If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the
following box:
¨
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.
x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become
effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.
x
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional
securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
DESCRIPTION OF THE PLAN
Our Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan is described in the following questions and answers:
1.
|
Why is the Plan being offered?
|
The purpose of the Plan is to provide a convenient and
economical method for our current stockholders to automatically reinvest all or a portion of their cash dividends in additional shares of our common stock. The Plan also provides our current stockholders and new investors with an economical way to
acquire shares of our common stock by directly investing additional cash amounts. In these ways, the Plan is intended to benefit our long-term investors by allowing them to increase their investment in our common stock. The Plan also provides us
with a cost-efficient way to raise additional capital through the direct sale of our common stock to participants in the Plan.
2.
|
How does the Plan work?
|
The dividend reinvestment component of the Plan permits our
stockholders to designate that all or a portion of their cash dividends on our common stock be reinvested in additional shares of our common stock. The optional cash purchase component of the Plan permits current stockholders and new investors to
purchase shares of our common stock in amounts, subject to certain exceptions (see Question 16), ranging from $50 to $10,000 on a monthly basis or, with our prior approval, in excess of $10,000 (see Question 17). Funds invested pursuant to the Plan
are fully invested through the purchase of both whole and fractional shares of our common stock and, under the dividend reinvestment component, proportionate cash dividends on fractional shares of our common stock held in a participants Plan
Account (as defined herein) are used to purchase additional shares under the Plan.
3.
|
What are the advantages of participating in the Plan?
|
The Plan provides participants
with the opportunity to acquire additional shares of our common stock directly from us without having to pay, subject to certain exceptions, the trading fees or service charges associated with an independent purchase (see Question 27). If we issue
new shares of our common stock to participants in the Plan, we may sell them at a discount of up to 5% from the current market price of our common stock. If the Plan Administrator acquires our shares in the open market for participants in the Plan,
we may discount such shares by paying up to 5% of the purchase price for such shares. You should note, however, that we are not required to offer
4
shares at a discount or to pay discounts, fees and service charges. We may change the discount percentage offered, apply a discount only to shares purchased through the dividend reinvestment
feature or only to shares purchased with cash or discontinue to offer this feature of the Plan, at any time or from time to time (see Question 12).
The Plan also offers a share safekeeping service that allows you to deposit your share certificates with the Plan Administrator
and have your share ownership maintained on the Plan Administrators records as part of your Plan Account. There is no charge for this service.
4.
|
What are the disadvantages of participating in the Plan?
|
Investing in our common stock
through the Plan is no different from, and is subject to, the same risks as investing in our common stock directly. This includes the risk that the market price for our common stock may decline. See Risk Factors.
NEITHER WE NOR THE PLAN ADMINISTRATOR CAN GUARANTEE THAT SHARES OF OUR COMMON STOCK PURCHASED UNDER THE PLAN WILL BE WORTH MORE OR LESS THAN
THEIR PURCHASE PRICE AT ANY PARTICULAR TIME.
Amounts contributed to the Plan will not necessarily be invested by the Plan Administrator
immediately upon receipt. Likewise, there may be delays in the delivery of moneys to be returned to you under the Plan. The Plan will not pay interest to you on funds held pending investment or pending return to you.
Purchases and sales of our common stock under the Plan will be effected by the Plan Administrator only as soon as practicable after it
receives investment instructions. Therefore, if you participate in the Plan, you may not be able to control the specific timing of purchases and sales made for you under the Plan. The market price of our common stock may fluctuate between the time
an investment instruction is received by the Plan Administrator and the time shares are purchased or sold for you under the Plan.
You
will not be able to pledge any shares of our common stock held in your Plan Account until a certificate for those shares is issued to you.
If you reinvest your cash dividends, you will be treated as having received dividend income for U.S. federal income tax purposes, but will not
receive a dividend check. There may be other tax-related disadvantages applicable to your participation in the Plan (see Question 33). See Material U.S. Federal Income Tax Considerations.
There are certain fees that will be charged to you by the Plan Administrator (see Question 27).
5.
|
Who is eligible to participate?
|
Anyone is potentially eligible to participate in the
Plan. You may participate in the Plan if: (i) you are a registered holder of our common stock; that is, your shares are registered in your name on our stock transfer books; (ii) you are a beneficial owner of our common stock;
that is, your shares are registered in a name other than your own name (i.e., in the name of a broker, bank or other nominee); or (iii) you are not presently a stockholder, but wish to acquire shares of our common stock. Registered holders may
participate in the Plan directly. If you are a beneficial owner, you must either become a registered holder by having your shares transferred into your own name or make arrangements with your broker, bank or other nominee to participate in the Plan
on your behalf (see Question 6).
You will not be allowed to participate if you live in a jurisdiction that makes it unlawful for us to
permit your participation in the Plan. Persons who are citizens or residents of a country other than the United States, its territories and possessions should make certain that their participation does not violate local laws governing such things as
taxes, currency and exchange controls, share registration, foreign investments and related matters. We reserve the right to terminate anyones participation in the Plan if we deem it advisable under any applicable laws or regulations. We also
reserve the right, in our sole discretion, to exclude anyone from the Plan who fails to comply with the requirements of the Plan, including, but not limited to, those seeking to use the Plan to engage in short-term trading activities that may cause
aberrations in the trading volume of our common stock or who use multiple Plan Accounts to circumvent the Plans standard $10,000 per month investment maximum.
5
6.
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How do I enroll in the Plan?
|
If you hold shares of our common stock in your own name or
if you are a new investor, you may enroll in the Plan and/or make optional cash purchases by completing your plan enrollment online via Computershares website at
www.computershare.com/investor
. Alternatively, you may enroll in the
Plan by obtaining a plan enrollment form by calling, toll free, 1-866-249-2610 and mailing your completed form to the Plan Administrator in care of Computershare, P.O. Box 30170, College Station, TX 77842-3170. If your shares are registered in
a name other than your own name (i.e., in the name of a broker, bank or other nominee), then you must either (i) have your shares reregistered in your own name and then complete your plan enrollment as discussed above or (ii) make
arrangements with your nominee holder to participate on your behalf. You will need to confirm that your nominee holder is able to accommodate your participation in the Plan.
An eligible person may elect to become a participant in the Plan at any time, subject to our right to modify, suspend, terminate or refuse
participation in the Plan. Your completed plan enrollment appoints the Plan Administrator as your agent for purposes of the Plan and permits it to reinvest dividends in the number of shares you designate and to make optional cash purchases on your
behalf as you direct.
If you are enrolling for dividend reinvestment, the Plan Administrator must receive your completed plan enrollment
at least one business day prior to the record date established for a particular dividend in order for you to be eligible for reinvestment of that dividend payment under the Plan (see Question 15). Otherwise, reinvestment of your dividends will begin
with the next dividend payment.
If you are enrolling in the Plan by making an optional cash purchase (see Question 9), the Plan
Administrator must receive your completed plan enrollment and investment funds at least one business day before the date such funds are scheduled to be invested for a particular month (see Question 15). If your completed plan enrollment and
investment funds are received after that date, your funds will be held in your Plan Account until the next Cash Purchase Investment Date; provided, however, that if your funds are not fully invested within 35 days of the next Cash Purchase
Investment Date, your uninvested funds will be returned to you without interest. If you are not a current stockholder, you must submit your initial investment with your completed plan enrollment.
7.
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Who is the Plan Administrator?
|
The Plan is being administered by Computershare Trust
Company, N.A., (or the Plan Administrator). Certain administrative support services to the Plan Administrator will be performed by its designated affiliates. Information on how to contact the Plan Administrator is described in Question
35. The Plan Administrator, along with its affiliates, keeps records, sends statements of account to each participant in the Plan and performs other duties related to the Plan, including the safekeeping of the shares purchased for each participant.
The Plan Administrator, along with its affiliates, also acts as the dividend disbursing agent, transfer agent and registrar for our common stock.
8.
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How will I keep track of my investments?
|
The Plan Administrator will send you a
transaction advice confirming the details of each Plan transaction you make, including the number of shares purchased and the price paid. If you continue to participate in the Plan, but have no transactions, the Plan Administrator will send you an
annual statement after the end of the year detailing the status of your holdings of our common stock in your Plan Account. You may also keep track of your investments online at
www.computershare.com/investor
. There you will be able to view
sales, purchases, balances, prices, dividends reinvested, cost basis and other information.
You will also receive annual income tax
information on Form 1099. These statements are your record of the cost of your purchases and should be retained for income tax and other purposes.
6
All notices from the Plan Administrator to you will be mailed to your last address of record.
However, if your shares are registered in a name other than your own name, communications regarding the Plan will be made through your nominee holder.
9.
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What investment options are available under the Plan?
|
You can purchase shares of our
common stock under the Plan through the following investment options:
Dividend Reinvestment
. You can instruct the Plan
Administrator to apply the cash dividends paid on all or any portion of the shares of our common stock designated by you for reinvestment. In order to participate in the Plan, you do not have to submit the shares of our common stock currently held
by you or on your behalf to your Plan Account in order to elect to reinvest the dividends on all or a portion of such shares, although share safekeeping is one of the benefits available under the Plan (see Question 21). You may choose one of the
following options when enrolling in the Plan:
Full Dividend Reinvestment -
If you select this option, the Plan
Administrator will reinvest all cash dividends paid on all shares of our common stock and you will be able to make optional cash payments for the purchase of additional shares in accordance with the Plan.
Partial Dividend Reinvestment
-
If you select this option, the Plan Administrator will pay you dividends in cash on the
number of shares of common stock that you specify in the appropriate space on the enrollment form and apply the balance of your dividends toward the purchase of additional shares in accordance with the Plan. This option also permits you to make
optional cash payments for the purchase of additional shares in accordance with the Plan.
Voluntary Cash Payments Only (No Dividend
Reinvestment)
-
If you select this option, your dividends will not be reinvested. Instead, you will receive payment by check or automatic deposit for all of your cash dividends. This option also permits you to make optional cash
payments for the purchase of additional shares in accordance with the Plan.
You may select any of the above investment options. If no
option is selected by you on the enrollment form which you return, you will be enrolled in the Full Dividend Reinvestment Option. Regardless of your investment choice, all shares purchased for you through the Plan will be credited to your account by
the Plan Administrator until you direct that these shares be sold or issued to you in certificate form.
Optional Cash
Purchases
. You can make voluntary cash contributions to your Plan Account at any time, even if you are not currently reinvesting dividends paid to you on our common stock. Payment for these optional cash purchases can be made by check or
electronic funds transfer from a pre-designated bank account. The Plan Administrator will not accept cash, travelers checks, money orders or third-party checks. The Plan Administrator will use these funds to purchase shares of our common stock
on a monthly basis. If you are already a stockholder, the minimum cash purchase is $50 per month. If you are using this feature to make your initial investment in our common stock, the minimum cash purchase is $1,000. You may not make optional cash
purchases of more than $10,000 per month without our prior written approval (see Question 17). Dividends paid on shares of our common stock that are purchased for your Plan Account with voluntary cash contributions will automatically be reinvested
in our common stock, unless you instruct the Plan Administrator otherwise.
10.
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Can I change my dividend reinvestment options?
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Yes. You may change your dividend
reinvestment options at any time online through Investor Centre at
www.computershare.com/investor
or by completing a new plan enrollment and submitting it to the Plan Administrator at least one business day prior to the record date for the
next dividend payment.
7
11.
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What is the source of shares purchased by the Plan?
|
We may either issue new shares of
our common stock directly to the Plan or instruct the Plan Administrator to acquire currently outstanding shares in the open market. Open market purchases may be made, at the Plan Administrators option, on the NYSE or any other securities
exchange where our common stock is traded, in the over-the-counter market or in negotiated transactions with third persons.
12.
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At what price will shares be acquired?
|
Shares Acquired Directly from
Us
.
The purchase price to be paid by any participant for shares acquired directly from us pursuant to the Plan will be equal to 100% of the volume-weighted average price (less any applicable discount), rounded to four decimal places,
if necessary, of our common stock as reported by the NYSE only, obtained from Bloomberg, LP for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern Time, on the applicable Dividend Payment Date or the applicable Cash Purchase Investment Date.
Shares of our common stock acquired directly from us pursuant to the Plan may be acquired at a discount rate, as determined and set by us from time to time, ranging from 0% to 5% from the volume-weighted average price.
Shares Acquired on the Open Market
. The Plan Administrator may combine Plan participant purchase requests with other
purchase requests received from other Plan participants and will generally batch purchase types (dividend and optional cash investments) for separate execution by the Plan Administrators broker. The Plan Administrator may also direct its
broker to execute each purchase type in several batches throughout a trading day. Depending on the number of shares being purchased and current trading volume in the shares, the Plan Administrators broker may execute purchases for any batch or
batches in multiple transactions and over more than one day. If different purchase types are batched, the price per share of the common shares purchased for each participants account, whether purchased with reinvested dividends, with
initial cash investments, or with optional cash, shall be the weighted average price of the specific batch for each shares purchased by the Plan Administrators broker on that investment date. All shares of our common stock purchased by
the Plan Administrator in the open market may be acquired at a discount rate, as determined and set by us from time to time, ranging from 0% to 5% from the prevailing market price, which will be paid by us. Open market purchases may be made on such
terms as to price, delivery and otherwise as the Plan Administrator determines.
We are not required to sell shares issued by us at a
discount to the Plan or to pay a discount with respect to shares purchased by the Plan Administrator in the open market, and the discount rate we offer is subject to change or discontinuance at our discretion and without prior notice to participants
in the Plan. In addition, we may choose, at our sole discretion, to apply a discount only to those shares of our common stock purchased pursuant to the reinvestment of cash dividends or only to those shares of our common stock purchased with cash,
but are not obligated to apply an equal discount to both at any given time. The discount rate, if any, will be determined by us from time to time based on a review of current market conditions, the level of participation in the Plan, our current and
projected capital needs and other factors that we deem to be relevant.
There are special rules for cash purchases in excess of $10,000 per
month (see Question 17).
13.
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When are the shares purchased for the Plan?
|
We typically pay dividends on a quarterly
basis. If these dividends are used to acquire new shares directly from us, the Plan Administrator will reinvest dividends on the applicable date on which we pay dividends (or a Dividend Payment Date). If these dividends are used to acquire shares
through open market purchases, the Plan Administrator will purchase all shares within 30 days of the applicable Dividend Payment Date. If the dividends are not able to be fully invested within this 30-day period, the uninvested dividends will be
distributed in full, without interest, by the Plan Administrator to the stockholders participating in the Plan. Payment of dividends is always announced in advance. You may learn the date of any announced dividend payment by calling the Plan
Administrator at 1-866-249-2610.
Funds for optional cash purchases may be deposited into your Plan Account at any time and will be used
to acquire shares on the last business day of each month (or a Cash Purchase Investment Date). If these funds deposited
8
during a particular calendar month are used to acquire new shares directly from us, they will be invested on the Cash Purchase Investment Date. If these funds are used to acquire shares through
open market purchases, the Plan Administrator will purchase all shares within 35 days of the Cash Purchase Investment Date. If any funds deposited for optional cash purchases are not able to be fully invested within this 35-day period, the
uninvested funds will be returned in full, without interest, by the Plan Administrator to the applicable stockholders and/or new investors.
There are special rules for cash purchases in excess of $10,000 per month (see Question 17).
14.
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Will I earn interest on funds in my Plan Account prior to investment or return to me?
|
No. Interest will not be paid on funds deposited by you in your Plan Account pending investment or return to you.
15.
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What are the procedures for cash purchases?
|
If you are not already a stockholder, you
are required under the Plan to make an initial investment of at least $1,000, but not more than $10,000, except in the case of Large Cash Purchases (as defined herein) (see Question 17). Your initial investment can be made online through
www.computershare.com/investor
by authorizing a one-time deduction from your designated bank account or by completing an Initial Enrollment form and submitting it with your check made payable to Computershare/MFA.
If you are already a stockholder and have enrolled in the Plan and want to make optional cash purchases, you can authorize specific deductions
from your designated bank account online through
www.computershare.com/investor
or send a check to the Plan Administrator for each purchase. If you choose to submit a check, please make sure to include the tear off coupon from your Plan
statement and mail it in the envelope provided. If you wish to make regular monthly optional cash purchases, you may authorize monthly automatic deductions from your bank account at
www.computershare.com/investor
or by completing a Direct
Debit Authorization Form and mailing it to the Plan Administrator. This feature enables you to make ongoing investments in an amount that is comfortable for you. Ongoing optional cash purchases are subject to a minimum investment of $50 per month
and a maximum of $10,000 per month per month. Funds will be deducted from your bank account on the 25th day of each month or, if the 25th is not a business day, the next business day.
In order for your funds to be invested on a particular Cash Purchase Investment Date, they must be received by the Plan Administrator no later
than one business day before the Cash Purchase Investment Date. No interest will be paid on funds held by the Plan Administrator pending investment.
You may cancel an optional cash purchase by advising the Plan Administrator at least two business day before the applicable Cash Purchase
Investment Date. The Plan Administrator will return the funds from a cancelled purchase to you without interest as soon as practical. No refund of a check will be made until the funds have been actually received by the Plan Administrator.
In the event that any check or other deposit is returned unpaid for any reason or your pre-designated bank account does not have sufficient
funds for an automatic withdrawal, the Plan Administrator will consider the request for investment of that purchase null and void. The Plan Administrator will immediately remove from your plan account any common shares already purchased in
anticipation of receiving those funds and will sell such shares. If the net proceeds from the sale of those common shares are insufficient to satisfy the balance of the uncollected amounts, the Plan Administrator may sell additional shares from your
plan account as necessary to satisfy the uncollected balance. There is a $35.00 charge for any check, electronic fund transfer or other deposit that is returned unpaid by your bank. This fee will be collected by the Plan Administrator through the
sale of the number of common shares from your plan account necessary to satisfy the fee. You will be responsible for customary fees incurred in connection with any such sale.
9
16.
|
What limitations apply to optional cash purchases?
|
Minimum Investments
.
If you are already a stockholder, the minimum cash purchase is $50 for any given month. If you are using this feature to make your initial investment in our common stock, the minimum cash purchase is $1,000. Cash purchases for less than these
minimums will be returned to you without interest, unless we choose to waive these minimum amounts.
Large Cash Purchases
.
Cash purchases in excess of $10,000 per month (or Large Cash Purchases) will not be allowed by the Plan Administrator without our prior written approval. Unless you have complied with the procedures described in Question 17, any amount you submit
for investment over this limit will be returned to you without interest. For purposes of this limitation, we reserve the right to aggregate all cash purchases from any participant with more than one Plan Account using the same name, address or
social security or taxpayer identification number. If you do not supply a social security or taxpayer identification number to the Plan Administrator, your participation may be limited to only one Plan Account. Also for the purpose of this
limitation, all Plan Accounts that we believe to be under common control or management or to have common ultimate beneficial ownership may be aggregated. We may grant or withhold our permission to make Large Cash Purchases in our sole discretion. We
may grant such request in whole or in part. We may also grant requests for some Large Cash Purchases and deny requests for others even though they are made in the same month.
17.
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May I invest more than the Plan maximum of $10,000 per account per month?
|
Yes, if you
request a waiver of this limit and we grant your waiver request. Upon receipt of a written waiver form from an investor, we will consider waiving the maximum investment limit. Grants of waiver requests will be made in our sole discretion based on a
variety of factors, which may include: our current and projected capital needs, prevailing market prices of our common stock and other securities, and general economic and market conditions.
Large Cash Purchases will be priced as follows:
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|
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Large Cash Purchases for which a waiver has been granted will be made subject to a pricing period, which will generally consist of one to fifteen separate days during which trading of our common stock is reported on the
NYSE. Each of these separate days will be an investment date, and an equal proportion of the investment amount will be invested on each trading day during such pricing period, subject to the qualifications listed below. The purchase
price for shares acquired on a particular investment date will be equal to 100% of the consolidated volume-weighted average price (less any applicable discount), rounded to four decimal places, of our common stock as reported by the NYSE only,
obtained from Bloomberg, LP for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern Time, up to and including the closing print, for that investment date. Funds for such investments must be received by the Plan Administrator not later than the
business day before the first day of the pricing period.
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We may establish a minimum, or threshold, price for any pricing period that the volume-weighted average price, rounded to four decimal places, of our common stock must equal or exceed during each trading day
of the pricing period for investments made pursuant to a waiver request.
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If we decide to establish a threshold price for a particular pricing period, the threshold price for any investments made pursuant to a request for waiver will be a stated dollar amount that the volume-weighted average
price, rounded to four decimal places, of our common stock, as reported by the NYSE for each trading day in the relevant pricing period, must equal or exceed. If the threshold price is not satisfied for a trading day in the pricing period, then that
trading day and the trading prices for that day will be excluded from the pricing period.
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|
|
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We will only establish a threshold price if shares will be purchased directly from us in connection with the
relevant pricing period (please see first bullet above). If we have established a threshold price with respect to the relevant pricing period, then we will exclude from the pricing period any trading day that
|
10
|
the volume-weighted average price is less than the threshold price and refund that days proportional investment amount. For example, if the threshold price is not met for two of the trading
days in a ten-day pricing period, then we will return 20% of the funds you submitted in connection with your waiver request, without interest, unless we have activated the pricing period extension feature for the pricing period, as described below.
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|
|
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Neither we nor the Plan Administrator are required to notify you that a threshold price has been established for any pricing period.
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|
|
|
We may elect to activate for any particular pricing period a pricing period extension feature which will provide that the initial pricing period be extended by the number of days that the threshold price is not
satisfied, subject to a maximum of five trading days. If we elect to activate the pricing period extension feature and the threshold price is satisfied for any additional day that has been added to the initial pricing period, that day will be
included as one of the trading days for the pricing period instead of the day on which the threshold price was not met. For example, if the determined pricing period is ten days, and the threshold price is not satisfied for three out of those ten
days in the initial pricing period, and we had previously announced in the bid-waiver form that the pricing period extension feature was activated, then the pricing period will be automatically extended, and if the threshold price is satisfied on
the next three trading days (or a subset thereof), then those three days (or subset thereof) will become investment dates in lieu of the three days on which the threshold price was not met. As a result, because there were ten trading days during the
initial and extended pricing period on which the threshold price was satisfied, all of the funds that you include with your request for waiver will be invested.
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|
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Newly issued shares purchased pursuant to Large Cash Purchases will be posted to participants accounts within three business days following the end of the applicable pricing period, or, if we elect to activate the
continuous settlement feature, within three business days of each separate investment date beginning on the first investment date in the relevant pricing period and ending on the final investment date in the relevant pricing period, with an equal
amount being invested on each day, subject to the qualifications set forth above. During any month when we are proposing to grant requests for waiver for one or more investments, we may elect to activate the continuous settlement feature for such
investments by announcing in the bid-waiver form that we will be doing so. The purchase price of shares acquired on each investment date will be equal to 100% of the consolidated volume-weighted average price obtained from Bloomberg, LP (unless such
service is unavailable, in which case we will designate another service to be utilized before the beginning of the pricing period), rounded to four decimal places, for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern Time, up to and including
the closing print, for each of the investment dates during the pricing period, assuming the threshold price is met on that day, less any discount that we may decide to offer. For each pricing period (assuming the threshold price is met on each
trading day of that pricing period), we would have a separate settlement of each investment dates purchases, each based on the volume-weighted average price for the trading day relating to each of the investment dates during the pricing
period.
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Waiver request forms and information regarding the establishment of a threshold price, if any, may be obtained by contacting our Investor Relations department at 1-212-207-6400.
|
We may alter, amend, supplement or waive, in our sole discretion, the time periods and/or other parameters relating to the pricing periods for
Large Cash Purchases made by one or more participants in the Plan or new investors, at any time and from time to time, prior to the commencement of any pricing period and/or prior to the granting of any request for waiver with respect to a
particular pricing period.
18.
|
Does the Plan Administrator credit my shares to a separate account?
|
Yes. The Plan
Administrator will establish a separate Plan Account for you and credit it with those shares that have been purchased for you under the Plan. In addition, the Plan Administrator will credit your Plan Account with those shares that you have delivered
to the Plan Administrator for safekeeping (see Question 21). All shares in
11
your Plan Account will be registered in book-entry form in the name of the Plan Administrator or its nominee, but your beneficial ownership will be maintained in your Plan Account. The total
number of shares credited to your Plan Account will be shown on each account statement.
In the event that you wish to have any whole
shares of our common stock that have been credited to your Plan Account issued in certificated form to you, you may do so by contacting the Plan Administrator and making such request (see Question 20).
Although the Plan Administrator will maintain a separate Plan Account for you, it is authorized to commingle funds in your Plan Account with
those of other Plan participants for purposes of making purchases of our common stock.
19.
|
Are funds held in my Plan Account insured?
|
No. Funds held in your Plan Account pending
investment or return are not treated as a bank deposit or account and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality.
20.
|
Will I receive certificates for the shares purchased for me under the Plan?
|
No. You will
not receive certificates for shares purchased for you under the Plan. For your convenience, the Plan Administrator will maintain the shares purchased for your Plan Account in non-certificated, book entry form. You may, however, request
that a stock certificate be issued to you for any or all whole shares of our common stock credited to your Plan Account. No certificates for fractional shares will be issued. Certificates will be issued free of charge. Cash dividends with respect to
participating shares represented by certificates issued to you will continue to be automatically reinvested, unless you instruct the Plan Administrator otherwise. Any remaining shares will continue to be credited to your Plan Account. You may
request certificates by contacting the Plan Administrator at 1-866-249-2610. You may also submit your request online via
www.computershare.com/investor
.
21.
|
What is share safekeeping?
|
If you hold the certificates for shares of our common stock
(whether or not you elect to have dividends on these shares reinvested), you may deposit the certificates with the Plan Administrator for safekeeping in your Plan Account. Share safekeeping protects your shares against loss, theft or accidental
destruction and is a convenient way for you to keep track of your shares. There is no fee or other charge for this service. Shares held for safekeeping will be credited to your Plan Account and the certificates for such shares will be cancelled. If
at a later time you want to withdraw those shares from share safekeeping in your Plan Account, a new certificate for such shares shall be issued to you (see Question 20). Only shares held in safekeeping may be sold through the Plan. The Plan
Administrator may maintain shares held for safekeeping in its name or in the name of its nominee. Contact the Plan Administrator at 1-866-249-2610 for information on how to submit your share certificates for safekeeping.
22.
|
May the shares in my Plan Account be sold or transferred?
|
Yes. You may request that the
Plan Administrator sell your shares in the manners described below. Please be aware that if you send in a request to sell shares, the market price of our shares could go down or up before your shares are sold.
Market Order
: A market order is a request to sell securities promptly at the current market price. Market order sales are
only available at
www.computershare.com/investor
, through Investor Centre, or by calling the Plan Administrator directly at 1-866-249-2610. Market order sale requests received at
www.computershare.com/investor
, through Investor Centre,
or by telephone will be placed promptly upon receipt during market hours (normally 9:30 a.m. to 4:00 p.m., Eastern Time). Any orders received outside of market hours will be submitted to the Plan Administrators broker on the next day the
market is open. Sales proceeds will equal the market price of the sale obtained by the Plan Administrators broker, net of taxes and fees. The Plan Administrator will use commercially reasonable efforts to honor requests by participants to
cancel market orders placed outside of market hours.
12
Depending on the number of shares being sold and current trading volume in the shares, a market order may only be partially filled or not filled at all on the trading day in which it is placed,
in which case the order, or remainder of the order, as applicable, will be cancelled at the end of such day. To determine if your shares were sold, you should check your account online at
www.computershare.com/investor
or call the Plan
Administrator directly at 1-866-249-2610. If your market order sale was not filled and you still want the shares sold, you will need to re-enter the sale request. The price shall be the market price of the sale obtained by the Plan
Administrators broker, less a service fee of $25.00 and a processing fee of $0.12 per share sold.
Day Limit
Order
: A day limit order is an order to sell securities when and if they reach a specific trading price on a specific day. The order is automatically cancelled if the price is not met by the end of that day (or, for orders placed after
market hours, the next day the market is open). Depending on the number of securities being sold and the current trading volume in the securities, such an order may only be partially filled, in which case the remainder of the order will be
cancelled. The order may be cancelled by the applicable stock exchange, by the Plan Administrator at its sole discretion or, if the Plan Administrators broker has not filled the order, at your request made online at
www.computershare.com/investor
or by calling the Plan Administrator directly at 1-866-249-2610. A service fee of $25.00 and a processing fee of $0.12 per share sold will be deducted from the sale proceeds.
Good-Til-Cancelled (GTC) Limit Order
: A GTC limit order is an order to sell securities when and if the securities reach a
specific trading price at any time while the order remains open (generally up to 30 days). Depending on the number of securities being sold and current trading volume in the securities, sales may be executed in multiple transactions and over more
than one day. If an order remains open for more than one day during which the market is open, a separate fee will be charged for each such day. The order (or any unexecuted portion thereof) is automatically cancelled if the trading price is not met
by the end of the order period. The order may be cancelled by the applicable stock exchange, by the Plan Administrator at its sole discretion or, if the Plan Administrators broker has not filled the order, at your request made online at
www.computershare.com/investor
or by calling the Administrator directly at 1-866-249-2610. A service fee of $25.00 and a processing fee of $0.12 per share sold will be deducted from the sale proceeds.
Batch Order
: A batch order is an accumulation of all sale requests for a security submitted together as a
collective request. Batch orders are submitted on each market day, assuming there are sale requests to be processed. Sale instructions for batch orders received by the Plan Administrator will be processed no later than five business days after the
date on which the order is received (except where deferral is required under applicable federal or state laws or regulations), assuming the applicable market is open for trading and sufficient market liquidity exists. All sale requests received in
writing will be submitted as batch order sales, unless such requests specify otherwise. Batch order sales may only be requested in writing. In every case of a batch order sale, the price shall be the weighted average sale price obtained by the Plan
Administrators broker, less a service fee of $15.00 and a processing fee of $0.06 per share sold.
All sales requests processed over
the telephone by a customer service representative entail an additional fee of $15.00. Fees are deducted from the proceeds derived from the sale. All per share fees include any brokerage commissions the Plan Administrator is required to pay. The
Plan Administrator may, under certain circumstances, require a transaction request to be submitted in writing. Please contact the Plan Administrator to determine if there are any limitations applicable to your particular sale request.
Alternatively, you may choose to sell common shares in your plan account through a stockbroker of your choice, in which case you should
contact your broker about transferring shares from your plan account to your brokerage account.
If you elect to sell shares online at
www.computershare.com/investor
through Investor Centre, you may utilize Computershares international currency exchange service to convert your sale proceeds to your local currency prior to being sent to you. Receiving your sales
proceeds in a local currency and having your check drawn on a local bank avoids the timely and costly collection process required for cashing U.S. dollar checks. This service is subject to additional terms and conditions and
fees, which you must agree to online.
All sales are subject to market conditions, system availability and other factors. The actual sale
date or price received for any shares sold through the Plan may not be guaranteed.
13
The fees charged in connection with the sale of shares are listed below (see Question 27).
Plan participants must perform their own research and must make their own investment decisions. Neither the Plan Administrator nor any of
its affiliates will provide any investment recommendations or investment advice with respect to transactions made through the Plan.
In addition, you may transfer the ownership of all or part of the shares in your Plan Account to the Plan Account of another person without
requiring the issuance of stock certificates. This could include a gift or private sale. Please visit the Plan Administrators Transfer Wizard at
www.transfermystock.com
. The Transfer Wizard will guide you through the transfer process,
assist you in completing the transfer form, and identify other necessary documentation you may need to provide. Transfers of less than all of the shares credited to your Plan Account must be made in whole share amounts. No fractional shares may be
transferred, unless your entire Plan Account balance is transferred. Requests for these transfers must meet the same requirements as are applicable to the transfer of stock certificates, including the requirement of a medallion stamp guarantee.
Shares that are transferred will be credited in book-entry form to the transferees Plan Account. If the transferee does not have a Plan Account, one will be opened for the transferee using the same investment options as your Plan Account,
unless you specify differently. The transferee may change the investment options after the transfer has been made. After the transfer, the transferee will receive an account statement showing the number of shares transferred to and held in the
transferees Plan Account.
23.
|
May shares in my Plan Account be pledged?
|
No. You must first request that certificates
for shares credited to your Plan Account be issued to you before you can pledge such shares.
24.
|
Can I vote shares in my Plan Account?
|
Yes. You will have the right to vote all whole
shares held in your Plan Account. Fractional shares may not be voted. Proxies for whole shares held in your Plan Account will be forwarded to you by the Plan Administrator. The Plan Administrator may vote your shares in certain cases if you fail to
return a proxy to the Plan Administrator.
25.
|
May I transfer my right to participate in the Plan?
|
No. Your right to participate in the
Plan is not transferable to any other person apart from a transfer of your shares.
26.
|
What happens if we issue a stock dividend, declare a stock split or have a rights offering?
|
Any stock dividends or stock splits distributed by us on shares of our common stock held in your Plan Account will be credited to your Plan
Account. In the event we make available to our stockholders rights to purchase additional shares of our common stock or other securities, you will receive appropriate instructions in connection with all such rights directly from the Plan
Administrator in order to permit you to determine what action you desire to take. Transaction processing under the Plan may be curtailed or suspended until the completion of any stock dividend, stock split or stockholder rights offering.
14
27.
|
Is there a cost to participate in the Plan?
|
The following fees will be paid to the Plan
Administrator by Plan participants:
|
|
|
|
|
|
|
Reinvestment of quarterly dividend
|
|
|
|
|
|
|
Stockholders owning one share or more may elect to reinvest all or part of their cash dividends
and, have access to their account electronically over the internet and will receive quarterly statements
|
|
|
5% of the
dividend
amount,
up to
$3.00 per
quarter
|
|
|
Per participant per quarter
|
|
|
|
Purchase of shares with additional investment
|
|
|
|
|
|
|
By check
|
|
$
|
5.00
|
|
|
Per transaction
|
By electronic debit
|
|
$
|
2.00
|
|
|
Per transaction
|
Purchase of shares with Initial investment
|
|
$
|
15.00
|
|
|
Per transaction
|
|
|
|
Trading fee (open market purchase of shares)
|
|
$
|
0.03
|
|
|
Per share*
|
|
|
|
Sale of Shares
|
|
|
|
|
|
|
Batch order
|
|
$
|
15.00
|
|
|
Per transaction
|
Trading fee
|
|
$
|
0.06
|
|
|
Per share*
|
Market order
|
|
$
|
25.00
|
|
|
Per transaction
|
Day limit order
|
|
$
|
25.00
|
|
|
Per transaction
|
GTC limit order
|
|
$
|
25.00
|
|
|
Per transaction
|
Trading fee
|
|
$
|
0.12
|
|
|
Per share*
|
|
|
|
CSR assisted sale
|
|
$
|
15.00
|
|
|
Per transaction
|
|
|
|
Returned check or debit
|
|
$
|
35.00
|
|
|
Per transaction
|
*
|
All per share fees include any brokerage commissions the Plan Administrator is required to pay.
|
We will pay the Plan Administrators fees in connection with dividend reinvestments. There are no fees for the share safekeeping service.
In general, trading fees and service charges incurred in connection with Plan purchases of shares of our common stock in the open market
will be added to and considered part of the purchase price of such shares. Service fees will be charged to participants making initial and optional cash purchases through electronic fund transfers. Further, the financial institution designated by a
participant on its plan enrollment may charge a fee for participating in the electronic fund transfer. When shares of our common stock are sold by the Plan Administrator for a participant, the participant will be responsible for any trading fees,
expenses, service charges or other expenses incurred pursuant to the sale of such shares of common stock.
28.
|
How and when may I terminate my participation in the Plan?
|
You may discontinue the
reinvestment of your dividends at any time by giving notice to the Plan Administrator. If the Plan Administrator receives your notice to discontinue reinvestment near a dividend record date, the Plan Administrator, in its sole discretion may either
distribute such dividends in cash or reinvest them. You may provide notice online via
www.computershare.com/investor
, by calling the Plan Administrator at 1-866-249-2610 or by mailing your request to the Plan Administrator in care of
Computershare, P.O. Box 43006, Providence, RI 02940-3006. The Plan Administrator will continue to hold your Plan shares after any discontinuation, unless you request a certificate for any whole shares and a cash payment for any fractional share. You
may also request the sale of all or part of such shares or have the Plan Administrator transfer your shares to your brokerage account or another Plan Account. In the case of a request submitted on behalf of a Plan participant who has died or is an
adjudicated incompetent, the request must be accompanied by certified evidence of the representatives authority to make such a request on behalf of the participant. Shares and cash will be retained in the participants Plan Account until
the participants legal representative has been appointed and has furnished proof satisfactory to the Plan Administrator of the legal representatives right to receive a distribution of these assets.
29.
|
May the Plan be changed or discontinued?
|
Yes. We reserve the right to suspend or
terminate the Plan in whole or in part at any time or from time to time. Notice will be sent to participants of any suspension or termination as soon as practicable after such action by us. Upon termination of the Plan, the Plan Administrator will
issue a stock certificate for the total number of whole shares credited to your Plan Account and a cash payment for any portion of a fractional share credited to your Plan Account. However, if we terminate the Plan for the purpose of establishing a
new plan, you will be automatically enrolled in the new plan and shares credited to your Plan Account will be credited automatically to the new plan, unless, prior to the effective date thereof, the Plan Administrator receives notice of termination
of your Plan Account.
15
The Plan may also be altered, amended or supplemented by us in whole or in part at any time,
including the period between the dividend record date and the related Dividend Payment Date. Any such amendment may include an appointment by the Plan Administrator of a successor Plan Administrator. Plan participants will be notified of any
amendments as soon as practicable. In addition, the Plan Administrator reserves the right to change its administrative procedures for the Plan.
30.
|
Who interprets and regulates the Plan?
|
We reserve the right, without notice to Plan
participants, to interpret and regulate the Plan as we deem necessary or desirable in connection with our operations. Any such interpretation and regulation shall be conclusive.
31.
|
What law governs the Plan?
|
The terms and conditions of the Plan and its operation are
governed by the laws of the State of New York.
32.
|
What are the responsibilities of the company and the Plan Administrator under the Plan?
|
The Plan Administrator has had no responsibility with respect to the preparation or contents of this prospectus. Neither we nor the Plan
Administrator, in administering the Plan, shall be liable for any act done in good faith, or for any good faith omission to act, including, without limitation, any claims of liability (i) arising out of failure to terminate any participants
Plan Account upon such participants death or adjudication of incompetence, prior to receipt of notice in writing of such death or adjudication of incompetence, (ii) with respect to the prices at which shares of our common stock are purchased
or sold for the participants Plan Account and the times such purchases or sales are made or (iii) with respect to any loss or fluctuation in the market value after the purchase of shares.
YOU SHOULD RECOGNIZE THAT NEITHER WE NOR THE PLAN ADMINISTRATOR CAN ASSURE A PROFIT OR PROTECT AGAINST A LOSS IN VALUE OF THE SHARES OF OUR
COMMON STOCK THAT YOU PURCHASE UNDER THE PLAN.
33.
|
What are the U.S. federal income tax consequences of participating in the Plan?
|
Dividend Reinvestment
.
If you elect to have distributions that we declare with respect to our common stock reinvested in
additional shares of our common stock under the Plan, then, notwithstanding the fact that you receive no cash distribution, you will be treated as having received a distribution from us for tax purposes. The position of the Internal Revenue Service
is likely to be, and the position that we intend to report for federal income tax purposes is, that the amount of the distribution that you are deemed to have received and that we are deemed to have paid is equal to the sum of fair market value of
the shares of common stock credited to your Plan Account on the Dividend Payment Date and any brokerage commissions or other fees we pay on your behalf in the event the Plan Administrator purchases shares on the open market. See Material U.S.
Federal Income Tax Considerations Federal Income Tax Considerations Relating to the Plan Tax consequences to you of participation in dividend reinvestment for further discussion of these issues. See Material U.S.
Federal Income Tax Considerations Taxation of Owners.
Cash Purchases
. The tax consequences relating to a
discount associated with a cash purchase of shares under the Plan are not entirely clear under current law. We will not treat any optional cash purchases under the Plan as giving rise to any deemed distribution from us. See Material U.S.
Federal Income Tax Considerations Federal Income Tax Considerations Relating to the Plan Tax consequences of optional cash payments.
Receipt of Share Certificates and Cash
. You will not realize any income when you receive certificates for shares of our common
stock credited to your Plan Account. Any cash received for a fractional share held in your Plan Account will be treated as an amount realized on the sale of the fractional share. You therefore will recognize gain or loss equal to any difference
between the amount of cash received for a fractional share and your tax basis in the fractional share.
16
34.
|
What are the U.S. federal withholding tax implications of participation in the Plan?
|
We
or the Plan Administrator may be required to withhold on all dividend payments to a stockholder if (i) such stockholder has failed to furnish his or her taxpayer identification number, which for an individual is his or her social security number,
(ii) the IRS has notified us that the stockholder has failed to properly report interest or dividends or (iii) the stockholder has failed to certify, under penalty of perjury, that he or she is not subject to backup withholding. In the case of a
stockholder who is subject to backup withholding tax on dividends under the Plan, the amount of the tax to be withheld will be deducted from the amount of the cash dividend and only the reduced amount will be reinvested in Plan shares. In
addition, if you are not a U.S. person, withholding may be required on dividends paid under normal income tax rules or pursuant to the Foreign Account Tax Compliance Act (also known as FATCA).
The summary set forth in Questions 33 and 34 is intended only as a general discussion of the current U.S. federal income tax consequences of
participation in the Plan. This discussion does not purport to deal with all aspects of taxation that may be relevant to particular participants in light of their personal investment circumstances or certain types of participants (including foreign
persons, insurance companies, tax-exempt organizations, financial institutions or broker-dealers) subject to special treatment under the U.S. federal income tax laws. For a discussion of the U.S. federal income tax consequences of holding stock in a
REIT generally, see Material U.S. Federal Income Tax Considerations.
35.
|
How do I get more information?
|
Questions regarding the Plan should be directed to
Computershare, P.O. Box 43006, Providence, RI 02940-3006, or by calling 1-866-249-2610, between 9:00 a.m. and 7:00 p.m., Eastern Time, Monday through Friday. For questions regarding Large Cash Purchases, please call our Investor Relations department
at 1-212-207-6400. You may also go to the website address set up for the Plan at
www.computershare.com/investor
. If your shares are not held in your name, contact your brokerage firm, bank, or other nominee for more information regarding your
participation in the Plan. They can contact the Plan Administrator directly for instructions on how to participate on your behalf. You can also get more information from our website at
www.mfafinancial.com
.
17
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax considerations that (i) apply to you, as an Owner (as defined in the immediately
succeeding paragraph) of shares of our common stock and as a participant in the Plan and (ii) relate to our qualification as a REIT. Mayer Brown LLP has acted as our tax counsel, has reviewed this section and is of the opinion that the discussion
contained herein fairly summarizes the U.S. federal income tax consequences that are likely to be material to an Owner of our shares of common stock and a participant in the Plan. Because this section is a summary, it does not address all aspects of
taxation that may be relevant to particular Owners of our common stock in light of their personal investment or tax circumstances, or to certain types of Owners that are subject to special treatment under the U.S. federal income tax laws, such as
insurance companies, tax-exempt organizations (except to the extent discussed in Taxation of OwnersTaxation of Tax-Exempt Owners below), regulated investment companies, partnerships and other pass-through entities (including
entities classified as partnerships for U.S. federal income tax purposes), financial institutions or broker-dealers, and non-U.S. individuals and foreign corporations (except to the extent discussed in Taxation of OwnersTaxation of
Foreign Owners below) and other persons subject to special tax rules.
You should be aware that in this section, when we use the
term:
Code, we mean the Internal Revenue Code of 1986, as amended;
Disqualified Organization, we mean any organization described in section 860E(e)(5) of the Code, including:
|
ii.
|
any state or political subdivision of the United States;
|
|
iii.
|
any foreign government;
|
|
iv.
|
any international organization;
|
|
v.
|
any agency or instrumentality of any of the foregoing;
|
|
vi.
|
any charitable remainder trust or other tax-exempt organization, other than a farmers cooperative described in section 521 of the Code, that is exempt both from income taxation and from taxation under the
unrelated business taxable income provisions of the Code; and
|
|
vii.
|
any rural electrical or telephone cooperative;
|
Domestic Owner, we mean an Owner
that is a U.S. Person;
Foreign Owner, we mean an Owner that is not a U.S. Person;
IRS, we mean the Internal Revenue Service;
Owner, we mean any person having a beneficial ownership interest in shares of our common stock;
REMIC, we mean real estate mortgage investment conduit as that term is defined in section 860D of the Code;
TMP, we mean a taxable mortgage pool as that term is defined in section 7701(i)(2) of the Code;
TRS, we mean a taxable REIT subsidiary described under Subsidiary EntitiesTaxable REIT Subsidiaries below;
and
18
U.S. Person, we mean (i) a citizen or resident of the United States; (ii) a
corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or of any state thereof, including, for this purpose, the District of Columbia;
(iii) a partnership (or entity treated as a partnership for tax purposes) organized in the United States or under the laws of the United States or of any state thereof, including, for this purpose, the District of Columbia (unless provided otherwise
by future Treasury regulations); (iv) an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or (v) a trust, if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more U.S. Persons have authority to control all substantial decisions of the trust. Notwithstanding the preceding clause, to the extent provided in Treasury regulations, certain trusts that were in
existence on August 20, 1996, that were treated as U.S. Persons prior to such date, and that elect to continue to be treated as U.S. Persons, also are U.S. Persons.
The statements in this section are based on the current U.S. federal income tax laws. We cannot assure you that new laws, interpretations of
law or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate. 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.
We have not sought and will not seek a private letter ruling (a PLR) from the IRS
regarding the Plan or any other matter described in this prospectus. Although the IRS has issued several PLRs to other taxpayers concerning the tax consequences of plans similar to our Plan, those PLRs apply only to the taxpayers that requested them
and they do not constitute precedent upon which other taxpayers can rely. Nevertheless, they do indicate how the IRS has reacted to certain issues that are substantially similar to those posed by our Plan.
This summary provides general information only and is not tax advice. We urge you to consult your tax advisor regarding the specific tax
consequences to you of the purchase, ownership and sale of our common stock and of our election to be taxed as a REIT. Specifically, you should consult your tax advisor regarding the federal, state, local, foreign, and other tax consequences of such
purchase, ownership, sale and election, and regarding potential changes in applicable tax laws.
Federal Income Tax Considerations Relating to the Plan
Tax consequences to you of participation in dividend reinvestment
If you elect to have distributions that we declare with respect to our common stock reinvested in additional shares of our common stock under
the Plan, then, notwithstanding the fact that you receive no cash distribution, you will be treated as having received a distribution from us for tax purposes. The amount of the distribution that you are deemed to have received and that we are
deemed to have paid for tax purposes is not entirely clear. One recent PLR addressing the tax consequences of a plan that appears to be similar to our Plan concludes that the amount of the distribution equals the amount of the cash distribution that
you would have received on the Dividend Payment Date had you not elected to reinvest your distribution in shares of our common stock, even if the value of the shares credited to your account on the Dividend Payment Date exceeded the amount of cash
you would have otherwise received due to a discount offered under the plan to the trading price of the shares of common stock on that date. Other PLRs on plans that appear to be similar to our Plan conclude that if distributions are reinvested in
shares that we issue directly on a Dividend Payment Date, the amount of the distribution is the fair market value of the shares on the Dividend Payment Date such that, if we allow you to purchase shares at a price less than the trading price of the
shares on the Dividend Payment Date, you could be viewed as having a distribution equal to the fair market value of the shares. This amount is likely to be in excess of the amount of the cash distribution to which you would otherwise receive. The
earlier PLRs also conclude that if we purchase or instruct an administrator to purchase shares on the open market to satisfy demand under the dividend reinvestment aspect of the Plan, that any brokerage commissions or other charges that we pay on
behalf of Plan participants will be treated as an additional distribution to those participants. If you participate in the Plan, we will report the sum of the fair market value of the shares transferred to you and any brokerage commissions or other
charges that we pay on behalf of you as the amount of the distribution.
19
Expenses of administering the Plan are our expenses, however, and no deemed distribution to you
will result from our payment of Plan administration expenses.
Your tax basis in each share of our common stock acquired upon the
reinvestment of distributions under the Plan will equal the amount of the deemed distribution you are treated as receiving with respect to such share (as described above). Your holding period in such common stock begins on the day following the date
on which the shares of our common stock are credited to your Plan Account.
Tax consequences of optional cash payments
If you make optional share purchases under the Plan, then regardless of whether you are a shareholder at the time of purchase and regardless of
whether you participate in the dividend reinvestment aspect of the Plan, you should not be treated as having received any deemed distribution as a result of your purchase of shares, even if we sell shares to you at a discount to the observed trading
price of those shares. This position is not, however, entirely free from doubt. The IRS has issued PLRs to other taxpayers with Plans that appear to be similar to our Plan in which the IRS held that, in certain circumstances, a sale of shares
to a shareholder pursuant to an optional share purchase plan could result in a deemed distribution to that shareholder. These conclusions are refuted by conclusions expressed by the IRS in subsequent PLRs. We must reiterate that PLRs represent the
view of the IRS solely with respect to a specific inquiry by a specific taxpayer and have no precedential value. Nevertheless, we believe the most recent views expressed by the IRS concerning the tax consequences of an optional share purchase are
correct and, for tax reporting purposes, we will not report any deemed distributions with respect to optional cash purchase transactions.
Your tax basis in each share of our common stock acquired through an optional cash purchase under the Plan should equal the amount you paid to
acquire the share. Your holding period will begin on the day following the date on which the shares of our common stock are credited to your Plan Account.
Our Tax consequences under the Plan
The IRS has issued PLRs in connection with plans similar to our Plan that a dividend reinvestment and optional cash purchase plan will not
compromise REIT qualification. In addition, we should receive a dividends-paid deduction for any deemed distributions to the extent such distributions are considered to be dividends (distributions out of earnings and profits).
Backup withholding and the Plan
In general, any distribution reinvested under the Plan is not subject to federal income tax withholding. We or the Plan Administrator may be
required, however, to deduct a backup withholding tax on all distributions paid to any stockholder, regardless of whether those distributions are reinvested pursuant to the Plan. Similarly, the Administrator may be required to deduct
backup withholding from all proceeds of sales of shares of common stock held in a Plan Account. Backup withholding amounts will be withheld from distributions before those distributions are reinvested under the Plan. Therefore, distributions to be
reinvested under the Plan by participants who are subject to backup withholding will be reduced by the backup withholding amount. The withholding amounts constitute a credit on the participants income tax return. For a discussion of the backup
withholding rules generally, see Taxation of Owners Taxation of Domestic Owners Information Reporting and Backup Withholding and Taxation of Owners Taxation of Foreign Owners Information Reporting and
Backup Withholding herein.
Tax consequences of dispositions
You may recognize a gain or loss upon receipt of a cash payment for a fractional share of common stock credited to your Plan Account or when
the common stock held in your Plan Account is sold at your request. A gain or loss may also be recognized upon your disposition of common stock received from the Plan. The amount of any such gain or loss will be the difference between the amount
realized (generally the amount of cash received) for the whole or fractional share of common stock and the tax basis of those shares of common stock. Generally, gain or loss recognized on the disposition of common stock acquired under the Plan will
be treated for federal income tax purposes as a capital gain or loss.
20
Federal Income Tax Considerations Relating to Our Treatment as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our short taxable year ending on December 31,
1997. We believe that we were organized and have operated and will continue to operate in such a manner as to qualify for taxation as a REIT under the federal income tax laws, but no assurances can be given that we will operate in a manner so as to
qualify or remain qualified as a REIT. This section discusses the laws governing the federal income tax treatment of a REIT and the owners of REIT stock. These laws are highly technical and complex.
If we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income that we currently distribute to our
stockholders, but taxable income generated by our domestic TRSs, if any, will be subject to regular U.S. federal (and applicable state and local) corporate income tax. However, we will be subject to U.S. federal tax in the following circumstances:
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1.
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We will pay U.S. federal income tax on our taxable income, including net capital gain that we do not distribute to stockholders during, or within a specified time period after, the calendar year in which the income is
earned.
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2.
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We may be subject to the alternative minimum tax.
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3.
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We will pay U.S. federal income tax at the highest corporate rate on:
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net income from the sale or other disposition of property acquired through foreclosure, which we refer to as foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, and
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other non-qualifying income from foreclosure property.
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4.
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We will pay a 100% tax on net income earned from sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business.
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5.
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If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under Gross Income Tests, but nonetheless continue to qualify as a REIT because we meet other
requirements, we will be subject to a 100% tax on:
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the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by
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a fraction intended to reflect our profitability.
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6.
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If we fail to satisfy the asset tests by more than a de minimis amount, as described below under Asset Tests, as long as the failure was due to reasonable cause and not to willful neglect, we dispose
of the assets or otherwise comply with such asset tests within six months after the last day of the quarter in which we identify such failure and we file a schedule with the IRS describing the assets that caused such failure, we will pay a tax equal
to the greater of $50,000 or 35% of the net income from the non-qualifying assets during the period in which we failed to satisfy such asset tests.
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7.
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If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, and such failure was due to reasonable cause and not due to willful neglect, we will be
required to pay a penalty of $50,000 for each such failure.
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8.
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We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet recordkeeping requirements intended to monitor our compliance with rules relating to the composition of a
REITs stockholders, as described below in Requirements for Qualification.
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9.
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If we fail to distribute during a calendar year at least the sum of: (i) 85% of our REIT ordinary income for the year, (ii) 95% of our REIT capital gain net income for the year and (iii) any undistributed taxable income
from earlier periods, we will pay a 4% nondeductible excise tax on the excess of the required distribution over the amount we actually distributed, plus any retained amounts on which income tax has been paid at the corporate level.
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10.
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We may elect to retain and pay U.S. federal income tax on our net long-term capital gain. In that case, a Domestic Owner would be taxed on its proportionate share of our undistributed long-term capital gain (to the
extent that we make a timely designation of such gain to the stockholder) and would receive a credit or refund for its proportionate share of the tax we paid.
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11.
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We will be subject to a 100% excise tax on transactions between us and any of our TRSs that are not conducted on an arms-length basis.
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12.
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If (a) we recognize excess inclusion income for a taxable year as a result of our ownership of a 100% equity interest in a TMP or our ownership of a REMIC residual interest and (b) one or more Disqualified Organizations
is the record owner of shares of our common stock during that year, then we will be subject to tax at the highest corporate U.S. federal income tax rate on the portion of the excess inclusion income that is allocable to the Disqualified
Organizations. We do not anticipate owning REMIC residual interests; we may, however, own 100% of the equity interests in one or more trusts formed in connection with our securitization transactions that would be classified as a TMP. See
Taxable Mortgage Pools.
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13.
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If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by
reference either to the C corporations basis in the asset or to another asset, we will pay tax at the highest corporate U.S. federal income tax rate if we recognize gain on the sale or disposition of the asset during the 10-year period after
we acquire the asset. The amount of gain on which we will pay tax is the lesser of:
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the amount of gain that we recognize at the time of the sale or disposition, and
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the amount of gain that we would have recognized if we had sold the asset at the time we acquired it, assuming that the C corporation will not elect in lieu of this treatment to an immediate tax when the asset is
acquired.
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In addition, notwithstanding our qualification as a REIT, we may also have to pay certain state, local, and
foreign income, property, and other taxes, because not all states and localities treat REITs in the same manner that they are treated for U.S. federal income tax purposes. Moreover, as further described below, any domestic TRS in which we own an
interest will be subject to federal, state and local corporate income tax on its taxable income. We could also be subject to tax in situations and on transactions not presently contemplated.
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Requirements for Qualification
A REIT is a corporation, trust, or association that meets each of the following requirements:
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1.
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It is managed by one or more trustees or directors.
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2.
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Its beneficial ownership is evidenced by transferable shares or by transferable certificates of beneficial interest.
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3.
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It would be taxable as a domestic corporation, but for the REIT provisions of the U.S. federal income tax laws.
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4.
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It is neither a financial institution nor an insurance company subject to special provisions of the U.S. federal income tax laws.
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5.
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At least 100 persons are beneficial owners of its shares or ownership certificates.
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6.
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Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the U.S. federal income tax laws define to include certain entities,
during the last half of any taxable year. For purposes of this requirement, indirect ownership will be determined by applying attribution rules set out in section 544 of the Code, as modified by section 856(h) of the Code.
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7.
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It elects to be taxed as a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements that must be met to elect and maintain REIT qualification.
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8.
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It meets certain other qualification tests, described below, regarding the nature of its income and assets.
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We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of
twelve months, or during a proportionate part of a taxable year of less than twelve months. If we comply with all the requirements for ascertaining the ownership of our outstanding stock in a taxable year and have no reason to know that we violated
requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. For purposes of determining share ownership under requirement 6, an individual generally includes a supplemental unemployment compensation benefits
plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An individual generally does not include a trust that is a qualified employee pension or profit sharing trust under
the U.S. federal income tax laws, however, and beneficiaries of such a trust will be treated as owning our stock in proportion to their actuarial interests in the trust for purposes of requirement 6.
We believe that we have and have always had sufficient diversity of ownership to satisfy requirements 5 and 6. In addition, our charter
restricts the ownership and transfer of our stock so that we should continue to satisfy these requirements.
To monitor compliance with
the share ownership requirements, we generally are 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 shares (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
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 your actual ownership of our shares and other information. In addition, we must satisfy all relevant filing and other administrative requirements that must be met to elect and maintain REIT qualification and use a calendar
year for U.S. federal income tax purposes. We intend to continue to comply with these requirements.
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Subsidiary Entities
Qualified REIT Subsidiaries
A corporation that is a qualified REIT subsidiary is not treated as a corporation separate from its parent REIT. All assets,
liabilities, and items of income, deduction and credit of a qualified REIT subsidiary are treated as assets, liabilities, and items of income, deduction and credit of the REIT, including for purposes of the gross income and asset tests applicable to
REITs (see Gross Income Tests and Asset Tests). A qualified REIT subsidiary is a corporation, other than a TRS, all of the capital stock of which is owned, directly or indirectly, by the REIT. Thus, in applying
the requirements described herein, any qualified REIT subsidiary that we own will be ignored, and all assets, liabilities, and items of income, deduction and credit of such subsidiary will be treated as our assets, liabilities, and items of income,
deduction and credit.
Other Disregarded Entities and Partnerships
An unincorporated domestic entity, such as a partnership, limited liability company, or trust that has a single owner generally is not treated
as an entity separate from its parent for U.S. federal income tax purposes, including for purposes of the gross income and asset tests applicable to REITs. An unincorporated domestic entity with two or more owners generally is treated as a
partnership for U.S. federal income tax purposes. Our proportionate share of the assets, liabilities, and items of income of any partnership, joint venture or limited liability company that is treated as a partnership for U.S. federal income tax
purposes in which we acquire an interest, directly or indirectly, will be treated as our assets and gross income for purposes of applying the various REIT qualification requirements. For purposes of the 10% value test (see Asset
Tests), our proportionate share is based on our proportionate interest in the equity interests and certain debt securities issued by the partnership. For all of the other asset and income tests, our proportionate share is based on our
proportionate interest in the capital interests in the partnership.
If a disregarded subsidiary of ours ceases to be
wholly-ownedfor example, if any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of oursthe subsidiarys separate existence would no longer be disregarded for U.S. federal
income tax purposes. Instead, the subsidiary 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
Gross Income Tests.
Taxable REIT Subsidiaries
A REIT is permitted to own up to 100% of the stock of one or more TRSs. A TRS is a fully taxable corporation that may earn income that would
not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation with respect to which a TRS directly or indirectly owns more than 35% of the voting power
or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% beginning in 2018) of the value of a REITs assets may consist of stock or securities of one or more TRSs.
The separate existence of a TRS or other taxable corporation, unlike a qualified REIT subsidiary or other disregarded subsidiary as discussed
above, is not ignored for U.S. federal income tax purposes. Accordingly, a domestic TRS would generally be subject to U.S. federal income tax (and applicable state and local taxes) on its earnings, which may reduce 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 subsidiary is an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if
any, that it receives from the subsidiary. This treatment can affect the gross income and asset test calculations that apply to the REIT, as described below. Because
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a parent REIT does not include the assets and income of such subsidiary corporations in determining the parents 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 indirectly through pass-through subsidiaries.
Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income
taxation. If a TRS that has for any taxable year both (i) a debt-to-equity ratio in excess of 1.5 to 1 and (ii) accrued interest expense in excess of accrued interest income, then the TRS may be denied an interest expense deduction for a portion of
the interest expense accrued on indebtedness owed to the parent REIT (although the TRS can carry forward the amount disallowed to subsequent taxable years). In addition, if amounts are paid to a REIT or deducted by a TRS due to transactions between
the REIT and a TRS that exceed the amount that would be paid to or deducted by a party in an arms-length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess. We intend to scrutinize all of our
transactions with any of our subsidiaries that are treated as a TRS in an effort to ensure that we do not become subject to this excise tax; however, we cannot assure you that we will be successful in avoiding this excise tax.
Gross Income Tests
We must satisfy two
gross income tests annually to maintain qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive from investments relating to real property or mortgages on real
property, or from qualified temporary investments. Qualifying income for purposes of the 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by a mortgage on real property or on interests in real property;
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dividends or other distributions on, and gain from the sale of, shares in other REITs;
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gain from the sale of real property (including interests in real property and interests in mortgages on real property) other than property held for sale to customers in the ordinary course of a trade or business;
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any amount includible in gross income with respect to a regular or residual interest in a REMIC, unless less than 95% of the REMICs assets are real estate assets, in which case only a proportionate amount of such
income will qualify; and
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income derived from certain temporary investments.
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Second, in general, at least 95% of our
gross income for each taxable year must consist of some combination of income that is qualifying income for purposes of the 75% gross income test and other types of interest and dividends, or gain from the sale or disposition of stock or securities
(provided that such stock or securities are not property held primarily for sale to customers in the ordinary course of business).
Gross
income from the sale of property held for sale to customers in the ordinary course of a trade or business is excluded from both the numerator and the denominator in both income tests. Income and gain from hedging transactions that we enter into to
hedge indebtedness incurred or to be incurred to acquire or carry real estate assets will generally be excluded from both the numerator and the denominator for purposes of the 95% gross income test and the 75% gross income test. We intend to monitor
the amount of our non-qualifying income and manage our investment portfolio to comply at all times with the gross income tests but we cannot assure you that we will be successful in this effort.
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Interest
The term interest, as defined for purposes of both gross income tests, generally excludes any amount that is based in whole or in
part on the income or profits of any person. However, interest generally includes the following: (i) an amount that is based on a fixed percentage or percentages of gross receipts or sales and (ii) an amount that is based on the income or profits of
a borrower, where the borrower derives substantially all of its income from the real property securing the debt by leasing substantially all of its interest in the property, but only to the extent that the amounts received by the borrower would be
qualifying rents from real property if received directly by a REIT.
If a loan contains a provision that entitles a REIT to a
percentage of the borrowers gain upon the sale of the real property securing the loan or a percentage of the appreciation in the propertys value as of a specific date, income attributable to that loan provision will be treated as gain
from the sale of the property securing the loan, which generally is qualifying income for purposes of both gross income tests, provided that the property is not held as inventory or dealer property.
Interest, including original issue discount and market discount, on debt secured by a mortgage on real property or on interests in real
property is generally qualifying income for purposes of the 75% gross income test. Where a mortgage covers both real property and other property, an apportionment of interest income must be made for purposes of the 75% gross income test. If a
mortgage covers both real property and other property and the fair market value of the real property securing the mortgage loan at the time we commit to originate or acquire the mortgage loan equals or exceeds the highest principal amount of the
loan during the year, then all of the interest we accrue on the mortgage loan will qualify for purposes of the 75% gross income test. If, however, the value of the real property were less than the highest principal amount, then only a portion of the
interest income we accrue on the mortgage loan would qualify for purposes of the 75% gross income test; such portion based on the percentage equivalent of a fraction, the numerator of which is the fair market value of the real property and the
denominator of which is the principal amount of the mortgage loan.
Interest, including original issue discount or market discount, that
we accrue on our real estate-related investments generally will be qualifying income for purposes of both gross income tests. Interest income from investments that are not secured by mortgages on real property will be qualifying income for purposes
of the 95% gross income test but not the 75% gross income test.
Mortgage-Backed Securities
We have acquired and expect to continue to acquire MBS, including Agency MBS, that will be treated either as interests in a grantor trust or as
REMIC regular interests. We expect that all income from the MBS in which we invest will be qualifying income for purposes of the 95% gross income test. In the case of interests in grantor trusts, we will be treated as owning an undivided beneficial
ownership interest in the mortgage loans held by the grantor trust. Thus, to the extent those mortgage loans are secured by real property or interests in real property, the income from the grantor trust will be qualifying income for purposes of the
75% gross income test. Income that we accrue with respect to REMIC regular interests will generally be treated as qualifying income for purposes of the 75% gross income tests. If, however, less than 95% of the assets of the REMIC are real estate
assets, then only a proportionate part of such income will qualify for purposes of the 75% gross income test. We expect that substantially all of the income we have accrued and will accrue on our investments in MBS, and any gain from the disposition
of MBS, will be qualifying income for purposes of the both the 75% and the 95% gross income tests.
Foreign Currency Gains
Certain foreign currency gains recognized after July 30, 2008 are excluded from gross income for purposes of one or both of the gross income
tests. Real estate foreign exchange gain is 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
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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.
Fee Income
We may receive various fees in connection with our operations. The fees will be qualifying income for purposes of both the 75% gross income and
95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by a mortgage on real property or an interest in real property and the fees are not determined by income or profits of any person.
Other fees are not qualifying income for purposes of either gross income test. Any fees earned by our TRS will not be included for purposes of the gross income tests.
Dividends
Our share of any
dividends received from any corporation (including any TRS, but excluding any qualified REIT subsidiary) in which we own an equity interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. Our
share of any dividends received from any other REIT in which we own an equity interest will be qualifying income for purposes of both gross income tests.
Failure to Satisfy Gross Income Tests
We have monitored and will continue to monitor the amount of our non-qualifying income and manage our assets to comply with the gross income
tests for each taxable year for which we seek to maintain our REIT qualification. We cannot assure you, however, that we will be able to satisfy the gross income tests. If we fail to satisfy one or both of the gross income tests for any taxable
year, we may nevertheless qualify as a REIT for such year if we qualify for relief under certain provisions of the Code. These relief provisions will be generally available if (i) our failure to meet such tests was due to reasonable cause and not
due to willful neglect, and (ii) we file with the IRS a schedule describing the sources of our gross income in accordance with Treasury regulations. We cannot predict, however, whether in all circumstances, we would qualify for the benefit of these
relief provisions. In addition, as discussed above under Federal Income Tax Considerations Relating to Our Treatment as a REIT, even if the relief provisions apply, a tax would be imposed upon the amount by which we fail to satisfy
the particular gross income test.
In addition, 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.
Cash/Income Differences Phantom Income
Due to the nature of the assets in which we will invest, we may be required to recognize taxable income from those assets in advance of our
receipt of cash flow on or proceeds from disposition of such assets, and may be required to report taxable income in early periods that exceeds the economic income ultimately realized on such assets.
We may acquire MBS in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may
reflect doubts about their ultimate collectibility rather than current market interest rates. The amount of such discount will nevertheless generally be treated as market discount for U.S. federal income tax purposes. Payments on
mortgage loans are ordinarily made monthly, and consequently accrued market discount generally will have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt
instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.
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Some of the MBS that we acquire may have been issued with original issue discount. In general, we
will be required to accrue original issue discount based on the constant yield to maturity of the MBS, and to treat the accrued original issue discount as taxable income in accordance with applicable U.S. federal income tax rules even though smaller
or no cash payments are received on such debt instrument. As in the case of the market discount discussed in the preceding paragraph, the constant yield in question will be determined and we will be taxed based on the assumption that all future
payments due on the MBS in question will be made, with consequences similar to those described in the previous paragraph if all payments on the MBS are not made.
In addition, if any debt instruments or MBS acquired by us are delinquent as to mandatory principal and interest payments, or if payments with
respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income. Similarly, we may be required to accrue interest income with respect to subordinate MBS at
the stated rate regardless of whether corresponding cash payments are received.
Finally, we may be required under the terms of
indebtedness that we incur, whether to private lenders or pursuant to government programs, to use cash received from interest payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a
corresponding amount of cash available for distribution to our shareholders.
Due to each of these potential timing differences between
income recognition or expense deduction and the related cash receipts or disbursements, there is a significant risk that we may have substantial taxable income in excess of cash available for distribution. In that event, we may need to borrow funds
or take other actions to satisfy the REIT distribution requirements for the taxable year in which this phantom income is recognized. See Annual Distribution Requirements.
Asset Tests
To qualify as a REIT, we
also must satisfy the following asset tests at the end of each quarter of each taxable year. First, at least 75% of the value of our total assets must consist of some combination of real estate assets, cash, cash items, government
securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, the term real estate assets includes interests in real property (including leaseholds and options to acquire real property
and leaseholds), stock of other corporations that qualify as REITs and interests in mortgage loans secured by real property (including certain types of mortgage backed securities). Assets that do not qualify for purposes of the 75% test are subject
to the additional asset tests described below.
Second, the value of our interest in any one issuers securities (other than debt and
equity securities issued by any of our TRSs, qualified REIT subsidiaries, any other entity that is disregarded as an entity separate from us, and any equity interest we may hold in a partnership) may not exceed 5% of the value of our total assets.
Third, we may not own more than 10% of the voting power or 10% of the value of any one issuers outstanding securities (other than debt and equity securities issued by any of our TRSs, qualified REIT subsidiaries, any other entity that is
disregarded as an entity separate from us, and any equity interest we may hold in a partnership). Solely for purposes of the 10% asset test, the determination of our interest in the assets of a partnership or limited liability company in which we
own an interest will be based on our proportionate interest in any securities issued by the partnership or limited liability company, excluding for this purpose certain securities described in the Code. Fourth, no more than 25% of the value of our
total assets may consist of the securities of one or more TRSs. For purposes of the 10% value test, the term securities does not include certain straight debt securities.
Notwithstanding the general rule that, for purposes of the gross income and asset tests, a REIT is treated as owning its proportionate share
of the underlying assets of a partnership in which it holds a partnership interest, if a REIT holds indebtedness issued by a partnership, the indebtedness will be subject to, and may cause a violation of the asset tests, unless it is a qualifying
mortgage asset or otherwise satisfies the rules for straight debt. Similarly, although stock of another REIT qualifies as a real estate asset for purposes of the REIT asset tests, non-mortgage debt issued by another REIT may not so
qualify (such debt, however, will not be treated as a security for purposes of the 10% asset test).
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Certain securities will not cause a violation of the 10% asset test described above. Such
securities include instruments that constitute straight debt, which includes, 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 issuers outstanding securities. In
addition to straight debt, the Code provides that certain other securities will not violate the 10% asset test. Such securities include (i) any loan made to an individual or an estate, (ii) certain rental agreements pursuant to 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), (iii) any obligation to pay rents from real property, (iv) 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, (v) any security (including debt securities) issued by another REIT, and (vi) any debt instrument issued by a partnership if the
partnerships income is of a nature that it would satisfy the 75% gross income test described above under Gross Income Tests. In applying the 10% asset test, a debt security issued by a partnership is not taken into account
to the extent, if any, of the REITs proportionate interest in the equity and certain debt securities issued by that partnership.
We
intend to acquire and manage MBS that are either interests in grantor trusts or REMIC regular interests. In the case of interests in grantor trusts, we will be treated as owning an undivided beneficial ownership interest in the mortgage loans held
by the grantor trust, and we will be treated as owning an interest in real estate assets to the extent those mortgage loans held by the grantor trust represent real estate assets. In the case of REMIC regular interests, such regular interests will
generally qualify as real estate assets. If, however, less than 95% of the REMICs assets are real estate assets, then only a proportionate part of the regular interest will be a real estate asset. We expect that substantially all of the MBS we
acquire will be treated as real estate assets.
In addition, we have and expect to continue to enter into repurchase agreements under
which we will nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the owner of the assets that
are the subject of any such repurchase agreement and the repurchase agreement will be treated as a secured lending transaction notwithstanding that we may transfer record ownership of the assets to the counterparty during the term of the agreement.
It is possible, however, that the IRS could successfully assert that we did not own the assets during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.
We have monitored and will continue to monitor the status of our assets for purposes of the various asset tests and will seek to manage our
portfolio to comply at all times with such tests. There can be no assurance, however, that we will be successful in this effort. In this regard, to determine our compliance with these requirements, we will need to estimate the value of our assets to
ensure compliance with the asset tests. We will not obtain independent appraisals to support our conclusions concerning the values of our assets. Moreover, some of the assets that we may own may not be susceptible to precise valuation. Although we
will seek to be prudent in making these estimates, there can be no assurance that the IRS will not disagree with these determinations and assert that a different value is applicable, in which case we might not satisfy the 75% asset test and the
other asset tests and would fail to qualify as a REIT.
Failure to Satisfy Asset Tests
If we fail to satisfy the asset tests as the end of a quarter, we will not lose our REIT qualification if:
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we satisfied the asset tests at the end of the preceding calendar quarter; and
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the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying
assets.
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If we did not satisfy the condition described in the second bullet above, we still could avoid
disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.
If we violate
the 5% value test, 10% voting test or 10% value test described above at the end of any calendar quarter, we will not lose our REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of our total assets or $10 million) and (ii) we
dispose of these assets or otherwise comply with the asset tests within six months after the last day of the quarter. In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to reasonable cause and
not to willful neglect, we will not lose our REIT qualification if we (i) file with the IRS a schedule describing the assets that caused the failure, (ii) dispose of these assets or otherwise comply with the asset tests within six months after the
last day of the quarter and (iii) pay a tax equal to the greater of $50,000 per failure or an amount equal to the product of the highest corporate income tax rate (currently 35%) and the net income from the non-qualifying assets during the period in
which we failed to satisfy the asset tests.
Annual Distribution Requirements
To qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least
equal to:
(A) the sum of
(i) 90% of our REIT taxable income (computed without regard to the dividends paid deduction and our net capital
gains), and
(ii) 90% of the net income (after tax), if any, from foreclosure property (as described below), minus
(B) the sum of certain items of non-cash income.
In addition, if we were to recognize built-in-gain (as defined below) on disposition of any assets acquired from a C
corporation in a transaction in which our basis in the assets was determined by reference to the C corporations basis (for instance, if the assets were acquired in a tax-free reorganization), we would be required to distribute at
least 90% of the built-in-gain recognized net of the tax we would pay on such gain. Built-in-gain is the excess of (a) the fair market value of an asset (measured at the time of acquisition) over (b) the basis of the asset (measured at
the time of acquisition).
Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if
either (i) we declare the distribution before we file a timely U.S. federal income tax return for the year and pay the distribution with or before the first regular dividend payment after such declaration or (ii) we declare the distribution in
October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and we actually pay the dividends before the end of January of the following year. The distributions under clause (i) are
taxable to the Owners of our common stock in the year in which paid, and the distributions in clause (ii) are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate to our prior taxable year for
purposes of the 90% distribution requirement.
For distributions to be counted as satisfying the annual distribution requirements for
REITs, and to provide us with a REIT-level tax deduction, the distributions must not be preferential dividends. A dividend is not a preferential dividend if the distribution is (i) pro rata among all outstanding shares of stock within a
particular class, and (ii) in accordance with the preferences among different classes of stock as set forth in our organizational documents.
We will pay U.S. federal income tax at corporate tax rates on our taxable income, including net capital gain that we do not distribute to
stockholders. Furthermore, if we fail to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year,
at least the sum of (i) 85% of our REIT ordinary income for such year,
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(ii) 95% of our REIT capital gain income for such year and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. We generally intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid corporate U.S. federal income tax and the 4% nondeductible
excise tax.
We may elect to retain rather than distribute our net capital gain and pay tax on such gains. In this case, we could elect to
have our stockholders include their proportionate share of such undistributed capital gains in income and to receive a corresponding credit or refund, as the case may be, for their share of the tax paid by us. Stockholders would then increase the
adjusted basis of their stock by the difference between the designated amounts of capital gains from us that they include in their taxable income, and the tax paid on their behalf by us with respect to that income.
To the extent that a REIT has available net operating losses carried forward from prior tax years, such losses may reduce the amount of
distributions that it must make 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, which are
generally taxable to stockholders to the extent that the REIT has current or accumulated earnings and profits. See Taxation of Owners Taxation of Taxable Domestic Owners.
We may find it difficult or impossible to meet distribution requirements in certain circumstances. Due to the nature of the assets in which we
will invest, we may be required to recognize taxable income from those assets in advance of our receipt of cash flow on or proceeds from disposition of such assets. For instance, we may be required to accrue interest and discount income on mortgage
loans, mortgage backed securities, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on such assets. Moreover, in certain instances we may be required to accrue taxable income
that we may not actually recognize as economic income. For example, if we own a residual equity position in a mortgage loan securitization, we may recognize taxable income that we will never actually receive due to losses sustained on the underlying
mortgage loans. Although those losses would be deductible for tax purposes, they would likely occur in a year subsequent to the year in which we recognized the taxable income. Thus, for any taxable year, we may be required to fund distributions in
excess of cash flow received from our investments. If such circumstances arise, then to fund our distribution requirement and maintain our status as a REIT we may have to sell assets at unfavorable prices, borrow at unfavorable terms, make taxable
stock dividends, or pursue other strategies. We cannot be assured, however, that any such strategy would be successful if our cash flow were to become insufficient to make the required distributions. Alternatively, we may declare a taxable dividend
payable in cash or stock at the election of each stockholder, where the aggregate amount of cash to be distributed in such dividend may be subject to limitation. In such case, for U.S. federal income tax purposes, the amount of the dividend paid in
stock will be equal to the amount of cash that could have been received instead of stock.
Under certain circumstances, we may be able to
rectify a failure to meet the distribution requirement for a year by paying deficiency dividends to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to
avoid being taxed on amounts distributed as deficiency dividends; however, we will be required to pay interest and a penalty to the IRS based on the amount of any deduction taken for deficiency dividends.
Failure to Qualify
If we fail to satisfy
one or more requirements for REIT qualification, other than the gross income tests and the asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each
such failure. In addition, there are relief provisions for a failure of the gross income tests and asset tests, as described in Gross Income Tests and Asset Tests.
If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be subject to tax (including
any applicable alternative minimum tax) on our taxable income at regular federal corporate income tax rates. Distributions to stockholders in any year in which we fail to qualify will not be deductible by us nor will they be required to be made. In
such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and, subject to certain limitations of the Code, corporate stockholders may be eligible for the
dividends received deduction, and individual
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stockholders and other non-corporate stockholders may be eligible to be taxed at the reduced 23.8% rate currently applicable to qualified dividend income. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. We cannot predict whether in all circumstances we would be entitled to such statutory
relief.
Prohibited Transactions
Net
income derived by a REIT from a prohibited transaction is subject to a 100% excise 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. Although we do not expect that our assets will be held primarily for sale to customers, these terms are dependent upon the particular facts and circumstances,
and we cannot assure you that we will never be subject to this excise tax. The 100% tax does 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 federal corporate income tax rates. We intend to structure our activities to avoid transactions that are prohibited transactions.
Foreclosure Property
A REIT is subject
to tax at the maximum corporate rate (currently 35%) on any income from foreclosure property, including gain from the disposition of such foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross
income test. Foreclosure property is real property and any personal property incident to such real property (i) that is acquired by a REIT as result of the REIT having bid on such 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 such 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. Any gain from the sale of property for which a foreclosure election has
been made will not be subject to the 100% excise 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. We do not expect to receive
income from foreclosure property that is not qualifying income for purposes of the 75% gross income test. However, if we do receive any such income, we intend to make an election to treat the related property as foreclosure property.
Derivatives and Hedging Transactions
We
and our subsidiaries may enter into hedging transactions with respect to interest rate exposure on one or more of our 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 we enter into (i) in the normal
course of our business primarily to manage risk of interest rate or price 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,
which is clearly identified as specified in Treasury regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, and (ii) 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% income tests (or any asset that produces such income) which is clearly identified as such before the close of the day on which
it was acquired, originated, or entered into, will not constitute gross income for purposes of the 75% or 95% gross income test. 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 of the 75% and 95% gross income 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 (including hedging activities relating to currency risk) 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.
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Taxable Mortgage Pools
An entity, or a portion of an entity, may be classified as a TMP under the Code if (i) substantially all of its assets consist of debt
obligations or interests in debt obligations, (ii) more than 50% of those debt obligations are real estate mortgage loans, interests in real estate mortgage loans or interests in certain MBS as of specified testing dates, (iii) the entity has issued
debt obligations that have two or more maturities and (iv) the payments required to be made by the entity on its debt obligations 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) consists 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.
We may structure or enter into securitization or financing transactions that will
cause us to be viewed as owning interests in one or more TMPs. Generally, if an entity or a portion of an entity is classified as a TMP, then the entity or portion thereof is treated as a taxable corporation and it cannot file a consolidated U.S.
federal income tax return with any other corporation. If, however, a REIT owns 100% of the equity interests in a TMP, then the TMP is a qualified REIT subsidiary and, as such, ignored as an entity separate from the REIT.
As long as we owned 100% of the equity interests in the TMP, all or a portion of the income that we recognize with respect to our investment
in the TMP will be treated as excess inclusion income. Section 860E(c) of the Code defines the term excess inclusion with respect to a residual interest in a REMIC. The IRS, however, has yet to issue guidance on the computation of excess
inclusion income on equity interests in a TMP held by a REIT. Generally, however, excess inclusion income with respect to our investment in any TMP and any taxable year will equal the excess of (i) the amount of income we accrue on our investment in
the TMP over (ii) the amount of income we would have accrued if our investment were a debt instrument having an issue price equal to the fair market value of our investment on the day we acquired it and a yield to maturity equal to 120% of the
long-term applicable federal rate in effect on the date we acquired our interest. The term applicable federal rate refers to rates that are based on weighted average yields for treasury securities and are published monthly by the IRS for
use in various tax calculations. If we undertake securitization transactions that are TMPs, the amount of excess inclusion income we recognize in any taxable year could represent a significant portion of our total taxable for that year.
If we recognized excess inclusion income, then under guidance issued by the IRS we would be required to allocate the excess inclusion income
proportionately among the dividends we pay to our stockholders and we must notify our stockholders of the portion of our dividends that represents excess inclusion income. The portion of any dividend you receive that is treated as excess inclusion
income is subject to special rules. First, your taxable income can never be less than the sum of your excess inclusion income for the year; excess inclusion income cannot be offset with net operating losses or other allowable deductions. Second, if
you are a tax-exempt organization and your excess inclusion income is subject to the unrelated business income tax, then the excess inclusion portion of any dividend you receive will be treated as unrelated business taxable income. Third, dividends
paid to Foreign Owners who hold stock for investment and not in connection with a trade or business conducted in the United States will be subject to United States federal withholding tax without regard to any reduction in rate otherwise allowed by
any applicable income tax treaty.
If we recognize excess inclusion income, and one or more Disqualified Organizations are record holders
of shares of common stock, we will be taxable at the highest federal corporate income tax rate on the portion of any excess inclusion income equal to the percentage of our stock that is held by Disqualified Organizations. In such circumstances, we
may reduce the amount of our distributions to a Disqualified Organization whose stock ownership gave rise to the tax. To the extent that our common stock owned by Disqualified Organizations is held by a broker/dealer or other nominee, the
broker/dealer or other nominee would be liable for a tax at the highest corporate tax rate on the portion of our excess inclusion income allocable to our common stock held by the broker/dealer or other nominee on behalf of the Disqualified
Organizations.
If we own less than 100% of the equity interests in a TMP, the foregoing rules would not apply. Rather, the TMP would be
treated as a corporation for U.S. federal income tax purposes and would potentially be subject to federal corporate income tax. This could adversely affect our compliance with the REIT gross income and asset tests described above. We currently do
not have, and currently do not intend to enter into any securitization or financing transaction that is a TMP in which we own some, but less than all, of the equity interests, and we intend to monitor the structure of any TMPs in which we have an
interest to ensure that they will not adversely affect our status as a REIT. We cannot assure you that we will be successful in this regard.
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Taxation of Owners
Taxation of Taxable Domestic Owners
Distributions
. As long as we qualify as a REIT, distributions we make to our taxable Domestic Owners out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income. Dividends we pay to a corporation will not be eligible for the dividends received deduction. In addition, distributions we
make to individuals and other Owners that are not corporations generally will not be eligible for the 23.8% reduced rate of tax in effect for qualified dividend income. However, provided certain holding period and other requirements are
met, an individual or other non-corporate Owner will be eligible for the 23.8% reduced rate with respect to (i) distributions attributable to dividends we receive from certain C corporations, such as our TRSs, and (ii) distributions
attributable to income upon which we have paid corporate income tax.
Distributions that we designate as capital gain dividends will be
taxed as long-term capital gains (to the extent that they do not exceed our actual net capital gain for the taxable year) without regard to the period for which you have owned our common stock. Long-term capital gains are generally taxable at
maximum federal rates of 23.8% in the case of individuals, trusts and estates, and 35% in the case of corporations.
Rather than
distribute our net capital gains, we may elect to retain and pay the U.S. federal income tax on them, in which case you will (i) include your proportionate share of the undistributed net capital gains in income, (ii) receive a credit for your
share of the U.S. federal income tax we pay and (iii) increase the basis in your common stock by the difference between your share of the capital gain and your share of the credit.
Distributions in excess of our current and accumulated earnings and profits will not be taxable to you to the extent that they do not exceed
your adjusted tax basis in our common stock you own, but rather, will reduce your adjusted tax basis in your common stock. Assuming that the common stock you own is a capital asset, to the extent that such distributions exceed your adjusted tax
basis in the common stock you own, you must include them in income as long-term capital gain (or short-term capital gain if the common stock has been held for one year or less). 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.
If we declare a dividend in October, November or December of any year that is payable to stockholders of record on a specified date in any
such month, but actually distribute the amount declared in January of the following year, then you must treat the January distribution as though you received it on December 31 of the year in which we declared the dividend. In addition, we may
elect to treat other distributions after the close of the taxable year as having been paid during the taxable year, but you will be treated as having received these distributions in the taxable year in which they are actually made.
To the extent that we have available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the
amount of distributions that we must make to comply with the REIT distribution requirements. See Annual Distribution Requirements. Such losses, however, are not passed through to you and do not offset your income from other
sources, nor would they affect the character of any distributions that you receive from us; you will be subject to tax on those distributions to the extent that we have current or accumulated earnings and profits.
If we did recognize excess inclusion income, we would identify a portion of the distributions that we make to you as excess inclusion income.
Your taxable income can never be less than the sum of your excess inclusion income for the year; excess inclusion income cannot be offset with net operating losses or other allowable deductions. See Taxable Mortgage Pools.
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Dispositions of Our Stock.
Any gain or loss you recognize upon the sale or other
disposition of our common stock will generally be capital gain or loss for U.S. federal income tax purposes, and will be long-term capital gain or loss if you held the common stock for more than one year. In addition, any loss you recognize upon a
sale or exchange of our common stock that you have owned for twelve months or less (after applying certain holding period rules) will generally be treated as a long-term capital loss to the extent of distributions received from us that you are
required to treat as long-term capital gain.
If you recognize a loss upon a disposition of our common stock in an amount that exceeds a
prescribed threshold, it is possible that the provisions of recently adopted Treasury regulations involving reportable transactions could apply, with a resulting requirement to separately disclose the loss-generating transaction to the
IRS. While these regulations are directed towards tax shelters, they are written quite broadly, and apply to transactions that would not typically be considered tax shelters. In addition, recently enacted legislation imposes significant
penalties for failure to comply with these requirements. You should consult your tax advisor concerning any possible disclosure obligation with respect to the receipt or disposition of our common stock, or transactions that might be undertaken
directly or indirectly by us. Moreover, you should be aware that we and other participants in the transactions involving us (including our advisors) may be subject to disclosure or other requirements pursuant to these regulations.
Amounts that you are required to include in taxable income with respect to our common stock you own, including taxable distributions and the
income you recognize with respect to undistributed net capital gain, and any gain recognized upon your disposition of our common stock, will not be treated as passive activity income. You may not offset any passive activity losses you may have, such
as losses from limited partnerships in which you have invested, with income you recognize with respect to our shares of common stock. Generally, income you recognize with respect to our common stock will be treated as investment income for purposes
of the investment interest limitations.
Information Reporting and Backup Withholding.
We will report to our stockholders and to
the IRS the amount of distributions we pay during each calendar year and the amount of tax we withhold, if any. Under the backup withholding rules, you may be subject to backup withholding at a current rate of 28% with respect to distributions
unless you:
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are a corporation or come within certain other exempt categories and, when required, demonstrate this fact; or
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provide a taxpayer identification number, certify as to no loss of exemption from backup withholding, and otherwise comply with the applicable requirements of the backup withholding rules.
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Any amount paid as backup withholding will be creditable against your income tax liability. For a discussion of the backup withholding rules
as applied to foreign owners, see Taxation of Foreign Owners.
Taxation of Tax-Exempt Owners
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, are generally exempt
from U.S. federal income taxation. However, they are subject to taxation on their unrelated business taxable income (UBTI). Provided that a tax-exempt Owner (i) has not held our common stock as debt financed property within
the meaning of the Code and (ii) has not used our common stock in an unrelated trade or business, amounts that we distribute to tax-exempt Owners generally should not constitute UBTI. To the extent that we are (or a part of us, or a disregarded
subsidiary of ours is) a TMP, a portion of the dividends paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as UBTI. If, however, excess inclusion income is allocable to some categories of tax-exempt
stockholders that are not subject to UBTI, we might be subject to corporate level tax on such income, and, in that case, may reduce the amount of distributions to those stockholders whose ownership gave rise to the tax. However, a tax-exempt
Owners allocable share of any excess inclusion income that we recognize will be subject to tax as UBTI. See Taxable Mortgage Pools. As required by IRS guidance, we intend to notify our stockholders if a portion of a dividend
paid by us is attributable to excess inclusion income.
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Tax-exempt Owners that are social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans, exempt from taxation under special provisions of the U.S. federal income tax laws, are subject to different UBTI rules, which generally will require them to characterize
distributions that they receive from us as UBTI.
In certain circumstances, a qualified employee pension trust or profit sharing trust
that owns more than 10% of our stock could be required to treat a percentage of the dividends that it receives from us as UBTI if we are a pension-held REIT. We will not be a pension-held REIT unless either (a) one pension trust owns
more than 25% of the value of our stock or (b) a group of pension trusts individually holding more than 10% of our stock collectively owns more than 50% of the value of our stock. However, the restrictions on ownership and transfer of our stock are
designed, among other things, to prevent a tax-exempt entity from owning more than 10% of the value of our stock, thus making it unlikely that we will become a pension-held REIT.
Taxation of Foreign Owners
The following
is a summary of certain U.S. federal income and estate tax consequences of the ownership and disposition of our common stock applicable to a Foreign Owner.
If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds our
common stock, 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 having Foreign Owners as partners should consult its tax
advisors about the U.S. federal income tax consequences of the acquisition, ownership and disposition of our common stock.
This
discussion is based on current law and is for general information only. This discussion addresses only certain and not all aspects of U.S. federal income and estate taxation.
General
. For most foreign investors, investment in a REIT that invests principally in mortgage loans and MBS is not the most
tax-efficient way to acquire and manage, through our subsidiaries, such assets. That is because receiving distributions of income derived from such assets in the form of REIT dividends subjects most foreign investors to withholding taxes that direct
investment in those asset classes, and the direct receipt of interest and principal payments with respect to them, would not. The principal exceptions are foreign sovereigns and their agencies and instrumentalities, which may be exempt from
withholding taxes on REIT dividends under the Code, and certain foreign pension funds or similar entities able to claim an exemption from withholding taxes on REIT dividends under the terms of a bilateral tax treaty between their country of
residence and the United States.
Ordinary Dividend Distributions.
The portion of dividends received by a Foreign Owner payable out
of our current and accumulated earnings and profits that are not attributable to our capital gains and that are not effectively connected with a U.S. trade or business of the Foreign Owner will be subject to U.S. withholding tax at the rate of 30%
(unless reduced by an applicable income tax treaty). In general, a Foreign Owner will not be considered engaged in a U.S. trade or business solely as a result of its ownership of our common stock. In cases where the dividend income from a Foreign
Owners investment in our common stock is (or is treated as) effectively connected with the Foreign Owners conduct of a U.S. trade or business, the Foreign Owner generally will be subject to U.S. tax at graduated rates, in the same manner
as Domestic Owners are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a foreign owner that is a foreign corporation). If a Foreign Owner is the record holder of shares of our common stock,
we plan to withhold U.S. income tax at the rate of 30% on the gross amount of any distribution paid to a Foreign Owner unless:
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a lower income treaty rate applies and the Foreign Owner provides us with an IRS Form W-8BEN evidencing eligibility for that reduced rate; or
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the Foreign Owner provides us with an IRS Form W-8ECI certifying that the distribution is effectively connected income.
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Under some income tax treaties, lower withholding tax rates do not apply to ordinary dividends
from REITs. Furthermore, reduced treaty rates are not available to the extent that distributions are treated as excess inclusion income. See Taxable Mortgage Pools. As required by IRS guidance, we intend to notify our stockholders
if a portion of a dividend paid by us is excess inclusion income.
Non-Dividend Distributions.
Distributions we make to a Foreign
Owner that are not considered to be distributions out of our current and accumulated earnings and profits will not be subject to U.S. federal income or withholding tax unless the distribution exceeds the Foreign Owners adjusted tax basis in
our common stock at the time of the distribution and, as described below, the Foreign Owner would otherwise be taxable on any gain from a disposition of our common stock. If it cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of our current and accumulated earnings and profits, the entire distribution will be subject to withholding at the rate applicable to dividends. A Foreign Owner may, however, seek a refund of such amounts from the
IRS if it is subsequently determined that the distribution was, in fact, in excess of our current and accumulated earnings and profits, provided the proper forms are timely filed with the IRS by the Foreign Owner.
Capital Gain Dividends.
Distributions that we make to Foreign Owners that are attributable to our disposition of U.S. real property
interests (USRPI, which term does not include interests in mortgage loans and mortgage backed securities) are subject to U.S. federal income and withholding taxes pursuant to the Foreign Investment in Real Property Act of 1980, or
FIRPTA, and may also be subject to branch profits tax if the Foreign Owner is a corporation that is not entitled to treaty relief or exemption. Although we do not anticipate recognizing any gain attributable to the disposition of USRPI, as defined
by FIRPTA, Treasury regulations interpreting the FIRPTA provisions of the Code could be read to impose a withholding tax at a rate of 35% on all of our capital gain dividends (or amounts we could have designated as capital gain dividends) paid to
Foreign Owners, even if no portion of the capital gains we recognize during the year are attributable to our disposition of USRPI. However, in any event, the FIRPTA rules will not apply to distributions to a Foreign Owner so long as (i) our common
stock is regularly traded (as defined by applicable Treasury regulations) on an established securities market, and (ii) the Foreign Owner owns (actually or constructively) no more than 10% of our common stock at any time during the one-year period
ending with the date of the distribution.
Dispositions of Our Stock.
Unless our common stock constitutes a USRPI, a sale of our
common stock by a Foreign Owner generally will not be subject to U.S. federal income tax under FIRPTA. We do not expect that our common stock will constitute a USRPI. Our common stock will not constitute 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, interest in real property solely in the capacity as a creditor. Even if the foregoing test is not met, our
common stock will not constitute a USRPI if we are a domestically controlled REIT. A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly
or indirectly by foreign owners. We believe that we will be a domestically controlled REIT, and that a sale of our stock should not be subject to taxation under FIRPTA. However, no assurance can be given that we are or will remain a domestically
controlled REIT.
Even if we do not constitute a domestically controlled REIT, a Foreign Owners sale of our common stock generally
will still not be subject to tax under FIRPTA as a sale of a USRPI provided that (i) our stock is regularly traded (as defined by applicable Treasury regulations) on an established securities market and (ii) the selling Foreign Owner has
owned (actually or constructively) 10% or less of our outstanding common stock at all times during a specified testing period.
If gain on
the sale of our stock were subject to taxation under FIRPTA, the Foreign Owner would generally be subject to the same treatment as a Domestic Owner with respect to such gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals) and the purchaser of the common stock could be required to withhold 15% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a Foreign Owner in two cases. First, if the Foreign
Owners investment in our common stock is effectively connected with a U.S. trade or business conducted by such Foreign Owner, the Foreign Owner will generally be subject to the same treatment as a Domestic Owner with respect to such gain.
Second, if the Foreign Owner 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, the nonresident alien individual will be subject to
a 30% tax on the individuals capital gain.
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Estate Tax.
Our common stock owned or treated as owned by an individual who is not a
citizen or resident of the United States (as specially defined for U.S. federal estate tax purposes) at the time of death will be includible in the individuals gross estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise. Such individuals estate may be subject to U.S. federal estate tax on the property includible in the estate for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding.
Under current Treasury regulations, information reporting and backup withholding will not
apply to payments on the common stock made by us or our paying agent (in its capacity as such) to you if you have provided the required certification that you are a Foreign Owner provided that neither we nor our paying agent has actual knowledge or
reason to know that you are a Domestic Owner. However, we or our paying agent may be required to report to the IRS and you payments of dividends on our common stock and the amount of tax, if any, withheld with respect to those payments. Copies of
the information returns reporting such payments and any withholding may also be made available to the tax authorities in the country in which you reside under the provisions of a treaty or agreement. The gross proceeds from the disposition of your
common stock may be subject to information reporting and backup withholding tax. If you sell your common stock outside the United States through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States,
then the U.S. information reporting and backup withholding requirements generally will not apply to that payment. However, U.S. information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is
made outside the United States, if you sell common stock through a non-U.S. office of a broker that:
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derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the United States;
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is a controlled foreign corporation for U.S. federal income tax purposes; or
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is a foreign partnership, if at any time during its tax year:
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one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership; or
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the foreign partnership is engaged in a U.S. trade or business,
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unless the broker has documentary evidence in
its files that you are a Foreign Owner and certain other conditions are met or you otherwise establish an exemption. If you receive payment of the proceeds of a sale of your common stock to or through a U.S. office of a broker, the payment is
subject to both U.S. backup withholding and information reporting unless you provide an IRS Form W-8BEN certifying that you are a Foreign Owner or you otherwise establish an exemption, provided that the broker does not have actual knowledge or
reason to know that you are not a Foreign Owner or the conditions of any other exemption are not, in fact, satisfied.
You are encouraged
to consult your own tax advisor regarding application of backup withholding in your particular circumstance and the availability of and procedure for obtaining an exemption from backup withholding under current Treasury regulations. Any amounts
withheld under the backup withholding rules from a payment to you will be allowed as a refund or credit against your U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
FATCA Withholding
Withholding on
Foreign Financial Accounts.
Under FATCA, we will be required to withhold 30% of withholdable payments made to certain Foreign Partners. This 30% withholding tax will apply to withholdable
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payments made to an Owner that is a foreign financial institution (FFI) unless the FFI enters into an agreement with the IRS to collect and provide to the IRS on an annual
basis substantial information regarding its United States accounts (which include certain equity and debt holders, as well as certain account holders that are foreign entities with owners that are U.S. Persons), or an exception applies.
Alternatively, an FFI resident or doing business in a country that has entered into an intergovernmental agreement with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the FFI and the applicable foreign government
comply with the terms of such agreement. An FFI is generally any foreign entity that (i) accepts deposits in the ordinary course of business (ii) holds financial assets for the account of others as a substantial portion of its business, (iii)
is engaged primarily in the business of investing or trading in securities or partnership interests or (iv) certain insurance companies issuing cash-value insurance or annuity contracts. The 30% withholding tax will also apply to withholdable
payments made to a foreign entity that is not a FFI unless the entity provides the withholding agent with a completed Form W-8BEN or Form W-8BEN-E certifying its FACTA status and, in certain circumstances, identifying its substantial U.S. owners,
which generally includes any U.S. Person who directly or indirectly owns more than 10% of the entity. The term withholdable payment includes any payment of interest, dividends, and, beginning in 2018, the gross proceeds of a disposition
of stock (including a liquidating distribution from a corporation) or debt instruments, in each case with respect to any U.S. investment.
Medicare Tax.
For taxable years beginning after December 31, 2012, certain taxable Domestic Owners who are individuals, estates or
trusts will be subject to a 3.8% tax on all or a portion of their net investment income, which may include all or a portion of their dividends on our capital stock and net gains from the taxable disposition of capital stock. Domestic
Owners that are individuals, estates or trusts should consult their tax advisors regarding the applicability of the Medicare tax to any of their income or gains in respect of capital stock.
Other Tax Consequences
Possible Legislative or Other Actions Affecting Tax Consequences.
Prospective investors should recognize that the present U.S. federal
income tax treatment of an investment in our common stock may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with U.S.
federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory
changes. Revisions in U.S. federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in our common stock.
State and Local Taxes.
We and our stockholders may be subject to state or local taxation in various state or local jurisdictions,
including those in which we or they transact business or reside. The state and local tax treatment may not conform to the U.S. federal income tax consequences discussed above. Consequently, prospective investors should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in our common stock.
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