realty will qualify for
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taxation
as a REIT. Non-U.S. holders should consult their tax advisors to determine the impact of U.S. federal, state, local and foreign tax laws with regard to the ownership and disposition of our
stock (including reporting requirements) in light of their individual circumstances.
Ordinary Dividends.
The portion of dividends received by non-U.S. holders that (1) is payable out of our earnings and profits,
(2) is
not attributable to our capital gains, and (3) is not effectively connected with a U.S. trade or business of the non-U.S. holder, will generally be subject to U.S. withholding tax at the rate
of 30%, unless reduced or eliminated by treaty. Reduced treaty rates and other exemptions are not available to the extent that income is attributable to excess inclusion income allocable to the
non-U.S. holder. Accordingly, we will withhold at a rate of 30% on any portion of a dividend that is paid to a non-U.S. holder and attributable to that holder's share of our excess inclusion income.
See "Taxation of Arbor RealtyTaxable Mortgage Pools and Excess Inclusion Income." As required by IRS guidance, we intend to disclose to holders if a portion of a dividend paid by us is
attributable to excess inclusion income.
In
general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our stock. In cases where the dividend income from
a non-U.S. holder's investment in our stock is, or is treated as, effectively connected with the non-U.S. holder's conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to
U.S. federal income tax at graduated rates, in the same manner as domestic holders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by
or on behalf of the non-U.S. holder. The income may also be subject to the 30% branch profits tax (unless reduced or eliminated by treaty) in the case of a non-U.S. holder that is a corporation.
Non-dividend Distributions.
Unless our stock constitutes a U.S. real property interest (a "USRPI"), distributions that we make which
are not
dividends out of our earnings and profits will not be subject to U.S. income tax. Although we believe that our stock is not a USRPI, no assurances can be given that our stock is not, or will not
become, a USRPI. See below under "Dispositions of Stock" for a discussion of whether our stock will constitute a USRPI. If we cannot determine at the time that a distribution is made
whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. The non-U.S. holder may
seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits. If our stock
constitutes a USRPI, as described below, distributions that we make in excess of the sum of (a) the holder's proportionate share of our earnings and profits, plus (b) the holder's basis
in its stock, will be taxed under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") at the rate of tax, including any applicable capital gains rates, that would apply to a domestic
holder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax may be enforced by a refundable withholding at a rate of 15% of the amount by
which the distribution exceeds the holder's share of our earnings and profits.
Capital Gain Dividends.
Under FIRPTA, a distribution that we make to a non-U.S. holder, to the extent attributable to gains from
dispositions of
USRPIs that we held directly or through pass-through subsidiaries ("USRPI capital gains"), will, except as described below, be considered effectively connected with a U.S. trade or business of the
non-U.S. holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations, without regard to whether we designate the distribution as a capital gain dividend.
See above under "Taxation of Non U.S. HoldersOrdinary Dividends," for a discussion of the consequences of income that is effectively connected with a U.S. trade or business.
In addition, we will be required to withhold tax equal to 21% of the amount of dividends to the extent the dividends constitute USRPI capital gains. Distributions subject to FIRPTA may also be subject
to a 30% branch profits tax (unless reduced or eliminated by treaty) in the hands of a non-U.S. holder that is a corporation. A distribution is not a USRPI capital gain if we held an
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interest
in the underlying asset solely as a creditor. Capital gain dividends received by a non-U.S. holder that are attributable to dispositions of our assets other than USRPIs are not subject to
U.S. federal income or withholding tax, unless (1) the gain is effectively connected with the non-U.S. holder's U.S. trade or business, in which case the non-U.S. holder would be subject to the
same treatment as U.S. holders with respect to such gain, or (2) the non-U.S. holder is a nonresident alien individual who was present in the United States for 183 days or more during
the taxable year and has a "tax home" in the United States, in which case the non-U.S. holder will incur a 30% tax on his or her capital gains.
A
capital gain dividend that would otherwise have been treated as a USRPI capital gain will not be so treated or be subject to FIRPTA, and generally will not be treated as income that is
effectively connected with a U.S. trade or business, and instead will be treated in the same manner as an ordinary dividend (see "Taxation of Non-U.S. HoldersOrdinary
Dividends"), provided that (1) the capital gain dividend is received with respect to a class of stock that is regularly traded on an established securities market located in the United States,
and (2) the recipient non-U.S. holder does not own more than 10% of that class of stock at any time during the year ending on the date on which the capital gain dividend is received. We believe
that our common stock is, and is likely to continue to be, "regularly traded" on an established securities exchange.
Dispositions of Stock.
Unless our stock constitutes a USRPI, a sale of our stock by a non-U.S. holder generally will not be subject to
U.S. taxation
under FIRPTA. Our stock will not be treated as a USRPI if less than 50% of our assets throughout a prescribed testing period consist of interests in real property located within the United States,
excluding, for this purpose, interests in real property solely in a capacity as a creditor. It is not currently anticipated that our stock will constitute a USRPI. However, we cannot assure you that
our stock will not become a USRPI.
Even
if the foregoing 50% test is not met, our stock nonetheless will not constitute a USRPI if we are a "domestically-controlled qualified investment entity." A domestically-controlled
qualified investment entity includes a REIT, less than 50% of value of which is treated as held directly or indirectly by non-U.S. holders at all times during a specified testing period (after
applying certain presumptions regarding the ownership of our stock, as described in Section 897(h)(4)(E) of the Code). We believe that we are, and we expect to continue to be, a
domestically-controlled qualified investment entity, and that a sale of our stock should not be subject to taxation under FIRPTA. No assurance can be given, however, that we are or will remain a
domestically-controlled qualified investment entity.
In
the event that we are not a domestically-controlled qualified investment entity, but our stock is "regularly traded," as defined by applicable Treasury Department regulations, on an
established securities market, a non-U.S. holder's sale of our stock nonetheless would not be subject to tax under FIRPTA as a sale of a USRPI, provided that the selling non-U.S. holder held 10% or
less of such class of stock at all times during a specified testing period. As noted above, we believe that our common stock is, and is likely to continue to be, "regularly traded" on an established
securities exchange.
If
gain on the sale of our stock were subject to taxation under FIRPTA, the non-U.S. holder would be required to file a U.S. federal income tax return and would be subject to the
same treatment as a U.S. holder with respect to such gain and the purchaser of the stock could be required to withhold 15% of the purchase price and remit such amount to the IRS.
Gain
from the sale of our stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. holder in two cases: (1) if the
non-U.S. holder's investment in our stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder, the
non-U.S. holder will be subject to the same treatment as a U.S. holder with respect to such gain, and a non-U.S. holder that is a corporation may also be subject to a branch profits tax at a rate of
30% (unless reduced or eliminated by treaty), or (2) if the non-U.S. holder is a nonresident alien individual who was present in the United States for 183 days or more during the
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taxable
year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain. In addition, even if we are a
domestically-controlled qualified investment entity, upon disposition of our stock (subject to the 10% exception applicable to "regularly traded" stock described above), a non-U.S. holder may be
treated as having gain from the sale or exchange of a USRPI if the non-U.S. holder (i) disposes of our stock within a 30-day period preceding the ex-dividend date of a distribution, any portion
of which, but for the dispositions, would have been treated as gain from the sale or exchange of a USRPI; and (ii) acquires, or enters into a contract or option to acquire, other shares of our
stock within 30 days after such ex-dividend date.
Special FIRPTA Rules.
Recently enacted amendments to FIRPTA create certain exemptions from FIRPTA and otherwise modify the application
of the
foregoing FIRPTA rules for particular types of foreign investors, including "qualified foreign pension funds" and their wholly owned foreign subsidiaries and certain widely held, publicly traded
"qualified collective investment vehicles." Non-U.S. holders are urged to consult their tax advisors regarding the applicability of these or any other special FIRPTA rules to their particular
investment in our common stock.
Foreign Account Tax Compliance Act.
Legislation enacted in 2010 and existing guidance issued thereunder requires withholding at a rate
of 30% on
dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, our common stock held by or through certain foreign financial institutions (including investment funds),
unless such institution enters into an agreement with the Treasury to report, on an annual basis, information with respect to shares in, or accounts maintained by, the institution to the extent such
shares or accounts are held by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity
through which our common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and after December 31, 2018, gross proceeds
from the sale of, our common stock held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless
such entity either (1) certifies that such entity does not have any "substantial United States owners" or (2) provides certain information regarding the entity's "substantial United
States owners," which the applicable withholding agent will in turn provide to the Secretary of the Treasury. An intergovernmental agreement between the United States and an applicable foreign
country, or future Treasury regulations or other guidance, may modify these requirements. We will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. holders
are encouraged to
consult their tax advisors regarding the possible implications of the legislation on their investment in our common stock.
Estate Tax.
If our stock is owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S.
federal estate
tax purposes) of the United States at the time of such individual's death, the stock will be includable in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise, and may therefore be subject to U.S. federal estate tax.
Foreign
holders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign income and other tax consequences of owning our stock.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt
from U.S. federal income taxation. Such entities, however, may be subject to taxation on their unrelated business taxable income ("UBTI"). While some investments in real estate may generate UBTI, the
IRS has ruled that dividend distributions from a REIT to a tax-exempt entity generally do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt stockholder has not held
our stock as "debt financed property" within the meaning of
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the
Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), and (2) our stock is not otherwise used in an unrelated
trade or business, distributions that we make and income from the sale of our stock generally should not give rise to UBTI to a tax-exempt stockholder.
Tax-exempt
stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from
U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code are subject to different UBTI rules, which generally require such stockholders to characterize
distributions that we make as UBTI.
In
certain circumstances, a pension trust that owns more than 10% of our stock could be required to treat a percentage of the dividends as UBTI, if we are a "pension-held REIT." We will
not be a pension-held REIT unless (1) we are required to "look through" one or more of our pension trust stockholders in order to satisfy the REIT closely held test, and (2) either
(i) one pension trust owns more than 25% of the value of our stock, or (ii) one or more pension trusts, each individually holding more than 10% of the value of our stock, collectively
owns more than 50% of the value of our stock. Certain restrictions on ownership and transfer of our stock should generally prevent a tax-exempt entity from owning more than 10% of the value of our
stock, and, in general, should prevent us from becoming a pension-held REIT.
Tax-exempt stockholders are urged to consult their tax advisors regarding the federal, state, local and foreign tax consequences of owning our
stock.
Other Tax Considerations
Legislative or Other Changes in Tax Law Affecting REITs
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or
administrative action at any time. The REIT rules are constantly under review by persons involved in the legislative process and by the IRS and the Treasury which may result in statutory changes as
well as revisions to regulations and interpretations. For example, the recently enacted "Tax Cuts and Jobs Act" (the "Act") significantly changed the U.S. federal income tax laws applicable to
businesses and their owners, including REITs and their shareholders. Technical corrections or other amendments to the Act or administrative guidance interpreting the Act may be forthcoming at any
time. We cannot predict the long-term effect of the Act or any future law changes on REITs or their shareholders. Changes to the U.S. federal tax laws and interpretations thereof, whether under the
Act or otherwise, could adversely affect an investment in our stock.
State, Local and Foreign Taxes
We and our subsidiaries and stockholders may be subject to state, local or foreign taxation in various jurisdictions, including those in which
we or they transact business, own property or reside. We may own properties located in numerous jurisdictions, and may be required to file tax returns in some or all of those jurisdictions. Our state,
local or foreign tax treatment, and that of our stockholders, may not conform to the U.S. federal income tax treatment discussed above. We may pay foreign property taxes, and dispositions of foreign
property or operations involving, or investments in, foreign property may give rise to foreign income or other tax liability in amounts that could be substantial. Any foreign taxes that we incur do
not pass through to stockholders as a credit against their U.S. federal income tax liability. Prospective investors should consult their tax advisors regarding the application and effect of state,
local and foreign income and other tax laws on an investment in our stock.
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PLAN OF DISTRIBUTION
We may sell the securities offered by this prospectus from time to time in one or more transactions, including without limitation;
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directly to purchasers;
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through agents;
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to or through underwriters or dealers; or
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through a combination of these methods.
A
distribution of the securities offered by this prospectus may also be effected through the issuance of derivative securities, including without limitation, warrants, exchangeable
securities, forward delivery contracts and the writing of options.
In
addition, the manner in which we may sell some or all of the securities covered by this prospectus includes, without limitation, through:
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a block trade in which a broker-dealer will attempt to sell as agent, but may position or resell a portion of the block, as principal, in order
to facilitate the transaction;
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purchases by a broker-dealer, as principal, and resale by the broker-dealer for its account;
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ordinary brokerage transactions and transactions in which a broker solicits purchasers; or
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privately negotiated transactions.
We
may also enter into hedging transactions. For example, we may:
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enter into transactions with a broker-dealer or affiliate thereof in connection with which such broker-dealer or affiliate will engage in short
sales of the common stock pursuant to this prospectus, in which case such broker-dealer or affiliate may use shares of common stock received from us to close out its short positions;
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sell securities short and redeliver such shares to close out our short positions;
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enter into option or other types of transactions that require us to deliver common stock to a broker-dealer or an affiliate thereof, who will
then resell or transfer the common stock under this prospectus; or
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loan or pledge the common stock to a broker-dealer or an affiliate thereof, who may sell the loaned shares or, in an event of default in the
case of a pledge, sell the pledged shares pursuant to this prospectus.
In
addition, we may enter into derivative or hedging transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated
transactions. In connection with such a transaction, the third parties may sell securities covered by and pursuant to this prospectus and an applicable prospectus supplement or pricing supplement, as
the case may be. If so, the third party may use securities borrowed from us or others to settle such sales and may use securities received from us to close out any related short positions. We may also
loan or pledge securities covered by this prospectus and an applicable prospectus supplement to third parties, who may sell the loaned securities or, in an event of default in the case of a pledge,
sell the pledged securities pursuant to this prospectus and the applicable prospectus supplement or pricing supplement, as the case may be.
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A
prospectus supplement with respect to each series of securities will state the terms of the offering of the securities, including:
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the terms of the offering;
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the name or names of any underwriters or agents and the amounts of securities underwritten or purchased by each of them, if any;
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the public offering price or purchase price of the securities and the net proceeds to be received by us from the sale;
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any delayed delivery arrangements;
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any initial public offering price;
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any underwriting discounts or agency fees and other items constituting underwriters' or agents' compensation;
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any discounts or concessions allowed or reallowed or paid to dealers; and
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any securities exchange on which the securities may be listed.
The
offer and sale of the securities described in this prospectus by us, the underwriters or the third parties described above may be effected from time to time in one or more
transactions, including privately negotiated transactions, either:
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at a fixed price or prices, which may be changed;
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at market prices prevailing at the time of sale;
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at prices related to the prevailing market prices; or
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at negotiated prices.
General
Any public offering price and any discounts, commissions, concessions or other items constituting compensation allowed or reallowed or paid to
underwriters, dealers, agents or
remarketing firms may be changed from time to time. Underwriters, dealers, agents and remarketing firms that participate in the distribution of the offered securities may be "underwriters" as defined
in the Securities Act, as amended (the "Securities Act"). Any discounts or commissions they receive from us and any profits they receive on the resale of the offered securities may be treated as
underwriting discounts and commissions under the Securities Act. We will identify any underwriters, agents or dealers and describe their commissions, fees or discounts in the applicable prospectus
supplement or pricing supplement, as the case may be.