UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the current federal income tax consequences to our Company and our stockholders, generally resulting from the
treatment of our Company as a REIT. Because this section is a general summary, it does not address all of the potential tax issues that may be relevant to you in light of your particular circumstances. Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C., or Baker Donelson, has acted as our counsel, has reviewed this summary, and is of the opinion that the discussion contained herein fairly summarizes the federal income tax consequences that are material to a holder of shares of our
common stock. The discussion does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders that are subject to special
treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions or broker-dealers, and non-United States individuals and foreign corporations.
The statements in this section of the opinion of Baker Donelson, referred to as the Tax Opinion, are based on the current federal income tax
laws governing qualification as a REIT. 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. You should be aware
that opinions of counsel are not binding on the Internal Revenue Service (the IRS), and no assurance can be given that the IRS will not challenge the conclusions set forth in those opinions.
This section is not a substitute for careful tax planning, nor does it constitute tax advice. We urge you to consult your own tax advisors
regarding the specific federal, state, local, foreign and other tax consequences to you, in the light of your own particular circumstances, of the purchase, ownership and disposition of shares of our common stock, our election to be taxed as a REIT
and the effect of potential changes in applicable tax laws.
Taxation of Our Company
We were previously taxed as a subchapter S corporation. We revoked our subchapter S election on April 6, 2004 and we have elected to be
taxed as a REIT under Sections 856 through and including 860 of the Internal Revenue Code of 1986, as amended (the Code), commencing with our taxable year that began on April 6, 2004 and ended on December 31, 2004. In connection
with this offering, our REIT counsel, Baker Donelson, has opined that, for federal income tax purposes, we are and have been organized in conformity with the requirements for qualification to be taxed as a REIT under the Code commencing with our
initial short taxable year ended December 31, 2004, and that our current and proposed method of operations as described in this prospectus and as represented to our counsel by us satisfies currently, and will enable us to continue to satisfy in the
future, the requirements for such qualification and taxation as a REIT under the Code for future taxable years. This opinion, however, is based on factual assumptions and representations made by us to Baker Donelson concerning our organization, our
proposed ownership and operations, and other matters relating to our ability to qualify as a REIT, and is expressly conditioned upon the accuracy of such assumptions and representations.
We believe that our proposed future method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given
that our beliefs or expectations will be fulfilled, as such qualification and taxation as a REIT depends upon our ability to meet, for each taxable year, various tests imposed under the Code as discussed below. Those qualification tests involve the
percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our stock ownership, and the percentage of our earnings that we distribute. Baker Donelson will not
review our compliance with those tests on a continuing basis. Accordingly, with respect to our current and future taxable years, no assurance can be given that the actual results of our operation will satisfy such requirements. For a discussion of
the tax consequences of our failure to maintain our qualification as a REIT, see Requirements for QualificationFailure to Qualify.
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The sections of the Code relating to qualification and operation as a REIT, and the federal
income taxation of a REIT and its stockholders, are highly technical and complex. The following discussion sets forth only a summary of those sections. This summary is qualified in its entirety by the applicable Code provisions and the related rules
and regulations.
We generally will not be subject to federal income tax on the taxable income that we currently distribute to our
stockholders. The benefit of that tax treatment is that it avoids the double taxation, or taxation at both the corporate and stockholder levels, that generally results from owning stock in a corporation. However, we will be subject to
federal tax in the following circumstances:
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We are subject to the corporate federal income tax on 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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We are subject to the corporate alternative minimum tax on any items of tax preference that we do not distribute or allocate to stockholders.
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We are subject to tax, at the highest corporate rate, on: (1) net gain from the sale or other disposition of property acquired through foreclosure (foreclosure property) that we hold primarily for sale
to customers in the ordinary course of business, and (2) other non-qualifying income from foreclosure property.
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We are subject to a 100% tax on net income 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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If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under Requirements for QualificationGross Income Tests, but nonetheless continue to qualify as a
REIT because we meet other requirements, we will be subject to a 100% tax on: (1) the greater of (a) the amount by which we fail the 75% gross income test, or (b) the amount by which we fail the 95% gross income test, multiplied by (2) a fraction
intended to reflect our profitability.
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If we fail to distribute during a calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain net income for the year and (3) any undistributed taxable income
from earlier periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the amount we actually distributed.
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If we fail to satisfy one or more requirements for REIT qualification during a taxable year beginning on or after January 1, 2005, other than a gross income test or an asset test, and such failure is due to reasonable
cause, we may retain our REIT qualification if we pay a penalty of $50,000 for each such failure.
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We may elect to retain and pay income tax on our net long-term capital gain. In that case, a United States stockholder 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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We may be subject to a 100% excise tax on some payments we receive or on certain other amounts (or on certain expenses deducted by our taxable REIT subsidiaries or TRSs) if arrangements among us, our tenants
and/or our TRSs are not comparable to similar arrangements among unrelated parties.
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If we acquire any asset from a C corporation (that is, a corporation generally subject to the full corporate-level tax) in a transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during the 10 year period beginning on the date that we acquired the asset, then the assets built-in gain
will be subject to tax at the highest corporate rate.
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Requirements for Qualification
To continue to qualify as a REIT, we must meet various (1) organizational requirements, (2) gross income tests, (3) asset tests, and (4)
annual distribution requirements.
Organizational Requirements
. A REIT is a corporation, trust or association that meets each of
the following requirements:
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it is managed by one or more trustees or directors;
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its beneficial ownership is evidenced by transferable stock, or by transferable certificates of beneficial interest;
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it would be taxable as a domestic corporation, but for its election to be taxed as a REIT under Sections 856 through and including 860 of the Code;
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it is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws;
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at least 100 persons are beneficial owners of its stock or ownership certificates (determined without reference to any rules of attribution);
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not more than 50% in value of its outstanding stock or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during
the last half of any taxable year; and
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it elects to be a REIT, or has made such election for a previous taxable year, which election has not been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by
the IRS that must be met to elect and maintain REIT status.
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We must meet requirements one through four during our entire
taxable year and must meet requirement five during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. If we comply with all the requirements for ascertaining information
concerning the ownership of our outstanding stock in a taxable year and have no reason to know that we violated requirement six, we will be deemed to have satisfied requirement six for that taxable year. We did not have to satisfy requirements five
and six for our taxable year ending December 31, 2004. After the issuance of common stock pursuant to our April 2004 private placement, we had issued common stock with enough diversity of ownership to satisfy requirements five and six as set forth
above. Our charter provides for restrictions regarding the ownership and transfer of our shares of common stock so that we should continue to satisfy these requirements. The provisions of our charter restricting the ownership and transfer of our
shares of common stock are described in Description of Capital StockRestrictions on Ownership and Transfer.
For
purposes of determining stock ownership under requirement six, 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, however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be
treated as holding our shares in proportion to their actuarial interests in the trust for purposes of requirement six.
A corporation that
is a qualified REIT subsidiary, or QRS, is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction and credit of a QRS are treated as
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assets, liabilities, and items of income, deduction and credit of the REIT. A QRS is a corporation other than a taxable REIT subsidiary as described below, all of the capital stock of
which is owned by the REIT. Thus, in applying the requirements described herein, any QRS 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.
An unincorporated domestic entity with two or more owners that is eligible to
elect its tax classification under Treasury Regulation Section 301.7701-3 but does not make such an election is generally treated as a partnership for federal income tax purposes. In the case of a REIT that is a partner in a partnership that has
other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. We treat our
operating partnership as a partnership for U.S. federal income tax purposes. Accordingly, our proportionate share of the assets, liabilities and items of income of the operating partnership and any other partnership, joint venture, or limited
liability company that is treated as a partnership for federal income tax purposes in which we acquire an interest, directly or indirectly, is treated as our assets and gross income for purposes of applying the various REIT qualification
requirements.
A REIT is permitted to own up to 100% of the stock of one or more TRSs. We have formed and made taxable REIT subsidiary
elections with respect to MPT Development Services, Inc., a Delaware corporation formed in January 2004 (MPT TRS), MPT Covington TRS, Inc., a Delaware corporation formed in January 2010 and MPT Finance Corporation, Inc., a Delaware
corporation formed in April 2011. We have also formed limited liability companies wholly-owned by MPT TRS which are disregarded entities for federal income tax purposes. A taxable REIT subsidiary is a fully taxable corporation that may earn income
that would not be qualifying income if earned directly by the parent REIT. Generally, the subsidiary and the REIT must jointly file an election with the IRS to treat the subsidiary as a taxable REIT subsidiary. Ernest Health, Inc.
(Ernest) and its corporate subsidiaries are also taxable REIT subsidiaries as a result of the ownership by disregarded entities owned by MPT TRS of more than 35% ownership interests in Ernest. A taxable REIT subsidiary will pay income
tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary
is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain types of transactions between a taxable REIT subsidiary and its parent REIT or the REITs tenants that are not conducted on an
arms-length basis. We may engage in activities indirectly through a taxable REIT subsidiary as necessary or convenient to avoid obtaining the benefit of income or services that would jeopardize our REIT status if we engaged in the activities
directly. In particular, we would likely engage in activities through a taxable REIT subsidiary if we wished to provide services to unrelated parties which might produce income that does not qualify under the gross income tests described below. We
might also engage in otherwise prohibited transactions through a taxable REIT subsidiary. See description below under Requirements for QualificationProhibited Transactions. A taxable REIT subsidiary may not operate or manage
a health care facility, though a health care facility leased to a taxable REIT subsidiary from a REIT may be operated on behalf of the taxable REIT subsidiary by an eligible independent contractor. For purposes of this definition a health care
facility means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is
operated by a service provider which is eligible for participation in the Medicare program under Title XVIII of the Social Security Act with respect to such facility. MPT Covington TRS, Inc. was formed specifically for the purpose of leasing a
health care facility from us, subleasing that facility to an entity in which it owned an equity interest, and having that facility operated by an eligible independent contractor. We obtained a private letter ruling from the IRS holding that
ownership of the equity interest and the operation of the facility in accordance with the agreements among the parties do not adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. We have structured other transactions in
which MPT TRS owns an indirect equity interest in a tenant entity in a similar manner, and we have structured leases with the operating subsidiaries of Ernest and Capella Healthcare, Inc. (Capella) in a similar manner and may structure
other such transactions similarly in the future.
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Gross Income Tests
. We must satisfy two gross income tests annually to maintain our
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, directly or indirectly, from investments relating to real property or mortgages on real property or
qualified temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by mortgages 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 estate assets;
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income derived from the temporary investment of new capital that is attributable to the issuance of our shares of common stock or a public offering of our debt with a maturity date of at least five years and that we
receive during the one year period beginning on the date on which we received such new capital; and
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gross income from foreclosure property.
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Second, in general, at least 95% of our gross income
for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends or gain from the sale or disposition of stock or securities. Gross income from our sale of
property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests. In addition, 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 and that are clearly and timely identified as such also will be excluded from both the numerator and the denominator for purposes of the 95% gross income
test and the 75% gross income test. Passive foreign exchange gain is excluded from the 95% gross income test and real estate foreign exchange gain is excluded from both the 95% and the 75% gross income tests. The following paragraphs discuss the
specific application of the gross income tests to us.
The Secretary of the Treasury is given broad authority to determine whether
particular items of gain or income 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.
Rents from Real Property
. Rent that we receive from our real property will qualify as rents from real property, which is
qualifying income for purposes of the 75% and 95% gross income tests, only if the following conditions are met.
First, the rent must not
be based in whole or in part on the income or profits of any person. Participating rent, however, will qualify as rents from real property if it is based on percentages of receipts or sales and the percentages:
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are fixed at the time the leases are entered into;
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are not renegotiated during the term of the leases in a manner that has the effect of basing rent on income or profits; and
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conform with normal business practice.
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More generally, the rent will not qualify as
rents from real property if, considering the relevant lease and all the surrounding circumstances, the arrangement does not conform with normal business practice, but is in
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reality used as a means of basing the rent on income or profits. We have represented to Baker Donelson that we intend to set and accept rents which are fixed dollar amounts or a fixed percentage
of gross revenue, and not determined to any extent by reference to any persons income or profits, in compliance with the rules above.
Second, we must not own, actually or constructively, 10% or more of the stock or the assets or net profits of any tenant, referred to as a
related party tenant, other than a taxable REIT subsidiary. Failure to adhere to this limitation would cause the rental income from the related party tenant to not be treated as qualifying income for purposes of the REIT gross income tests. The
constructive ownership rules generally provide that, if 10% or more in value of our stock is owned, directly or indirectly, by or for any person, we are considered as owning the stock owned, directly or indirectly, by or for such person. In
addition, our charter prohibits transfers of our shares that would cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant. We do not own, actually or constructively, 10% or more of any tenant other than a
taxable REIT subsidiary. However, after the disposal of our equity interest in Capella on April 30, 2016, we have directly leased facilities to affiliates of Capella. Rent from these leases might be considered related-party rents for the year ending
December 31, 2016 because of our prior ownership of the equity interest in Capella during a portion of 2016. We have represented to counsel that considering rents from these leases as related-party rents will not cause us to fail the REIT gross
income tests for 2016 and that we have not otherwise rented any facility to a related-party tenant. Also, MPT Covington TRS, Inc. acquired a greater than 10% equity interest in an entity to which it subleased a health care facility which was
operated by an eligible independent operator. We have obtained a private letter ruling from the IRS holding that the ownership of the equity interest and the operation of the facility in accordance with the agreements among the parties did not
adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. or disqualify the rents paid by MPT Covington TRS, Inc. to us from being treated as qualifying income under the 75% and 95% gross income tests. We have structured other
transactions and may structure future transactions in a similar manner. In particular, our leases with subsidiaries of Ernest are structured in a similar manner with the exception that the prior management of Ernest and its subsidiaries, through a
management company, Guiding Health Management Group, LLC (GHMG), formed by the prior management, is the manager of the Ernest facilities. Prior to our disposition of our investment in the operations of Capella, our leases with
subsidiaries of Capella were structured in a similar manner with a management company, Sunergeo Health Partners, LLC (Sunergeo), formed by the prior management of Capella and its subsidiaries, as the manager of the Capella facilities.
GHMG and Sunergeo previously operated Ernest and its subsidiaries and Capella and its subsidiaries, respectively, as officers and employees. Although certain management personnel remained as officers of Ernest and Capella, they became employees of
and were compensated by GHMG or Sunergeo. We believe that GHMG meets, and during the time in which we held an investment in the operations of Capella Sunergeo met, the definition of an eligible independent contractor which is any
independent contractor if, at the time such contractor enters into an agreement with a taxable REIT subsidiary to operate a qualified health care facility, such contractor is actively engaged in the trade or business of operating such facilities for
any person who is not a related person to the REIT or the taxable REIT subsidiary. There is no assurance that the IRS will not take a contrary position with respect to the structuring of these and other such transactions. In addition, MPT Covington
TRS, Inc. has made, and MPT TRS has and will make loans to tenants to acquire operations and for other purposes. We have structured and will structure these loans as debt and believe that they will be characterized as such, and that our rental
income from our tenant borrowers will be treated as qualifying income for purposes of the REIT gross income tests. However, there can be no assurance that the IRS will not take a contrary position. If the IRS were to successfully treat a loan to a
particular tenant as an equity interest, the tenant would be a related party tenant with respect to us, the rent that we receive from the tenant would not be qualifying income for purposes of the REIT gross income tests, and we could lose our REIT
status.
However, as stated above, we believe that these loans will be treated as debt rather than equity interests. Finally, because the
constructive ownership rules are broad and it is not possible to monitor continually direct and indirect transfers of our shares, no absolute assurance can be given that such transfers or other events of which we have no knowledge will not cause us
to own constructively 10% or more of a tenant other than a taxable REIT subsidiary at some future date.
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We currently own 100% of the stock of MPT TRS, MPT Covington TRS, Inc. and MPT Finance
Corporation, Inc., all of which are taxable REIT subsidiaries, and may in the future own up to 100% of the stock of one or more additional taxable REIT subsidiaries. In addition, Ernest and its corporate subsidiaries are, and prior to our
disposition of our investment in the operations of Capella, Capella and its corporate subsidiaries were, taxable REIT subsidiaries because of MPT TRSs indirect ownership of more than a 35% interest in Ernest and Capella. Under an exception to
the related-party tenant rule described in the preceding paragraph, rent that we receive from a taxable REIT subsidiary will qualify as rents from real property as long as (1) the taxable REIT subsidiary is a qualifying taxable REIT
subsidiary (among other things, it does not operate or manage a health care facility), (2) at least 90% of the leased space in the facility is leased to persons other than taxable REIT subsidiaries and related party tenants, and (3) the amount paid
by the taxable REIT subsidiary to rent space at the facility is substantially comparable to rents paid by other tenants of the facility for comparable space. In addition, rents paid to a REIT by a taxable REIT subsidiary with respect to a
qualified health care property (as defined below under Requirements for QualificationForeclosure Property), operated on behalf of such taxable REIT subsidiary by a person who is an eligible independent
contractor (as defined above), are qualifying rental income for purposes of the 75% and 95% gross income tests. We obtained a private letter ruling from the IRS holding that the rent received by us from MPT Covington TRS, Inc. qualified as
rent from real property under these exceptions. We have since structured leases with taxable REIT subsidiaries in a similar manner, including leases with the subsidiaries of Ernest and Capella.
Third, the rent attributable to the personal property leased in connection with a lease of real property must not be greater than 15% of the
total rent received under the lease. The rent attributable to personal property under a lease is the amount that bears the same ratio to total rent under the lease for the taxable year as the average of the fair market values of the leased personal
property at the beginning and at the end of the taxable year bears to the average of the aggregate fair market values of both the real and personal property covered by the lease at the beginning and at the end of such taxable year (the
personal property ratio). With respect to each of our leases, we believe that the personal property ratio generally will be less than 15%. Where that is not, or may in the future not be, the case, we believe that any income attributable
to personal property will not jeopardize our ability to qualify as a REIT. There can be no assurance, however, that the IRS would not challenge our calculation of a personal property ratio, or that a court would not uphold such assertion. If such a
challenge were successfully asserted, we could fail to satisfy the 75% or 95% gross income test and thus lose our REIT status.
Fourth, we
cannot furnish or render noncustomary services to the tenants of our facilities, or manage or operate our facilities, other than through an independent contractor who is adequately compensated and from whom we do not derive or receive any income.
However, we need not provide services through an independent contractor, but instead may provide services directly to our tenants, if the services are usually or customarily rendered in connection with the rental of space for
occupancy only and are not considered to be provided for the tenants convenience. In addition, we may provide a minimal amount of noncustomary services to the tenants of a facility, other than through an independent contractor, as
long as our income from the services does not exceed 1% of our income from the related facility (though any income attributable to such services would not be qualifying income for either the 75% or the 95% gross income tests). Finally, we may own up
to 100% of the stock of one or more taxable REIT subsidiaries, which may provide noncustomary services to our tenants without tainting our rents from the related facilities. We do not intend to perform any services other than customary services for
our tenants, and services provided through independent contractors or taxable REIT subsidiaries. We have represented to Baker Donelson that we will not perform noncustomary services which would jeopardize our REIT status.
Finally, in order for the rent payable under the leases of our properties to constitute rents from real property, the leases must
be respected as true leases for federal income tax purposes and not treated as service contracts, joint ventures, financing arrangements, or another type of arrangement. We generally treat our leases with respect to our properties as true leases for
federal income tax purposes; however, there can be no assurance that the IRS would not consider a particular lease a financing arrangement instead of a true lease for federal
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income tax purposes. In that case, and in any case in which we intentionally structure a lease as a financing arrangement, our income from that lease would be interest income rather than rent and
would be qualifying income for purposes of the 75% gross income test to the extent that our loan does not exceed the fair market value of the real estate assets associated with the facility. All of the interest income from our loan would
be qualifying income for purposes of the 95% gross income test. We believe that the characterization of a lease as a financing arrangement would not adversely affect our ability to qualify as a REIT.
If a portion of the rent we receive from a facility does not qualify as rents from real property because the rent attributable to
personal property exceeds 15% of the total rent for a taxable year, the portion of the rent attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income test. Thus, if rent attributable to
personal property, plus any other income that is nonqualifying income for purposes of the 95% gross income test, during a taxable year exceeds 5% of our gross income during the year, we would lose our REIT status. By contrast, in the following
circumstances, none of the rent from a lease of a facility would qualify as rents from real property: (1) the rent is considered based on the income or profits of the tenant; (2) the tenant is a related party tenant and fails to qualify
for the exception to the related-party tenant rule for qualifying taxable REIT subsidiaries; (3) we furnish more than a de minimis amount of noncustomary services to the tenants of the facility, other than through a qualifying independent contractor
or a taxable REIT subsidiary; or (4) for health care facilities or lodging facilities, we manage or operate the facility, other than through an independent contractor. In any of these circumstances, we could lose our REIT status because we would be
unable to satisfy either the 75% or 95% gross income test.
Tenants may be required to pay, besides base rent, reimbursements for certain
amounts we are obligated to pay to third parties (such as a tenants proportionate share of a facilitys operational or capital expenses), penalties for nonpayment or late payment of rent or additions to rent. These and other similar
payments should qualify as rents from real property.
Interest
. The term interest generally does not
include any amount received or accrued, directly or indirectly, if the determination of the amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the
term interest solely because it is based on a fixed percentage or percentages of receipts or sales. Furthermore, to the extent that interest from a loan that is based upon the residual cash proceeds from the sale of the property securing
the loan constitutes a shared appreciation provision, income attributable to such participation feature will be treated as gain from the sale of the secured property.
Fee Income
. We may receive various fees in connection with our operations. The fees will be qualifying income for purposes of both the
75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income and profits. Other fees are not qualifying income for purposes of
either gross income test. We anticipate that MPT TRS, one of our taxable REIT subsidiaries, will receive most of the management fees, inspection fees and construction fees in connection with our operations. Any fees earned by MPT TRS will not be
included as income for purposes of the gross income tests.
Prohibited Transactions
. A REIT will incur a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets will be held primarily for
sale to customers and that a sale of any of our assets will not be in the ordinary course of our business. Whether a REIT holds an asset primarily for sale to customers in the ordinary course of a trade or business depends, however, on
the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale
will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property that we hold primarily for
sale to customers in the ordinary course of a trade or business. We may use a taxable REIT subsidiary to engage in transactions that may not fall within the safe-harbor provisions.
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Foreclosure Property
. We will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure
property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incidental to such real property acquired by a REIT as the result of the
REITs having bid on the property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after actual or imminent default on a lease of the property or on indebtedness secured by the
property, or a Repossession Action. Property acquired by a Repossession Action will not be considered foreclosure property if (1) the REIT held or acquired the property subject to a lease or securing indebtedness for sale to
customers in the ordinary course of business or (2) the lease or loan was acquired or entered into with intent to take Repossession Action or in circumstances where the REIT had reason to know a default would occur. The determination of such intent
or reason to know must be based on all relevant facts and circumstances. In no case will property be considered foreclosure property unless the REIT makes a proper election to treat the property as foreclosure property.
Foreclosure property includes any qualified health care property acquired by a REIT as a result of a termination of a lease of such property
(other than a termination by reason of a default, or the imminence of a default, on the lease). A qualified health care property means any real property, including interests in real property, and any personal property incident to such
real property which is a health care facility (as defined above under Requirements for QualificationOrganizational Requirements) or is necessary or incidental to the use of a health care facility.
However, a REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT
acquired the property (or, in the case of a qualified health care property which becomes foreclosure property because it is acquired by a REIT as a result of the termination of a lease of such property, at the end of the second taxable year
following the taxable year in which the REIT acquired such property) or longer if an extension is granted by the Secretary of the Treasury. This period (as extended, if applicable) terminates, and foreclosure property ceases to be foreclosure
property on the first day:
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on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test;
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on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or
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which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the
REIT itself does not derive or receive any income. For this purpose, in the case of a qualified health care property, income derived or received from an independent contractor will be disregarded to the extent such income is attributable to (1) a
lease of property in effect on the date the REIT acquired the qualified health care property (without regard to its renewal after such date so long as such renewal is pursuant to the terms of such lease as in effect on such date) or (2) any lease of
property entered into after such date if, on such date, a lease of such property from the REIT was in effect and, under the terms of the new lease, the REIT receives a substantially similar or lesser benefit in comparison to the prior lease.
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Hedging Transactions
. From time to time, we may enter into hedging transactions with respect to one or more of our
assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and
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floors, options to purchase such items, and futures and forward contracts. Income and gain from hedging transactions is excluded from gross income for purposes of the 95% gross income
test and the 75% gross income test. For this purpose, a hedging transaction will mean any transaction (i) entered into in the normal course of our trade or business primarily to manage the risk of interest rate or price changes with
respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets; (ii) entered into primarily to manage risks 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 property which generates such income or gain) ; or (iii) for taxable years beginning after December 31, 2015, that hedges against transactions described in clause (i) or (ii)
and is entered into in connection with the extinguishment of debt or sale of property that is being hedged against by the transaction described in clause (i) or (ii). We are required to clearly identify any such hedging transaction before the close
of the day on which it is acquired, originated, or entered into, subject, for taxable years beginning after December 31, 2015, to certain curative provisions. Since the financial markets continually introduce new and innovative instruments related
to risk-sharing or trading, it is not entirely clear which such instruments will generate income which will be considered qualifying or excluded income for purposes of the gross income tests. We intend to structure any hedging or similar
transactions so as not to jeopardize our status as a REIT.
Foreign Currency Gain
. Passive foreign exchange gain is excluded from
the 95% income test and real estate foreign exchange gain is excluded from the 75% income test. Real estate foreign exchange gain is foreign currency gain (as defined in Code Section 988(b)(1)) which is attributable to (i) any qualifying item of
income or gain for purposes of the 75% income test, (ii) the acquisition or ownership of obligations secured by mortgages on real property or interests in real property; or (iii) becoming or being the obligor under obligations secured by mortgages
on real property or on interests in real property. Real estate foreign exchange gain also includes Code Section 987 gain attributable to a qualified business unit (QBU) of the REIT if the QBU itself meets the 75% income test for the
taxable year, and meets the 75% asset test at the close of each quarter of the REIT that has directly or indirectly held the QBU. The QBU is not required to meet the 95% income test in order for this 987 gain exclusion to apply. Real estate foreign
exchange gain also includes any other foreign currency gain as determined by the Secretary of the Treasury.
Passive foreign exchange gain
includes all real estate foreign exchange gain, and in addition includes foreign currency gain which is attributable to (i) any qualifying item of income or gain for purposes of the 95% income test, (ii) the acquisition or ownership of obligations,
(iii) becoming or being the obligor under obligations, and (iv) any other foreign currency gain as determined by the Secretary of the Treasury.
Any gain derived from dealing, or engaging in substantial and regular trading, in securities denominated in, or determined by reference to,
one or more nonfunctional currencies will be treated as non-qualifying income for both the 75% and 95% gross income tests. We do not currently, and do not expect to, engage in such trading.
Failure to Satisfy Gross Income Tests
. If we fail to satisfy one or both of the gross income tests for any taxable year, we
nevertheless may qualify as a REIT for that year if we qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:
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our failure to meet those tests is due to reasonable cause and not to willful neglect, and
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following our identification of such failure for any taxable year, a schedule of the sources of our income is filed in accordance with regulations prescribed by the Secretary of the Treasury.
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We cannot with certainty predict whether any failure to meet these tests will qualify for the relief provisions. As discussed above in
Taxation of Our Company, even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction
intended to reflect our profitability.
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Asset Tests
. To maintain our qualification 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:
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cash or cash items, including certain receivables;
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real estate assets, which includes interest in real property, leaseholds, options to acquire real property or leaseholds, interests in mortgages on real property, shares (or transferable certificates of beneficial
interest) in other REITs, and, for taxable years beginning after December 31, 2015, debt instruments issued by publicly offered REITs and interests in mortgages on interests in real property; and
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investments in stock or debt instruments attributable to the temporary investment (i.e., for a period not exceeding 12 months) of new capital that we raise through any equity offering or public offering of debt with at
least a five year term.
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If a REIT or its QBU uses any foreign currency as its functional currency (as defined in section
985(b) of the Code), the term cash includes such currency to the extent held for use in the normal course of the activities of the REIT or QBU which give rise to items of income or gain qualifying under the 95% and 75% income tests or
are directly related to acquiring or holding assets qualifying under the 75% assets test, provided that the currency cannot be held in connection with dealing, or engaging in substantial and regular trading, in securities.
With respect to investments not included in the 75% asset class, we may not hold securities of any one issuer (other than a taxable REIT
subsidiary) that exceed 5% of the value of our total assets; nor may we hold securities of any one issuer (other than a taxable REIT subsidiary) that represent more than 10% of the voting power of all outstanding voting securities of such issuer or
more than 10% of the value of all outstanding securities of such issuer.
In addition, for taxable years beginning before January 1, 2018,
we may not hold securities of one or more taxable REIT subsidiaries that represent in the aggregate more than 25% of the value of our total assets and, for taxable years beginning on or after January 1, 2018, we may not hold securities of one or
more taxable REIT subsidiaries that represent in the aggregate more than 20% of the value of our total assets, in all cases irrespective of whether such securities may also be included in the 75% asset class (e.g., a mortgage loan issued to a
taxable REIT subsidiary). For taxable years beginning after December 31, 2015, we may not hold debt instruments (other than debt secured by interests in real property) issued by publicly offered REITs that represent in the aggregate more than 25% of
the value of our total assets. Furthermore, no more than 25% of our total assets may be represented by securities that are not included in the 75% asset class, including, among other things, certain securities of a taxable REIT subsidiary such as
stock or non-mortgage debt.
For purposes of the 5% and 10% asset tests, the term securities does not include stock in another
REIT, equity or debt securities of a qualified REIT subsidiary or taxable REIT subsidiary, mortgage loans that constitute real estate assets, or equity interests in a partnership to the extent that the partnership holds real estate assets. The term
securities, however, generally includes debt securities issued by a partnership or another REIT, except that for purposes of the 10% value test, the term securities does not include:
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Straight debt, defined as a written unconditional promise to pay on demand or on a specified date a
sum certain in money if (1) the debt is not convertible, directly or indirectly, into stock, and (2) the interest rate and interest payment dates are not contingent on profits, the borrowers discretion,
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or similar factors. Straight debt securities do not include any securities issued by a partnership or a corporation in which we or any controlled TRS (i.e., a TRS in which we own
directly or indirectly more than 50% of the voting power or value of the stock) holds non- straight debt securities that have an aggregate value of more than 1% of the issuers outstanding securities. However, straight
debt securities include debt subject to the following contingencies:
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a contingency relating to the time of payment of interest or principal, as long as either (1) there is no change to the effective yield to maturity of the debt obligation, other than a change to the annual yield to
maturity that does not exceed the greater of 0.25% or 5% of the annual yield to maturity, or (2) neither the aggregate issue price nor the aggregate face amount of the issuers debt obligations held by us exceeds $1 million and no more than 12
months of unaccrued interest on the debt obligations can be required to be prepaid;
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a contingency relating to the time or amount of payment upon a default or exercise of a prepayment right by the issuer of the debt obligation, as long as the contingency is consistent with customary commercial practice;
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Any loan to an individual or an estate;
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Any Section 467 rental agreement, other than an agreement with a related party tenant;
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Any obligation to pay rents from real property;
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Any security issued by a state or any political subdivision thereof, the District of Columbia, a foreign government or any political subdivision thereof, or the Commonwealth of Puerto Rico, but only if the determination
of any payment thereunder does not depend in whole or in part on the profits of any entity not described in this paragraph or payments on any obligation issued by an entity not described in this paragraph;
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Any security issued by a REIT;
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Any debt instrument of an entity treated as a partnership for federal income tax purposes to the extent of our interest as a partner in the partnership; and
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Any debt instrument of an entity treated as a partnership for federal income tax purposes not described in the preceding bullet points if at least 75% of the partnerships gross income, excluding income from
prohibited transactions, is qualifying income for purposes of the 75% gross income test described above in Requirements for QualificationGross Income Tests.
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For purposes of the 10% value test, our proportionate share of the assets of a partnership is our proportionate interest in any securities
issued by the partnership, excluding all securities described above except those securities described in the last two bullet points above.
MPT Covington TRS, Inc. has made, and MPT TRS has made and will make loans to tenants to acquire operations and for other purposes. If the IRS
were to successfully treat a particular loan to a tenant as an equity interest in the tenant, the tenant would be a related party tenant with respect to our company and the rent that we receive from the tenant would not be qualifying
income for purposes of the REIT gross income tests. As a result, we could lose our REIT status. In addition, if the IRS were to successfully treat a particular loan as an interest held by our operating partnership rather than by one of our taxable
REIT subsidiaries we could fail the 5% asset test, and if the IRS further successfully treated the loan as other than straight debt, we could fail the 10% asset test with respect to such interest. As a result of the failure of either test, we could
lose our REIT status.
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MPT Covington TRS, Inc. leased a health care facility from us and subleased it to a tenant in
which it owns a greater than 10% interest. The facility was operated by an eligible independent contractor. We obtained a private letter ruling from the IRS holding that ownership of the equity interest and the operation of the facility in
accordance with the agreements among the parties did not adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. We have since structured other transactions in which MPT TRS owns an indirect equity interest in a tenant entity
in a similar manner, including leases with the subsidiaries of Ernest. If the IRS successfully challenged the taxable REIT subsidiary status of MPT Covington TRS, Inc. or MPT TRS, and we were unable to cure as described below, we could fail the 10%
asset test with respect to our ownership of MPT Covington TRS, Inc. or MPT TRS and as a result lose our REIT status.
We will monitor the
status of our assets for purposes of the various asset tests and will manage our portfolio in order to comply at all times with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT status 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 item above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.
In the event that, at the end of
any calendar quarter, we violate the 5% or 10% test described above, we will not lose our REIT status if (1) the failure is de minimis (up to the lesser of 1% of our assets or $10 million) and (2) we dispose of assets or otherwise comply with the
asset tests within six months after the last day of the quarter in which we identified the failure of the asset test. In the event of a more than de minimis failure of the 5% or 10% tests, or a failure of the other assets test, at the end of any
calendar quarter, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT status if we (1) file with the IRS a schedule describing the assets that caused the failure, (2) dispose of assets or
otherwise comply with the asset tests within six months after the last day of the quarter in which we identified the failure of the asset test and (3) pay a tax equal to the greater of $50,000 and tax at the highest corporate rate on the net income
from the nonqualifying assets during the period in which we failed to satisfy the asset tests.
Distribution Requirements
. Each
taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount not less than:
the sum of:
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90% of our REIT taxable income, computed without regard to the dividends-paid deduction or our net capital gain or loss; and
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90% of our after-tax net income, if any, from foreclosure property;
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minus:
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the sum of certain items of non-cash income.
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We must pay such distributions in the taxable
year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such
declaration.
S-20
We will pay federal income tax on taxable income, including net capital gain, that we do not
distribute to stockholders. In addition, we will incur a 4% nondeductible excise tax on the excess of a specified required distribution over amounts we actually distribute if we distribute an amount less than the required distribution during a
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. The required distribution must not be less than the sum of:
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85% of our REIT ordinary income for the year;
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95% of our REIT capital gain income for the year; and
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any undistributed taxable income from prior periods.
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We may elect to retain and pay income
tax on the net long-term capital gain we receive in a taxable year. See Requirements for QualificationTaxation of Taxable United States Stockholders. If we so elect, we will be treated as having distributed any such retained
amount for purposes of the 4% excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% excise tax.
It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. For example, we may not deduct recognized capital losses from our REIT taxable income. Further, it is possible
that, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our allocable share of cash attributable to that sale. As a result of the foregoing, we may have less cash than is
necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue additional shares of common or preferred
stock.
Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying
deficiency dividends to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest based upon the amount of any deduction we take for deficiency dividends.
Recordkeeping
Requirements
. We must maintain certain records in order to qualify as a REIT. In addition, to avoid paying a penalty, we must request on an annual basis information from our stockholders designed to disclose the actual ownership of our shares of
outstanding capital stock. We intend to comply with these requirements.
Failure to Qualify
. If we failed to qualify as a REIT in
any taxable year and no relief provision applied, we would have the following consequences. We would be subject to federal income tax and any applicable alternative minimum tax at rates applicable to regular C corporations on our taxable income,
determined without reduction for amounts distributed to stockholders. We would not be required to make any distributions to stockholders, and any distributions to stockholders would be taxable to them as dividend income to the extent of our current
and accumulated earnings and profits. Corporate stockholders could be eligible for a dividends-received deduction if certain conditions are satisfied. Unless we qualified for relief under specific statutory provisions, we would not be permitted to
elect taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.
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 the 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 above in Gross Income Tests and Asset Tests.
S-21
Other Tax Consequences
Tax Aspects of Our Investments in Our Operating Partnership
. The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investment in our operating partnership and any subsidiary partnerships or limited liability companies we form or acquire, each individually referred to as a Partnership and
collectively, as Partnerships. The following discussion does not cover state or local tax laws or any federal tax laws other than income tax laws.
Classification as Partnerships
. We are entitled to include in our income our distributive share of each Partnerships income and
to deduct our distributive share of each Partnerships losses only if each Partnership is classified for federal income tax purposes as a partnership (or an entity that is disregarded for federal income tax purposes if the entity has only one
owner or member), rather than as a corporation or an association taxable as a corporation. An organization with at least two owners or members will be classified as a partnership, rather than as a corporation, for federal income tax purposes if it:
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is treated as a partnership under the Treasury regulations relating to entity classification (the check-the-box regulations); and
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is not a publicly traded partnership.
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Under the check-the-box regulations, a
domestic unincorporated entity with at least two owners or members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity does not make an election, it generally will be treated as a
partnership for federal income tax purposes. We intend that each Partnership will be classified as a partnership for federal income tax purposes (or else a disregarded entity where there are not at least two separate beneficial owners).
A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a
secondary market (or a substantial equivalent). A publicly traded partnership is generally treated as a corporation for federal income tax purposes, but will not be so treated for any taxable year for which at least 90% of the partnerships
gross income consists of specified passive income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends (the 90% passive income exception).
Treasury regulations provide limited safe harbors from treatment as a publicly traded partnership. Pursuant to one of those safe harbors, the
private placement exclusion, interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (1) all interests in the partnership were issued in a transaction or
transactions that were not required to be registered under the Securities Act, and (2) the partnership does not have more than 100 partners at any time during the partnerships taxable year. For the determination of the number of partners in a
partnership, a person owning an interest in a partnership, grantor trust, or S corporation that owns an interest in the partnership is treated as a partner in the partnership only if (1) substantially all of the value of the owners interest in
the entity is attributable to the entitys direct or indirect interest in the partnership and (2) a principal purpose of the use of the entity is to permit the partnership to satisfy the 100-partner limitation. We expect that each Partnership
would qualify for the private placement exclusion.
An unincorporated entity with only one separate beneficial owner generally may elect
to be classified either as an association taxable as a corporation or as a disregarded entity. If such an entity is domestic and does not make an election, it generally will be treated as a disregarded entity. A disregarded entitys activities
are treated as those of a branch or division of its beneficial owner.
The operating partnership has not elected to be treated as an
association taxable as a corporation. Therefore, our operating partnership is treated as a partnership for federal income tax purposes. We intend that our operating partnership will continue to be treated as partnership for federal income tax
purposes.
S-22
We have not requested, and do not intend to request, a ruling from the IRS that the operating
partnership or any other subsidiary entity will be classified as either a partnership or disregarded entity for federal income tax purposes. If for any reason any Partnership were taxable as a corporation, rather than as a partnership or a
disregarded entity, for federal income tax purposes, we likely would not be able to qualify as a REIT. See Requirements for QualificationGross Income Tests and Requirements for QualificationAsset
Tests. In addition, any change in a Partnerships status for tax purposes might be treated as a taxable event, in which case we might incur tax liability without any related cash distribution. See Requirements for
QualificationDistribution Requirements. Further, items of income and deduction of such Partnership would not pass through to its partners, and its partners would be treated as stockholders for tax purposes. Consequently, such Partnership
would be required to pay income tax at corporate rates on its net income, and distributions to its partners would constitute dividends that would not be deductible in computing such Partnerships taxable income.
Income Taxation of the Partnerships and Their Partners
Partners, Not the Partnerships, Subject to Tax
. A partnership is not a taxable entity for federal income tax purposes. If each
Partnership is classified as a partnership, we will therefore take into account our allocable share of each such Partnerships income, gains, losses, deductions, and credits for each taxable year of each Partnership ending with or within our
taxable year, even if we receive no distribution from any Partnership for that year or a distribution less than our share of taxable income. Similarly, even if we receive a distribution, it may not be taxable if the distribution does not exceed our
adjusted tax basis in our interest in the Partnership. If any Partnership is classified as a disregarded entity, each Partnerships activities will be treated as if carried on directly by us.
Partnership Allocations
. Although a partnership agreement generally will determine the allocation of income and losses among partners,
allocations will be disregarded for tax purposes if they do not comply with the provisions of the federal income tax laws governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect
to such item. Each Partnerships allocations of taxable income, gain, and loss are intended to comply with the requirements of the federal income tax laws governing partnership allocations.
Tax Allocations with Respect to Contributed Properties
. Income, gain, loss, and deduction attributable to appreciated or depreciated
property that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss
associated with the property at the time of the contribution. Similar rules apply with respect to property revalued on the books of a partnership. The amount of such unrealized gain or unrealized loss, referred to as built-in gain or built-in loss,
is generally equal to the difference between the fair market value of the contributed or revalued property at the time of contribution or revaluation and the adjusted tax basis of such property at that time, referred to as a book-tax difference.
Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The United States Treasury Department has issued regulations requiring partnerships
to use a reasonable method for allocating items with respect to which there is a book-tax difference and outlining several reasonable allocation methods. Our operating partnership generally intends to use the traditional
method for allocating items with respect to which there is a book-tax difference.
Basis in Partnership Interest
. Our
adjusted tax basis in any partnership interest we own generally will be:
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the amount of cash and the basis of any other property we contribute to the partnership;
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increased by our allocable share of the partnerships income (including tax-exempt income) and our allocable share of indebtedness of the partnership; and
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reduced, but not below zero, by our allocable share of the partnerships loss, the amount of cash and the basis of property distributed to us, and constructive distributions resulting from a reduction in our share
of indebtedness of the partnership.
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Loss allocated to us in excess of our basis in a partnership interest will not be taken
into account until we again have basis sufficient to absorb the loss. A reduction of our share of partnership indebtedness will be treated as a constructive cash distribution to us, and will reduce our adjusted tax basis. Distributions, including
constructive distributions, in excess of the basis of our partnership interest will constitute taxable income to us. Such distributions and constructive distributions normally will be characterized as long-term capital gain.
Partnership Audits.
Under recently enacted legislation (the New Partnership Audit Rules) that will apply for taxable years
beginning after December 31, 2017 (unless a Partnership elects to apply the legislative changes sooner), in the event of a federal income tax audit the Partnership, rather than the Partnerships partners, could be liable for the payment of
certain taxes, including interest and penalties, or the partners could be liable for the tax but be required to pay interest at a higher rate than would otherwise apply to underpayments. Furthermore, the partnership representative of the
Partnership will have exclusive authority to bind all partners to any federal income tax proceeding.
Depreciation Deductions Available
to Partnerships
. The initial tax basis of property is the amount of cash and the basis of property given as consideration for the property. A partnership in which we are a partner generally will depreciate property for federal income tax
purposes under the modified accelerated cost recovery system of depreciation, referred to as MACRS. Under MACRS, each Partnership generally will depreciate furnishings over a seven year recovery period and equipment over a five year recovery period
using a 200% declining balance method and a half-year convention. If, however, the partnership places more than 40% of its furnishings and equipment in service during the last three months of a taxable year, a mid-quarter depreciation convention
must be used for the furnishings and equipment placed in service during that year. Under MACRS, the partnership generally will depreciate buildings and improvements over a 39 year recovery period using a straight line method and a mid-month
convention. Each Partnerships initial basis in properties acquired solely in exchange for units of each Partnership should be the same as the transferors basis in such properties on the date of acquisition by the partnership. Although
the law is not entirely clear, each Partnership generally will depreciate such property for federal income tax purposes over the same remaining useful lives and under the same methods used by the transferors. Each Partnerships tax depreciation
deductions will be allocated among the partners in accordance with their respective interests in the partnership, except to the extent that any Partnership is required under the federal income tax laws governing partnership allocations to use a
method for allocating tax depreciation deductions attributable to contributed or revalued properties that results in our receiving a disproportionate share of such deductions.
Sale of a Partnerships Property
. Generally, any gain realized by a Partnership on the sale of property held for more than one
year will be long-term capital gain, except for any portion of the gain treated as depreciation or cost recovery recapture. Any gain or loss recognized by a Partnership on the disposition of contributed or revalued properties will be allocated first
to the partners who contributed the properties or who were partners at the time of revaluation, to the extent of their built-in gain or loss on those properties for federal income tax purposes. The partners built-in gain or loss on contributed
or revalued properties is the difference between the partners proportionate share of the book value of those properties and the partners tax basis allocable to those properties at the time of the contribution or revaluation. Any
remaining gain or loss recognized by the Partnership on the disposition of contributed or revalued properties, and any gain or loss recognized by the Partnership on the disposition of other properties, will be allocated among the partners in
accordance with the Partnerships allocation provisions (subject to the restrictions described above).
Our share of any Partnership
gain from the sale of inventory or other property held primarily for sale to customers in the ordinary course of each Partnerships trade or business will be treated as income from a prohibited transaction subject to a 100% tax. Income from a
prohibited transaction may have an adverse effect on our ability to satisfy the gross income tests for REIT status. See Requirements for QualificationGross
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Income Tests. We do not presently intend to acquire or hold, or to allow any Partnership to acquire or hold, any property that is likely to be treated as inventory or property held
primarily for sale to customers in the ordinary course of our, or any Partnerships, trade or business.
Taxable REIT
Subsidiaries
. As described above, we have formed and have made a timely election to treat MPT TRS, MPT Covington TRS, Inc. and MPT Finance Corporation, as taxable REIT subsidiaries and may form or acquire additional taxable REIT subsidiaries in
the future. A taxable REIT subsidiary may provide services to our tenants and engage in activities unrelated to our tenants, such as third-party management, development, and other independent business activities.
We and any corporate subsidiary in which we own stock, other than a qualified REIT subsidiary, must make an election for the subsidiary to be
treated as a taxable REIT subsidiary. If a taxable REIT subsidiary directly or indirectly owns shares of a corporation with more than 35% of the value or voting power of all outstanding shares of the corporation, the corporation will automatically
also be treated as a taxable REIT subsidiary. Ernest and its corporate subsidiaries are, and prior to our disposition of our investment in the operations of Capella, Capella and its corporate subsidiaries were, automatically treated as taxable REIT
subsidiaries under this rule. For tax years beginning before January 1, 2018, no more than 25% of the value of our assets may consist of securities of one or more taxable REIT subsidiaries and for taxable years beginning on or after January 1, 2018,
no more than 20% of the value of our assets may consist of securities of taxable REIT subsidiaries, irrespective of whether such securities may also qualify under the 75% assets test, and no more than 25% of the value of our assets may consist of
the securities that are not qualifying assets under the 75% test, including, among other things, certain securities of a taxable REIT subsidiary, such as stock or non-mortgage debt.
Rent we receive from our taxable REIT subsidiaries will qualify as rents from real property as long as at least 90% of the leased
space in the property is leased to persons other than taxable REIT subsidiaries and related party tenants, and the amount paid by the taxable REIT subsidiary to rent space at the property is substantially comparable to rents paid by other tenants of
the property for comparable space. Rents paid to a REIT by a taxable REIT subsidiary with respect to a qualified health care property, (as defined above under Requirements for QualificationForeclosure Property)
operated on behalf of such taxable REIT subsidiary by a person who is an eligible independent contractor, (as defined above under Requirements for QualificationOrganizational Requirements) are qualifying rental
income for purposes of the 75% and 95% gross income tests. The taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to us to assure that the taxable REIT subsidiary is subject to an
appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain types of transactions between a taxable REIT subsidiary and us or our tenants that are not conducted on an arms-length basis.
A taxable REIT subsidiary may not directly or indirectly operate or manage a health care facility, (as defined above under
Requirements for QualificationOrganizational Requirements) though a health care facility leased to a taxable REIT subsidiary from a REIT may be operated on behalf of the taxable REIT subsidiary by an eligible independent
contractor. MPT Covington TRS, Inc. was formed for the purpose of leasing a health care facility from us, subleasing that facility to an entity in which MPT Covington TRS, Inc. owned an equity interest, and having that facility operated by an
eligible independent contractor. We have obtained a private letter ruling from the IRS holding that the ownership of the equity interest and the operation of the facility in accordance with the agreements of the parties did not adversely affect the
taxable REIT subsidiary status of MPT Covington TRS, Inc. We have structured other transactions in which MPT TRS owns an indirect equity interest in a tenant entity in a similar manner, including our leases with subsidiaries of Ernest and Capella,
and may structure other such transactions in the future.
State and Local Taxes
. We and our stockholders may be subject to taxation
by various states and localities, including those in which we or a stockholder transact business, own property or reside. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, stockholders
should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in our common stock.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, LLC.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of our charter and bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to the MGCL and our charter and bylaws. See Where You Can Find More Information.
Our Board
of Directors
Our charter and bylaws provide that the number of our directors is to be established by our board of directors but may
not be fewer than one nor, under the MGCL, more than 15. Currently, our board is comprised of eight directors. Any vacancy, other than one resulting from an increase in the number of directors, may be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors, though less than a quorum. Any vacancy resulting from an increase in the number of our directors must be filled by a majority of the entire board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election of directors and until his successor shall be elected and qualified.
Pursuant to our charter, each member of our board of directors is elected until the next annual meeting of stockholders and until his
successor is elected, with the current members terms expiring at the annual meeting of stockholders to be held in 2016. Holders of shares of our common stock have no right to cumulative voting in the election of directors. Consequently, at
each annual meeting of stockholders, all of the members of our board of directors will stand for election and our directors will be elected by a majority of votes cast in uncontested elections and by a plurality of votes cast in contested elections.
Directors may be removed with or without cause by the affirmative vote of two-thirds of the votes entitled to be cast in the election of directors.
Business Combinations
Maryland law
prohibits business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and reclassifications. Maryland law defines an interested
stockholder as:
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any person who beneficially owns 10% or more of the voting power of the corporations voting stock; or
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an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation.
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A person is not an interested stockholder if the board of directors approves in advance the transaction by
which the person otherwise would have become an interested stockholder. However, in approving the transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and
conditions determined by the board of directors.
After the five year prohibition, any business combination between a corporation and an
interested stockholder generally must be recommended by the board of directors and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock; and
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two-thirds of the votes entitled to be cast by holders of the voting stock other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or shares held
by an affiliate or associate of the interested stockholder.
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These super-majority vote requirements do not apply if stockholders receive a minimum price, as
defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are approved by the board of directors before
the time that the interested stockholder becomes an interested stockholder.
As permitted by Maryland law, our charter includes a
provision excluding our company from these provisions of the MGCL and, consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and any interested stockholder of ours unless
we later amend our charter, with stockholder approval, to modify or eliminate this exclusion provision. We believe that our ownership restrictions will substantially reduce the risk that a stockholder would become an interested
stockholder within the meaning of the Maryland business combination statute. There can be no assurance, however, that we will not opt into the business combination provisions of the MGCL at a future date, subject to stockholder approval as
required under the MGCL and our charter.
Control Share Acquisitions
The MGCL provides that a holder of control shares of a Maryland corporation acquired in a control share acquisition
has no voting rights with respect to the control shares, except to the extent approved at a special meeting by the affirmative vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror or by officers or
directors who are our employees are excluded from shares entitled to vote on the matter. Control shares are voting shares which, if aggregated with all other shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power except solely by virtue of a revocable proxy, would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-tenth
or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions, including an undertaking to
pay expenses, may compel a corporations board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by Maryland law, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares, except those for which voting rights have previously
been approved, for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to exercise or direct the exercise of a majority of the voting power, then all other
stockholders are entitled to demand and receive fair value for their stock, or provided for in the dissenters rights provisions of the MGCL may exercise appraisal rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
The control
share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) to acquisitions approved or exempted by the charter or bylaws of the
corporation.
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Our charter contains a provision exempting from the control share acquisition statute any and all
acquisitions by any person of our stock. There can be no assurance that we will not opt into the control share acquisition provisions of the MGCL in the future, subject to stockholder approval as required under the MGCL and our charter.
Maryland Unsolicited Takeover Act
Maryland law also permits Maryland corporations that are subject to the Exchange Act and have at least three outside directors to elect, by
resolution of the board of directors or by provision in its charter or bylaws and notwithstanding any contrary provision in the charter or bylaws, to be subject to any or all of the following corporate governance provisions:
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the board of directors may classify itself without the vote of stockholders. A board of directors classified in that manner cannot be altered by amendment to the charter of the corporation;
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a special meeting of the stockholders will be called only at the request of stockholders entitled to cast at least a majority of the votes entitled to be cast at the meeting;
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the board of directors may reserve for itself the right to fix the number of directors and to fill vacancies created by the death, removal or resignation of a director;
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a director may be removed only by the vote of the holders of two-thirds of the stock entitled to vote; and
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provide that all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum for the
remainder of the full term of the class of directors in which the vacancy occurred.
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A board of directors may implement all
or any of these provisions without amending the charter or bylaws and without stockholder approval. While applicability of these provisions is already addressed by our charter, the law would permit our board of directors to override the relevant
provisions in our charter or bylaws. If implemented, these provisions could discourage offers to acquire our stock and could increase the difficulty of completing an offer.
Amendment to Our Charter
Pursuant to
the MGCL, our charter may be amended only if declared advisable by the board of directors and approved by the affirmative vote of the holders of at least two-thirds of all of the votes entitled to be cast on the matter, except that our board of
directors is able, without stockholder approval, to amend our charter to change our corporate name or the name or designation or par value of any class or series of stock.
Dissolution of Our Company
A voluntary
dissolution of our company must be declared advisable by a majority of the entire board of directors and approved by the affirmative vote of the holders of at least two-thirds of all of the votes entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
Our bylaws provide that with respect to an annual meeting of stockholders, the only business to be considered and the only proposals to be
acted upon will be those properly brought before the annual meeting:
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pursuant to our notice of the meeting;
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by, or at the direction of, a majority of our board of directors; or
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by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our bylaws.
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With respect to special meetings of stockholders, only the business specified in our companys notice of meeting may be brought before
the meeting of stockholders unless otherwise provided by law.
Nominations of persons for election to our board of directors at any annual
or special meeting of stockholders may be made only:
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by, or at the direction of, our board of directors; or
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by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in our bylaws.
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Generally, under our bylaws, a stockholder seeking to nominate a director or bring other business before our annual meeting of stockholders
must deliver a notice to our secretary not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the date of mailing of the notice to stockholders for the prior
years annual meeting. For a stockholder seeking to nominate a candidate for our board of directors, the notice must describe various matters regarding the nominee, including name, address, occupation and number of shares of common stock held,
and other specified matters. For a stockholder seeking to propose other business, the notice must include a description of the proposed business, the reasons for the proposal and other specified matters.
Indemnification and Limitation of Directors and Officers Liability
The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter limits the personal liability of our directors and officers for monetary damages to the fullest extent permitted under current Maryland law, and our charter and bylaws provide that a director or officer
shall be indemnified to the fullest extent required or permitted by Maryland law from and against any claim or liability to which such director or officer may become subject by reason of his or her status as a director or officer of our company.
Maryland law allows directors and officers to be indemnified against judgments, penalties, fines, settlements, and expenses actually incurred in connection with any proceeding to which they may be made a party by reason of their service on those or
other capacities, unless the following can be established:
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the act or omission of the director or officer was material to the cause of action adjudicated in the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;
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the director or officer actually received an improper personal benefit in money, property or services; or
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with respect to any criminal proceeding, the director or officer had reasonable cause to believe his or her act or omission was unlawful.
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The MGCL requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has
been successful on the merits or otherwise, in the defense of any claim to which he or she is made a party by reason of his or her service in that capacity.
However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or
for a judgment of liability on the basis that personal benefit was
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improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or
officer upon the corporations receipt of:
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a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and
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a written undertaking by the director or on the directors behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director did not meet the standard of conduct.
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Our charter authorizes us to obligate ourselves to indemnify and our bylaws do obligate us, to the fullest extent permitted
by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:
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any present or former director or officer who is made a party to the proceeding by reason of his or her service in that capacity; or
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any individual who, while a director or officer of our company and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his or
her service in that capacity.
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Our charter and bylaws also permit us to indemnify and advance expenses to any person who
served a predecessor of ours in any of the capacities described above.
Our stockholders have no personal liability for indemnification
payments or other obligations under any indemnification agreements or arrangements. However, indemnification could reduce the legal remedies available to us and our stockholders against the indemnified individuals.
This provision for indemnification of our directors and officers does not limit a stockholders ability to obtain injunctive relief or
other equitable remedies for a violation of a directors or an officers duties to us or to our stockholders, although these equitable remedies may not be effective in some circumstances.
In addition to any indemnification to which our directors and officers are entitled pursuant to our charter and bylaws and the MGCL, our
charter and bylaws provide that, with the approval of our board of directors, we may indemnify other employees and agents to the fullest extent permitted under Maryland law, whether they are serving us or, at our request, any other entity. We have
entered into indemnification agreements with each of our directors and executive officers, and we maintain a directors and officers liability insurance policy. Although the form of the indemnification agreement offers substantially the same scope of
coverage afforded by provisions in our charter and bylaws, it provides greater assurance to the directors and officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the board of
directors or by stockholders to eliminate the rights it provides.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF OUR OPERATING PARTNERSHIP
We have summarized the material terms and provisions of the Second Amended and Restated Agreement of Limited Partnership of our
operating partnership, which we refer to as the partnership agreement. This summary is not complete. For more detail, you should refer to the partnership agreement itself, a copy of which has previously been filed with the SEC and which
we incorporate by reference in this prospectus and any accompanying prospectus supplements. See Where You Can Find More Information.
Management of Our Operating Partnership
MPT Operating Partnership, L.P., our operating partnership, was organized as a Delaware limited partnership on September 10, 2003. The
initial partnership agreement was entered into on that date and was last amended and restated on July 31, 2007. Pursuant to the partnership agreement, as the sole equity owner of the sole general partner of the operating partnership, Medical
Properties Trust, LLC, we have, subject to certain protective rights of limited partners described below, full, exclusive and complete responsibility and discretion in the management and control of the operating partnership. We have the power to
cause the operating partnership to enter into certain major transactions, including acquisitions, dispositions, refinancings and selection of tenants, and to cause changes in the operating partnerships line of business and distribution
policies. However, any amendment to the partnership agreement that would affect the redemption rights of the limited partners or otherwise adversely affect the rights of the limited partners requires the consent of limited partners, other than us,
holding more than 50% of the units of our operating partnership held by such partners.
Transferability of Interests
We may not voluntarily withdraw from the operating partnership or transfer or assign our interest in the operating partnership or engage in
any merger, consolidation or other combination, or sale of substantially all of our assets, in a transaction which results in a change of control of our company unless:
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we receive the consent of limited partners holding more than 50% of the partnership interests of the limited partners, other than those held by our company or its subsidiaries;
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as a result of such transaction, all limited partners will have the right to receive for each partnership unit an amount of cash, securities or other property equal in value to the greatest amount of cash, securities or
other property paid in the transaction to a holder of one share of our common stock, provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of
the outstanding shares of our common stock, each holder of partnership units shall be given the option to exchange its partnership units for the greatest amount of cash, securities or other property that a limited partner would have received had it
(1) exercised its redemption right (described below) and (2) sold, tendered or exchanged pursuant to the offer shares of our common stock received upon exercise of the redemption right immediately prior to the expiration of the offer; or
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we are the surviving entity in the transaction and either (1) our stockholders do not receive cash, securities or other property in the transaction or (2) all limited partners receive for each partnership unit
an amount of cash, securities or other property having a value that is no less than the greatest amount of cash, securities or other property received in the transaction by our stockholders.
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We also may merge with or into or consolidate with another entity if immediately after such merger or consolidation (1) substantially all
of the assets of the successor or surviving entity, other than partnership units held by us, are contributed, directly or indirectly, to the partnership as a capital contribution in exchange for partnership units with a fair market value equal to
the value of the assets so contributed as determined by the survivor in good faith and (2) the survivor expressly agrees to assume all of our obligations under the partnership agreement and the partnership agreement shall be amended after any
such merger or consolidation so as to arrive
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at a new method of calculating the amounts payable upon exercise of the redemption right that approximates the existing method for such calculation as closely as reasonably possible.
We also may (1) transfer all or any portion of our general partnership interest to (A) a wholly-owned subsidiary or (B) a
parent company, and following such transfer may withdraw as general partner and (2) engage in a transaction required by law or by the rules of any national securities exchange or automated quotation system on which our securities may be listed
or traded.
Capital Contribution
We
contributed the net proceeds of our April 2004 private placement and subsequent public offerings as capital contributions in exchange for units of our operating partnership. The partnership agreement provides that if the operating partnership
requires additional funds at any time in excess of funds available to the operating partnership from borrowing or capital contributions, we may borrow such funds from a financial institution or other lender and lend such funds to the operating
partnership on the same terms and conditions as are applicable to our borrowing of such funds. Under the partnership agreement, we are obligated to contribute the proceeds of any offering of shares of our companys stock as additional capital
to the operating partnership. We are authorized to cause the operating partnership to issue partnership interests for less than fair market value if we have concluded in good faith that such issuance is in both the operating partnerships and
our best interests. If we contribute additional capital to the operating partnership, we will receive additional partnership units and our percentage interest will be increased on a proportionate basis based upon the amount of such additional
capital contributions and the value of the operating partnership at the time of such contributions. Conversely, the percentage interests of the limited partners will be decreased on a proportionate basis in the event of additional capital
contributions by us. In addition, if we contribute additional capital to the operating partnership, we will revalue the property of the operating partnership to its fair market value, as determined by us, and the capital accounts of the partners
will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property, that has not been reflected in the capital accounts previously, would be allocated among the partners under the terms of the partnership agreement
if there were a taxable disposition of such property for its fair market value, as determined by us, on the date of the revaluation. The operating partnership may issue preferred partnership interests, in connection with acquisitions of property or
otherwise, which could have priority over common partnership interests with respect to distributions from the operating partnership, including the partnership interests that our wholly-owned subsidiary owns as general partner.
Redemption Rights
Pursuant to
Section 8.04 of the partnership agreement, the limited partners, other than us, will receive redemption rights, which will enable them to cause the operating partnership to redeem their limited partnership units in exchange for cash or, at our
option, shares of our common stock on a one-for-one basis, subject to adjustment for stock splits, dividends, recapitalization and similar events. Under Section 8.04 of the partnership agreement, holders of limited partnership units will be
prohibited from exercising their redemption rights for 12 months after they are issued, unless this waiting period is waived or shortened by our board of directors. Notwithstanding the foregoing, a limited partner will not be entitled to
exercise its redemption rights if the delivery of common stock to the redeeming limited partner would:
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result in any person owning, directly or indirectly, common stock in excess of the stock ownership limit in our charter;
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result in our shares of stock being owned by fewer than 100 persons (determined without reference to any rules of attribution);
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cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant of our or the partnerships real property, within the meaning of Section 856(d)(2)(B) of the Code; or
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cause the acquisition of common stock by such redeeming limited partner to be integrated with any other distribution of common stock for purposes of complying with the registration provisions of the
Securities Act.
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We may, in our sole and absolute discretion, waive any of these restrictions.
With respect to the partnership units issuable in connection with the acquisition or development of our facilities, the redemption rights may
be exercised by the limited partners at any time after the first anniversary of our acquisition of these facilities;
provided
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however
, unless we otherwise agree:
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a limited partner may not exercise the redemption right for fewer than 1,000 partnership units or, if such limited partner holds fewer than 1,000 partnership units, the limited partner must redeem all of the partnership
units held by such limited partner;
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a limited partner may not exercise the redemption right for more than the number of partnership units that would, upon redemption, result in such limited partner or any other person owning, directly or indirectly,
common stock in excess of the ownership limitation in our charter; and
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a limited partner may not exercise the redemption right more than two times annually.
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number of shares of common stock issuable upon exercise of the redemption rights will be adjusted to account for stock splits, mergers, consolidations or similar pro rata stock transactions.
The partnership agreement requires that the operating partnership be operated in a manner that enables us to satisfy the requirements for
being classified as a REIT, to avoid any federal income or excise tax liability imposed by the Code (other than any federal income tax liability associated with our retained capital gains) and to ensure that the partnership will not be classified as
a publicly traded partnership taxable as a corporation under Section 7704 of the Code.
In addition to the administrative
and operating costs and expenses incurred by the operating partnership, the operating partnership generally will pay all of our administrative costs and expenses, including:
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all expenses relating to our continuity of existence;
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all expenses relating to offerings and registration of securities;
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all expenses associated with the preparation and filing of any of our periodic reports under federal, state or local laws or regulations;
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all expenses associated with our compliance with laws, rules and regulations promulgated by any regulatory body; and
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all of our other operating or administrative costs incurred in the ordinary course of business on behalf of the operating partnership.
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Distributions
The partnership agreement
provides that the operating partnership will distribute cash from operations, including net sale or refinancing proceeds, but excluding net proceeds from the sale of the operating partnerships property in connection with the liquidation of the
operating partnership, at such time and in such amounts as determined by us in our sole discretion, to us and the limited partners in accordance with their respective percentage interests in the operating partnership.
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Upon liquidation of the operating partnership, after payment of, or adequate provision for, debts
and obligations of the partnership, including any partner loans, any remaining assets of the partnership will be distributed to us and the limited partners with positive capital accounts in accordance with their respective positive capital account
balances.
Allocations
Profits and
losses of the partnership, including depreciation and amortization deductions, for each fiscal year generally are allocated to us and the limited partners in accordance with the respective percentage interests in the partnership. All of the
foregoing allocations are subject to compliance with the provisions of Sections 704(b) and 704(c) of the Code and Treasury regulations promulgated thereunder. The operating partnership expects to use the traditional method under
Section 704(c) of the Code for allocating items with respect to contributed property acquired in connection with the offering for which the fair market value differs from the adjusted tax basis at the time of contribution.
Term
The operating partnership will
have perpetual existence, or until sooner dissolved upon:
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our bankruptcy, dissolution, removal or withdrawal, unless the limited partners elect to continue the partnership;
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the passage of 90 days after the sale or other disposition of all or substantially all the assets of the partnership; or
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an election by us in our capacity as the owner of the sole general partner of the operating partnership.
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Tax Matters
Pursuant to the partnership
agreement, the general partner is the tax matters partner of the operating partnership. Accordingly, through our ownership of the general partner of the operating partnership, we have authority to handle tax audits and to make tax elections under
the Code on behalf of the operating partnership.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the current material federal income tax consequences to our company and to our stockholders generally resulting from
the treatment of our company as a REIT. Because this section is a general summary, it does not address all of the potential tax issues that may be relevant to you in light of your particular circumstances. Baker, Donelson, Bearman,
Caldwell & Berkowitz, P.C., or Baker Donelson, has acted as our counsel, has reviewed this summary, and is of the opinion that the discussion contained herein fairly summarizes the federal income tax consequences that are material to a
holder of shares of our common stock. The discussion does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders that are
subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions or broker-dealers, and non-United States individuals and foreign corporations.
The statements in this section of the opinion of Baker Donelson, referred to as the Tax Opinion, are based on the current federal
income tax laws governing qualification as a REIT. 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. You should
be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in those opinions.
This section is not a substitute for careful tax planning, nor does it constitute tax advice. We urge you to consult your own tax advisors
regarding the specific federal, state, local, foreign and other tax consequences to you, in the light of your own particular circumstances, of the purchase, ownership and disposition of shares of our common stock, our election to be taxed as a REIT
and the effect of potential changes in applicable tax laws.
Taxation of Our Company
We were previously taxed as a subchapter S corporation. We revoked our subchapter S election on April 6, 2004 and we have elected to be
taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year that began on April 6, 2004 and ended on December 31, 2004. In connection with this offering, our REIT counsel, Baker Donelson, has opined that,
for federal income tax purposes, we are and have been organized in conformity with the requirements for qualification to be taxed as a REIT under the Code commencing with our initial short taxable year ended December 31, 2004, and that our
current and proposed method of operations as described in this prospectus and as represented to our counsel by us satisfies currently, and will enable us to continue to satisfy in the future, the requirements for such qualification and taxation as a
REIT under the Code for future taxable years. This opinion, however, is based on factual assumptions and representations made by us to Baker Donelson concerning our organization, our proposed ownership and operations, and other matters relating to
our ability to qualify as a REIT, and is expressly conditioned upon the accuracy of such assumptions and representations.
We believe that
our proposed future method of operation will enable us to continue to qualify as a REIT. However, no assurances can be given that our beliefs or expectations will be fulfilled, as such qualification and taxation as a REIT depends upon our ability to
meet, for each taxable year, various tests imposed under the Code as discussed below. Those qualification tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified
categories, the diversity of our stock ownership, and the percentage of our earnings that we distribute. Baker Donelson will not review our compliance with those tests on a continuing basis. Accordingly, with respect to our current and future
taxable years, no assurance can be given that the actual results of our operation will satisfy such requirements. For a discussion of the tax consequences of our failure to maintain our qualification as a REIT, see Requirements for
QualificationFailure to Qualify.
The sections of the Code relating to qualification and operation as a REIT, and the federal
income taxation of a REIT and its stockholders, are highly technical and complex. The following discussion sets forth
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only the material aspects of those sections. This summary is qualified in its entirety by the applicable Code provisions and the related rules and regulations.
We generally will not be subject to federal income tax on the taxable income that we currently distribute to our stockholders. The benefit of
that tax treatment is that it avoids the double taxation, or taxation at both the corporate and stockholder levels, that generally results from owning stock in a corporation. However, we will be subject to federal tax in the following
circumstances:
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We are subject to the corporate federal income tax on 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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We are subject to the corporate alternative minimum tax on any items of tax preference that we do not distribute or allocate to stockholders.
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We are subject to tax, at the highest corporate rate, on:
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net gain from the sale or other disposition of property acquired through foreclosure (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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We are subject to a 100% tax on net income 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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If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under Requirements for QualificationGross 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 (1) the amount by which we fail the 75% gross income test, or (2) the amount by which we fail the 95% gross income test multiplied by
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a fraction intended to reflect our profitability.
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If we fail to distribute during a calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year, (2) 95% of our REIT capital gain net income for the year and (3) any undistributed
taxable income from earlier periods, then we will be subject to a 4% excise tax on the excess of the required distribution over the amount we actually distributed.
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If we fail to satisfy one or more requirements for REIT qualification during a taxable year beginning on or after January 1, 2005, other than a gross income test or an asset test, we will be required to pay a
penalty of $50,000 for each such failure.
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We may elect to retain and pay income tax on our net long-term capital gain. In that case, a United States stockholder 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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We may be subject to a 100% excise tax on certain transactions with a taxable REIT subsidiary that are not conducted at arms-length.
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If we acquire any asset from a C corporation (that is, a corporation generally subject to the full
corporate-level tax) in a transaction in which the basis of the asset in our hands is determined by
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reference to the basis of the asset in the hands of the C corporation, and we recognize gain on the disposition of the asset during the 10 year period beginning on the date that we acquired the
asset, then the assets built-in gain will be subject to tax at the highest corporate rate.
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Requirements for
Qualification
To continue to qualify as a REIT, we must meet various (1) organizational requirements, (2) gross income
tests, (3) asset tests, and (4) annual distribution requirements.
Organizational Requirements.
A REIT is a corporation,
trust or association that meets each of the following requirements:
(1) it is managed by one or more trustees or directors;
(2) its beneficial ownership is evidenced by transferable stock, or by transferable certificates of beneficial interest;
(3) it would be taxable as a domestic corporation, but for its election to be taxed as a REIT under Sections 856 through 860 of the Code;
(4) it is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws;
(5) at least 100 persons are beneficial owners of its stock or ownership certificates (determined without reference to any rules of
attribution);
(6) not more than 50% in value of its outstanding stock or ownership certificates is owned, directly or indirectly, by five
or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year; and
(7) it elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative
requirements established by the IRS that must be met to elect and maintain REIT status.
We must meet requirements one through four during
our entire taxable year and must meet requirement five during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. If we comply with all the requirements for ascertaining
information concerning the ownership of our outstanding stock in a taxable year and have no reason to know that we violated requirement six, we will be deemed to have satisfied requirement six for that taxable year. We did not have to satisfy
requirements five and six for our taxable year ending December 31, 2004. After the issuance of common stock pursuant to our April 2004 private placement, we had issued common stock with enough diversity of ownership to satisfy requirements five
and six as set forth above. Our charter provides for restrictions regarding the ownership and transfer of our shares of common stock so that we should continue to satisfy these requirements. The provisions of our charter restricting the ownership
and transfer of our shares of common stock are described in Description of Capital StockRestrictions on Ownership and Transfer.
For purposes of determining stock ownership under requirement six, 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, however, generally does not include a trust that is a qualified employee pension
or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be treated as holding our shares in proportion to their actuarial interests in the trust for purposes of requirement six.
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A corporation that is a qualified REIT subsidiary, or QRS, is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction and credit of a QRS are treated as assets, liabilities, and items of income, deduction and credit of the REIT. A QRS is a corporation other than a
taxable REIT subsidiary as described below, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any QRS 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.
An
unincorporated domestic entity with two or more owners that is eligible to elect its tax classification under Treasury Regulation Section 301.7701-3 but does not make such an election is generally treated as a partnership for federal income tax
purposes. In the case of a REIT that is a partner in a partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the
partnership for purposes of the applicable REIT qualification tests. We will treat our operating partnership as a partnership for U.S. federal income tax purposes. Accordingly, our proportionate share of the assets, liabilities and items of income
of the operating partnership and any other partnership, joint venture, or limited liability company that is treated as a partnership for federal income tax purposes in which we acquire an interest, directly or indirectly, is treated as our assets
and gross income for purposes of applying the various REIT qualification requirements.
A REIT is permitted to own up to 100% of the stock
of one or more taxable REIT subsidiaries, or TRS. We have formed and made taxable REIT subsidiary elections with respect to MPT Development Services, Inc., a Delaware corporation formed in January 2004 (MPT TRS), MPT
Covington TRS, Inc., a Delaware corporation formed in January 2010 and MPT Finance Corporation, Inc., a Delaware corporation formed in April 2011. We have also formed limited liability companies wholly-owned by MPT TRS which are disregarded entities
for federal income tax purposes. A taxable REIT subsidiary is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. Generally, the subsidiary and the REIT must jointly file an
election with the IRS to treat the subsidiary as a taxable REIT subsidiary. Ernest Health, Inc. (Ernest) and Capella Healthcare, Inc. (Capella) are also taxable REIT subsidiaries as a result of the ownership by disregarded
entities owned by MPT TRS of more than 35% ownership interests in Ernest and Capella. A taxable REIT subsidiary will pay income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the
deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain
types of transactions between a taxable REIT subsidiary and its parent REIT or the REITs tenants that are not conducted on an arms-length basis. We may engage in activities indirectly through a taxable REIT subsidiary as necessary or
convenient to avoid obtaining the benefit of income or services that would jeopardize our REIT status if we engaged in the activities directly. In particular, we would likely engage in activities through a taxable REIT subsidiary if we wished to
provide services to unrelated parties which might produce income that does not qualify under the gross income tests described below. We might also engage in otherwise prohibited transactions through a taxable REIT subsidiary. See description below
under Requirements for QualificationProhibited Transactions. A taxable REIT subsidiary may not operate or manage a health care facility, though for tax years beginning after July 30, 2008 a health care facility leased to
a taxable REIT subsidiary from a REIT may be operated on behalf of the taxable REIT subsidiary by an eligible independent contractor. For purposes of this definition a health care facility means a hospital, nursing facility, assisted
living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a service provider which is eligible for
participation in the Medicare program under Title XVIII of the Social Security Act with respect to such facility. MPT Covington TRS, Inc. has been formed specifically for the purpose of leasing a health care facility from us, subleasing that
facility to an entity in which it owns an equity interest, and having that facility operated by an eligible independent contractor. We have obtained a private letter ruling from the IRS holding that ownership of the equity interest and the operation
of the facility in accordance with the agreements among the parties do not adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. We have structured other transactions in which MPT TRS owns an indirect
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equity interest in a tenant entity in a similar manner, and we have structured leases with the operating subsidiaries of Ernest and Capella in a similar manner and may structure other such
transactions similarly in the future.
Gross Income Tests.
We must satisfy two gross income tests annually to maintain our
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, directly or indirectly, from investments relating to real property or mortgages on real property or
qualified temporary investment income. Qualifying income for purposes of that 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by mortgages 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 estate assets;
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income derived from the temporary investment of new capital that is attributable to the issuance of our shares of common stock or a public offering of our debt with a maturity date of at least five years and that we
receive during the one year period beginning on the date on which we received such new capital; and
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gross income from foreclosure property.
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Second, in general, at least 95% of our gross income
for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends or gain from the sale or disposition of stock or securities. Gross income from our sale of
property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests. In addition, for taxable years beginning on and after January 1, 2005, 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 and that are clearly and timely identified as such also will be excluded from both the
numerator and the denominator for purposes of the 95% gross income test and for transactions entered into after July 30, 2008, such income and gain also will be excluded from the 75% gross income test. For items of income and gain recognized
after July 30, 2008, passive foreign exchange gain is excluded from the 95% gross income test and real estate foreign exchange gain is excluded from both the 95% and the 75% gross income tests. The following paragraphs discuss the specific
application of the gross income tests to us.
The Secretary of the Treasury is given broad authority to determine whether particular items
of gain or income 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.
Rents from Real Property.
Rent that we receive from our real property will qualify as rents from real property, which is
qualifying income for purposes of the 75% and 95% gross income tests, only if the following conditions are met.
First, the rent
must not be based in whole or in part on the income or profits of any person. Participating rent, however, will qualify as rents from real property if it is based on percentages of receipts or sales and the percentages:
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are fixed at the time the leases are entered into;
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are not renegotiated during the term of the leases in a manner that has the effect of basing rent on income or profits; and
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conform with normal business practice.
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More generally, the rent will not qualify as
rents from real property if, considering the relevant lease and all the surrounding circumstances, the arrangement does not conform with normal business practice, but is in reality used as a means of basing the rent on income or profits.
We have represented to Baker Donelson that we intend to set and accept rents which are fixed dollar amounts or a fixed percentage of gross revenue, and not determined to any extent by reference to any persons income or profits, in compliance
with the rules above.
Second, we must not own, actually or constructively, 10% or more of the stock or the assets or net profits of any
tenant, referred to as a related party tenant, other than a taxable REIT subsidiary. Failure to adhere to this limitation would cause the rental income from the related party tenant to not be treated as qualifying income for purposes of the REIT
gross income tests. The constructive ownership rules generally provide that, if 10% or more in value of our stock is owned, directly or indirectly, by or for any person, we are considered as owning the stock owned, directly or indirectly, by or for
such person. In addition, our charter prohibits transfers of our shares that would cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant. Presently we own a less than 10% ownership interest in one tenant
entity. We do not own, actually or constructively, 10% or more of any tenant other than a taxable REIT subsidiary. We have represented to counsel that we will not rent any facility to a related-party tenant. However, MPT Covington TRS, Inc. has
acquired a greater than 10% equity interest in an entity to which it subleases a health care facility which is operated by an eligible independent operator. We have obtained a private letter ruling from the IRS holding that the ownership of the
equity interest and the operation of the facility in accordance with the agreements among the parties do not adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. or disqualify the rents paid by MPT Covington TRS, Inc. to us
from being treated as qualifying income under the 75% and 95% gross income tests. We have structured other transactions and may structure future transactions in a similar manner. In particular, our leases with subsidiaries of Ernest are structured
in a similar manner with the exception that the prior management of Ernest and its subsidiaries, through a management company, Guiding Health Management Group, LLC (GHMG), formed by the prior management, is the manager of the Ernest
facilities. Our leases with subsidiaries of Capella are structured in a similar manner with a management company, Sunergeo Health Partners , LLC (Sunergeo), formed by the prior management of Capella and its subsidiaries, as the manager
of the Capella facilities. GHMG and Sunergeo previously operated Ernest and its subsidiaries and Capella and its subsidiaries, respectively, as officers and employees. Although certain management personnel have remained as officers of Ernest and
Capella, they are now employees of and compensated by GHMG or Sunergeo. We believe that GHMG and Sunergeo meet the definition of an eligible independent contractor which is any independent contractor if, at the time such contractor
enters into an agreement with a taxable REIT subsidiary to operate a qualified health care facility, such contractor is actively engaged in the trade or business of operating such facilities for any person who is not a related person to the REIT or
the taxable REIT subsidiary. There is no assurance that the IRS will not take a contrary position with respect to the structuring of these and other such transactions. In addition, MPT TRS and MPT Covington TRS, Inc. have made and will make loans to
tenants to acquire operations and for other purposes. We have structured and will structure these loans as debt and believe that they will be characterized as such, and that our rental income from our tenant borrowers will be treated as qualifying
income for purposes of the REIT gross income tests. However, there can be no assurance that the IRS will not take a contrary position. If the IRS were to successfully treat a loan to a particular tenant as an equity interest, the tenant would be a
related party tenant with respect to us, the rent that we receive from the tenant would not be qualifying income for purposes of the REIT gross income tests, and we could lose our REIT status.
However, as stated above, we believe that these loans will be treated as debt rather than equity interests. Finally, because the constructive
ownership rules are broad and it is not possible to monitor continually direct and indirect transfers of our shares, no absolute assurance can be given that such transfers or other events of which we have no knowledge will not cause us to own
constructively 10% or more of a tenant other than a taxable REIT subsidiary at some future date.
We currently own 100% of the stock of
MPT TRS, MPT Covington TRS, Inc. and MPT Finance Corporation, Inc., all of which are taxable REIT subsidiaries, and may in the future own up to 100% of the stock
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of one or more additional taxable REIT subsidiaries. In addition, Ernest and Capella, and their corporate subsidiaries, are taxable REIT subsidiaries because of MPT TRSs indirect ownership
of more than a 35% interest in Ernest and Capella. Under an exception to the related-party tenant rule described in the preceding paragraph, rent that we receive from a taxable REIT subsidiary will qualify as rents from real property as
long as (1) the taxable REIT subsidiary is a qualifying taxable REIT subsidiary (among other things, it does not operate or manage a health care facility), (2) at least 90% of the leased space in the facility is leased to persons other
than taxable REIT subsidiaries and related party tenants, and (3) the amount paid by the taxable REIT subsidiary to rent space at the facility is substantially comparable to rents paid by other tenants of the facility for comparable space. In
addition, for tax years beginning after July 30, 2008, rents paid to a REIT by a taxable REIT subsidiary with respect to a qualified health care property (as defined below under Requirements for
QualificationForeclosure Property), operated on behalf of such taxable REIT subsidiary by a person who is an eligible independent contractor (as defined above), are qualifying rental income for purposes of the 75% and 95%
gross income tests. We have formed and made a taxable REIT subsidiary election with respect to MPT Covington TRS, Inc. for the purpose of leasing a health care facility from us, subleasing that facility to an entity in which it owns an equity
interest, and having that facility operated by an eligible independent contractor. We have obtained a private letter ruling from the IRS holding that the rent received by us from MPT Covington TRS, Inc. will qualify as rent from real property under
these exceptions. We have since structured leases with taxable REIT subsidiaries in a similar manner, including leases with the subsidiaries of Ernest.
Third, the rent attributable to the personal property leased in connection with a lease of real property must not be greater than 15% of the
total rent received under the lease. The rent attributable to personal property under a lease is the amount that bears the same ratio to total rent under the lease for the taxable year as the average of the fair market values of the leased personal
property at the beginning and at the end of the taxable year bears to the average of the aggregate fair market values of both the real and personal property covered by the lease at the beginning and at the end of such taxable year (the
personal property ratio). With respect to each of our leases, we believe that the personal property ratio generally will be less than 15%. Where that is not, or may in the future not be, the case, we believe that any income attributable
to personal property will not jeopardize our ability to qualify as a REIT. There can be no assurance, however, that the IRS would not challenge our calculation of a personal property ratio, or that a court would not uphold such assertion. If such a
challenge were successfully asserted, we could fail to satisfy the 75% or 95% gross income test and thus lose our REIT status.
Fourth, we
cannot furnish or render noncustomary services to the tenants of our facilities, or manage or operate our facilities, other than through an independent contractor who is adequately compensated and from whom we do not derive or receive any income.
However, we need not provide services through an independent contractor, but instead may provide services directly to our tenants, if the services are usually or customarily rendered in connection with the rental of space for
occupancy only and are not considered to be provided for the tenants convenience. In addition, we may provide a minimal amount of noncustomary services to the tenants of a facility, other than through an independent contractor, as
long as our income from the services does not exceed 1% of our income from the related facility. Finally, we may own up to 100% of the stock of one or more taxable REIT subsidiaries, which may provide noncustomary services to our tenants without
tainting our rents from the related facilities. We do not intend to perform any services other than customary services for our tenants, and services provided through independent contractors or taxable REIT subsidiaries. We have represented to Baker
Donelson that we will not perform noncustomary services which would jeopardize our REIT status.
Finally, in order for the rent payable
under the leases of our properties to constitute rents from real property, the leases must be respected as true leases for federal income tax purposes and not treated as service contracts, joint ventures, financing arrangements, or
another type of arrangement. We generally treat our leases with respect to our properties as true leases for federal income tax purposes; however, there can be no assurance that the IRS would not consider a particular lease a financing arrangement
instead of a true lease for federal income tax purposes. In that case, and in any case in which we intentionally structure a lease as a financing
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arrangement, our income from that lease would be interest income rather than rent and would be qualifying income for purposes of the 75% gross income test to the extent that our loan
does not exceed the fair market value of the real estate assets associated with the facility. All of the interest income from our loan would be qualifying income for purposes of the 95% gross income test. We believe that the characterization of a
lease as a financing arrangement would not adversely affect our ability to qualify as a REIT.
If a portion of the rent we receive from a
facility does not qualify as rents from real property because the rent attributable to personal property exceeds 15% of the total rent for a taxable year, the portion of the rent attributable to personal property will not be qualifying
income for purposes of either the 75% or 95% gross income test. If rent attributable to personal property, plus any other income that is nonqualifying income for purposes of the 95% gross income test, during a taxable year exceeds 5% of our gross
income during the year, we would lose our REIT status. By contrast, in the following circumstances, none of the rent from a lease of a facility would qualify as rents from real property: (1) the rent is considered based on the
income or profits of the tenant; (2) the tenant is a related party tenant or fails to qualify for the exception to the related-party tenant rule for qualifying taxable REIT subsidiaries; (3) we furnish more than a de minimis amount of
noncustomary services to the tenants of the facility, other than through a qualifying independent contractor or a taxable REIT subsidiary; or (4) we manage or operate the facility, other than through an independent contractor. In any of these
circumstances, we could lose our REIT status because we would be unable to satisfy either the 75% or 95% gross income test.
Tenants may
be required to pay, besides base rent, reimbursements for certain amounts we are obligated to pay to third parties (such as a tenants proportionate share of a facilitys operational or capital expenses), penalties for nonpayment or late
payment of rent or additions to rent. These and other similar payments should qualify as rents from real property.
Interest.
The term interest generally does not include any amount received or accrued, directly or indirectly, if the
determination of the amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term interest solely because it is based on a fixed percentage
or percentages of receipts or sales. Furthermore, to the extent that interest from a loan that is based upon the residual cash proceeds from the sale of the property securing the loan constitutes a shared appreciation provision, income
attributable to such participation feature will be treated as gain from the sale of the secured property.
Fee Income.
We
may receive various fees in connection with our operations. The fees will be qualifying income for purposes of both the 75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by
real property and the fees are not determined by income and profits. Other fees are not qualifying income for purposes of either gross income test. We anticipate that MPT TRS, one of our taxable REIT subsidiaries, will receive most of the management
fees, inspection fees and construction fees in connection with our operations. Any fees earned by MPT TRS will not be included as income for purposes of the gross income tests.
Prohibited Transactions
. A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other
than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets will be held primarily for sale to customers and that a sale of any of our assets will
not be in the ordinary course of our business. Whether a REIT holds an asset primarily for sale to customers in the ordinary course of a trade or business depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction. We
cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property that we hold primarily for sale to customers in the ordinary course of a trade or
business. We may form or acquire a taxable REIT subsidiary to engage in transactions that may not fall within the safe-harbor provisions.
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Foreclosure Property
. We will be subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure
property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incidental to such real property acquired by a REIT as the result of the
REITs having bid on the property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after actual or imminent default on a lease of the property or on indebtedness secured by the
property, or a Repossession Action. Property acquired by a Repossession Action will not be considered foreclosure property if (1) the REIT held or acquired the property subject to a lease or securing indebtedness for
sale to customers in the ordinary course of business or (2) the lease or loan was acquired or entered into with intent to take Repossession Action or in circumstances where the REIT had reason to know a default would occur. The determination of
such intent or reason to know must be based on all relevant facts and circumstances. In no case will property be considered foreclosure property unless the REIT makes a proper election to treat the property as foreclosure property.
Foreclosure property includes any qualified health care property acquired by a REIT as a result of a termination of a lease of such property
(other than a termination by reason of a default, or the imminence of a default, on the lease). A qualified health care property means any real property, including interests in real property, and any personal property incident to such
real property which is a health care facility (as defined above under Requirements for QualificationOrganizational Requirements) or is necessary or incidental to the use of a health care facility.
However, a REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT
acquired the property (or, in the case of a qualified health care property which becomes foreclosure property because it is acquired by a REIT as a result of the termination of a lease of such property, at the end of the second taxable year
following the taxable year in which the REIT acquired such property) or longer if an extension is granted by the Secretary of the Treasury. This period (as extended, if applicable) terminates, and foreclosure property ceases to be foreclosure
property on the first day:
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on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test;
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on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or
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which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the
REIT itself does not derive or receive any income. For this purpose, in the case of a qualified health care property, income derived or received from an independent contractor will be disregarded to the extent such income is attributable to
(1) a lease of property in effect on the date the REIT acquired the qualified health care property (without regard to its renewal after such date so long as such renewal is pursuant to the terms of such lease as in effect on such date) or
(2) any lease of property entered into after such date if, on such date, a lease of such property from the REIT was in effect and, under the terms of the new lease, the REIT receives a substantially similar or lesser benefit in comparison to
the prior lease.
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Hedging Transactions
. From time to time, we may enter into hedging transactions with respect to one
or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and
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floors, options to purchase such items, and futures and forward contracts. For taxable years beginning on and after January 1, 2005, income and gain from hedging transactions
will be excluded from gross income for purposes of the 95% gross income test and for transactions entered into after July 30, 2008, such income or gain will also be excluded from the 75% gross income test. For this purpose, a hedging
transaction will mean any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate or price changes with respect to borrowings made or to be made, or ordinary obligations incurred or
to be incurred, to acquire or carry real estate assets or to manage risks 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 property which generates such
income or gain). We are required to clearly identify any such hedging transaction before the close of the day on which it is acquired, originated, or entered into. Since the financial markets continually introduce new and innovative instruments
related to risk-sharing or trading, it is not entirely clear which such instruments will generate income which will be considered qualifying or excluded income for purposes of the gross income tests. We intend to structure any hedging or similar
transactions so as not to jeopardize our status as a REIT.
Foreign Currency Gain
. For gains and items of income recognized after
July 30, 2008, passive foreign exchange gain is excluded from the 95% income test and real estate foreign exchange gain is excluded from the 75% income test. Real estate foreign exchange gain is foreign currency gain (as defined in Code
Section 988(b)(1)) which is attributable to (i) any qualifying item of income or gain for purposes of the 75% income test, (ii) the acquisition or ownership of obligations secured by mortgages on real property or interests in real
property; or (iii) becoming or being the obligor under obligations secured by mortgages on real property or on interests in real property. Real estate foreign exchange gain also includes Code Section 987 gain attributable to a qualified
business unit (QBU) of the REIT if the QBU itself meets the 75% income test for the taxable year, and meets the 75% asset test at the close of each quarter of the REIT that has directly or indirectly held the QBU. The QBU is not required
to meet the 95% income test in order for this 987 gain exclusion to apply. Real estate foreign exchange gain also includes any other foreign currency gain as determined by the Secretary of the Treasury.
Passive foreign exchange gain includes all real estate foreign exchange gain, and in addition includes foreign currency gain which is
attributable to (i) any qualifying item of income or gain for purposes of the 95% income test, (ii) the acquisition or ownership of obligations, (iii) becoming or being the obligor under obligations, and (iv) any other foreign
currency gain as determined by the Secretary of the Treasury.
Any gain derived from dealing, or engaging in substantial and regular
trading, in securities denominated in, or determined by reference to, one or more nonfunctional currencies will be treated as non-qualifying income for both the 75% and 95% gross income tests. We do not currently, and do not expect to, engage in
such trading.
Failure to Satisfy Gross Income Tests.
If we fail to satisfy one or both of the gross income tests for any taxable
year, we nevertheless may qualify as a REIT for that year if we qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:
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our failure to meet those tests is due to reasonable cause and not to willful neglect, and
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following our identification of such failure for any taxable year, a schedule of the sources of our income is filed in accordance with regulations prescribed by the Secretary of the Treasury.
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We cannot with certainty predict whether any failure to meet these tests will qualify for the relief provisions. As discussed above in
Taxation of Our Company, even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction
intended to reflect our profitability.
Asset Tests
. To maintain our qualification as a REIT, we also must satisfy the following
asset tests at the end of each quarter of each taxable year.
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First, at least 75% of the value of our total assets must consist of:
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cash or cash items, including certain receivables;
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real estate assets, which includes interest in real property, leaseholds, options to acquire real property or leaseholds, interests in mortgages on real property, shares (or transferable certificates of beneficial
interest) in other REITs, and, for taxable years beginning after December 31, 2015, debt instruments issued by publicly offered REITs and interests in mortgages on interests in real property; and
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investments in stock or debt instruments attributable to the temporary investment (i.e., for a period not exceeding 12 months) of new capital that we raise through any equity offering or public offering of debt with at
least a five year term.
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Effective for tax years beginning after July 30, 2008, if a REIT or its QBU uses any foreign
currency as its functional currency (as defined in section 985(b) of the Code), the term cash includes such currency to the extent held for use in the normal course of the activities of the REIT or QBU which give rise to items of income
or gain qualifying under the 95% and 75% income tests or are directly related to acquiring or holding assets qualifying under the 75% assets test, provided that the currency cannot be held in connection with dealing, or engaging in substantial and
regular trading, in securities.
With respect to investments not included in the 75% asset class, we may not hold securities of any one
issuer (other than a taxable REIT subsidiary) that exceed 5% of the value of our total assets; nor may we hold securities of any one issuer (other than a taxable REIT subsidiary) that represent more than 10% of the voting power of all outstanding
voting securities of such issuer or more than 10% of the value of all outstanding securities of such issuer.
In addition, for taxable
years beginning before January 1, 2018, we may not hold securities of one or more taxable REIT subsidiaries that represent in the aggregate more than 25% of the value of our total assets and, for taxable years beginning on or after
January 1, 2018, we may not hold securities of one or more taxable REIT subsidiaries that represent in the aggregate more than 20% of the value of our total assets, in all cases irrespective of whether such securities may also be included in
the 75% asset class (e.g., a mortgage loan issued to a taxable REIT subsidiary). For taxable years beginning after December 31, 2015, we may not hold debt instruments (other than debt secured by interests in real property) issued by publicly
offered REITs that represent in the aggregate more than 25% of the value of our total assets. Furthermore, no more than 25% of our total assets may be represented by securities that are not included in the 75% asset class, including, among other
things, certain securities of a taxable REIT subsidiary such as stock or non-mortgage debt.
For purposes of the 5% and 10% asset tests,
the term securities does not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or taxable REIT subsidiary, mortgage loans that constitute real estate assets, or equity interests in a partnership that
holds real estate assets. The term securities, however, generally includes debt securities issued by a partnership or another REIT, except that for purposes of the 10% value test, the term securities does not include:
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Straight debt, defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (1) the debt is not convertible, directly or indirectly, into stock, and
(2) the interest rate and interest payment dates are not contingent on profits, the borrowers discretion, or similar factors. Straight debt securities do not include any securities issued by a partnership or a corporation in
which we or any controlled TRS (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock) holds non- straight debt securities that have an aggregate value of more than 1% of the
issuers outstanding securities. However, straight debt securities include debt subject to the following contingencies:
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a contingency relating to the time of payment of interest or principal, as long as either (1) there is no change to the effective yield to maturity of the debt obligation, other than a change to the annual yield to
maturity that does not exceed the greater of 0.25% or 5% of the annual yield to maturity, or (2) neither the aggregate issue price nor the aggregate face amount of the issuers debt obligations held by us exceeds $1 million and no more
than 12 months of unaccrued interest on the debt obligations can be required to be prepaid;
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a contingency relating to the time or amount of payment upon a default or exercise of a prepayment right by the issuer of the debt obligation, as long as the contingency is consistent with customary commercial practice;
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Any loan to an individual or an estate;
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Any Section 467 rental agreement, other than an agreement with a related party tenant;
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Any obligation to pay rents from real property;
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Any security issued by a state or any political subdivision thereof, the District of Columbia, a foreign government or any political subdivision thereof, or the Commonwealth of Puerto Rico, but only if the determination
of any payment thereunder does not depend in whole or in part on the profits of any entity not described in this paragraph or payments on any obligation issued by an entity not described in this paragraph;
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Any security issued by a REIT;
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Any debt instrument of an entity treated as a partnership for federal income tax purposes to the extent of our interest as a partner in the partnership; and
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Any debt instrument of an entity treated as a partnership for federal income tax purposes not described in the preceding bullet points if at least 75% of the partnerships gross income, excluding income from
prohibited transaction, is qualifying income for purposes of the 75% gross income test described above in Requirements for QualificationGross Income Tests.
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For purposes of the 10% value test, our proportionate share of the assets of a partnership is our proportionate interest in any securities
issued by the partnership, excluding all securities described above except those securities described in the last two bullet points above.
MPT TRS and MPT Covington TRS, Inc., two of our taxable REIT subsidiaries, have made and will make loans to tenants to acquire operations and
for other purposes. If the IRS were to successfully treat a particular loan to a tenant as an equity interest in the tenant, the tenant would be a related party tenant with respect to our company and the rent that we receive from the
tenant would not be qualifying income for purposes of the REIT gross income tests. As a result, we could lose our REIT status. In addition, if the IRS were to successfully treat a particular loan as an interest held by our operating partnership
rather than by one of our taxable REIT subsidiaries we could fail the 5% asset test, and if the IRS further successfully treated the loan as other than straight debt, we could fail the 10% asset test with respect to such interest. As a result of the
failure of either test, we could lose our REIT status.
MPT Covington TRS, Inc. leases a health care facility from us and subleases it to
a tenant in which it owns a greater than 10% interest. The facility is operated by an eligible independent contractor. We have obtained a private letter ruling from the IRS holding that ownership of the equity interest and the operation of the
facility in accordance with the agreements among the parties do not adversely affect the taxable REIT subsidiary status of MPT Covington TRS, Inc. We have since structured other transactions in which MPT TRS owns an
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indirect equity interest in a tenant entity in a similar manner, including leases with the subsidiaries of Ernest. If the IRS successfully challenged the taxable REIT subsidiary status of MPT
Covington TRS, Inc. or MPT TRS, and we were unable to cure as described below, we could fail the 10% asset test with respect to our ownership of MPT Covington TRS, Inc. or MPT TRS and as a result lose our REIT status.
We will monitor the status of our assets for purposes of the various asset tests and will manage our portfolio in order to comply at all times
with such tests. If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT status 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 item above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.
In the event that, at the end of
any calendar quarter, we violate the 5% or 10% test described above, we will not lose our REIT status if (1) the failure is de minimis (up to the lesser of 1% of our assets or $10 million) and (2) we dispose of assets or otherwise comply
with the asset tests within six months after the last day of the quarter in which we identified the failure of the asset test. In the event of a more than de minimis failure of the 5% or 10% tests, or a failure of the other assets test, at the end
of any calendar quarter, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT status if we (1) file with the IRS a schedule describing the assets that caused the failure, (2) dispose of
assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified the failure of the asset test and (3) pay a tax equal to the greater of $50,000 and tax at the highest corporate rate on
the net income from the nonqualifying assets during the period in which we failed to satisfy the asset tests.
Distribution
Requirements.
Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount not less than:
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90% of our REIT taxable income, computed without regard to the dividends-paid deduction or our net capital gain or loss; and
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90% of our after-tax net income, if any, from foreclosure property;
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the sum of certain items of non-cash income.
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We must pay such distributions in the taxable
year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such
declaration.
We will pay federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders. In
addition, we will incur a 4% nondeductible excise tax on the excess of a specified required distribution over amounts we actually distribute if we distribute an amount less than the required distribution during a 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. The required distribution must not be less than the sum of:
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85% of our REIT ordinary income for the year;
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95% of our REIT capital gain income for the year; and
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any undistributed taxable income from prior periods.
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We may elect to retain and pay income
tax on the net long-term capital gain we receive in a taxable year. See Requirements for QualificationTaxation of Taxable United States Stockholders. If we so elect, we will be treated as having distributed any such retained
amount for purposes of the 4% excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% excise tax.
It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. For example, we may not deduct recognized capital losses from our REIT taxable income. Further, it is possible
that, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our allocable share of cash attributable to that sale. As a result of the foregoing, we may have less cash than is
necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue additional shares of common or preferred
stock.
Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying
deficiency dividends to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest based upon the amount of any deduction we take for deficiency dividends.
Recordkeeping
Requirements
. We must maintain certain records in order to qualify as a REIT. In addition, to avoid paying a penalty, we must request on an annual basis information from our stockholders designed to disclose the actual ownership of our shares of
outstanding capital stock. We intend to comply with these requirements.
Failure to Qualify
. If we failed to qualify as a REIT in
any taxable year and no relief provision applied, we would have the following consequences. We would be subject to federal income tax and any applicable alternative minimum tax at rates applicable to regular C corporations on our taxable income,
determined without reduction for amounts distributed to stockholders. We would not be required to make any distributions to stockholders, and any distributions to stockholders would be taxable to them as dividend income to the extent of our current
and accumulated earnings and profits. Corporate stockholders could be eligible for a dividends-received deduction if certain conditions are satisfied. Unless we qualified for relief under specific statutory provisions, we would not be permitted to
elect taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.
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 the 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 above in Gross Income Tests and Asset Tests.
Taxation of Our Stockholders
Taxation of Taxable United States Stockholders
. As long as we qualify as a REIT, a taxable United States stockholder will
be required to take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long-term capital gain. A United States stockholder will not
qualify for the dividends-received deduction generally available to corporations. The term United States stockholder means a holder of shares of common stock that, for United States federal income tax purposes, is:
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a citizen or resident of the United States;
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a corporation or partnership (including an entity treated as a corporation or partnership for United States federal income tax purposes) created or organized under the laws of the United States or of a political
subdivision of the United States;
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an estate whose income is subject to United States federal income taxation regardless of its source; or
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any trust if (1) a United States court is able to exercise primary supervision over the administration of such trust and one or more United States persons have the authority to control all substantial decisions of
the trust or (2) it has a valid election in place to be treated as a United States person.
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For individuals with
taxable income in excess of certain thresholds, the maximum federal income tax rate on ordinary income is 39.6% and the maximum rate on long-term capital gains and qualified dividend income is 20%. Estates and trusts have separate tax rate
schedules.
Distributions
. Distributions paid to a United States stockholder will generally not qualify for the maximum 20% tax
rate in effect for qualified dividend income. Qualified dividend income generally includes dividends paid by domestic C corporations and certain qualified foreign corporations to most United States noncorporate stockholders. As long as
we qualify as a REIT, our dividends generally will not be eligible for the current preferred rates on qualified dividend income. As a result, our ordinary REIT dividends will continue to be taxed at the higher tax rate applicable to ordinary income.
Currently, the highest marginal individual income tax rate on ordinary income is 39.6%. However, the 20% maximum tax rate for qualified dividend income will apply to our ordinary REIT dividends, if any, that are (1) attributable to dividends
received by us from non-REIT corporations, such as our taxable REIT subsidiaries, and (2) attributable to income upon which we have paid corporate income tax (e.g., to the extent that we distribute less than 100% of our taxable income). In
general, to qualify for the reduced tax rate on qualified dividend income, a stockholder must hold our common stock for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which our common stock
becomes ex-dividend.
Distributions to a United States stockholder which we designate as capital gain dividends will generally be treated
as long-term capital gain, without regard to the period for which the United States stockholder has held its common stock. With certain limitations, capital gain dividends received by an individual U.S. stockholder may be eligible for preferential
rates of taxation. U.S. stockholders that are corporations, may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. In addition, certain net capital gains attributable to depreciable real property held for
more than 12 months are subject to a 25% maximum federal income tax rate to the extent of previously claimed real property depreciation.
Under recently enacted legislation, for taxable years beginning after December 31, 2015, the amount of dividends we designate as
qualified dividends and capital gain dividends with respect to any taxable year may not exceed the dividends we pay with respect to such year.
We may elect to retain and pay income tax on the net long-term capital gain that we receive in a taxable year. In that case, a United States
stockholder would be taxed on its proportionate share of our undistributed long-term capital gain. The United States stockholder would receive a credit or refund for its proportionate share of the tax we paid. The United States stockholder would
increase the basis in its shares of common stock by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.
A United States stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the
distribution does not exceed the adjusted basis of the United States stockholders shares. Instead, the distribution will reduce the adjusted basis of the shares, and any amount in excess of both our current and accumulated earnings and profits
and the adjusted basis will be treated as capital gain, long-term if the shares have been held for more than one year, provided the shares are a capital asset in the hands of the
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United States stockholder. In addition, any distribution we declare in October, November, or December of any year that is payable to a United States stockholder of record on a specified date in
any of those months will be treated as paid by us and received by the United States stockholder on December 31 of the year, provided we actually pay the distribution during January of the following calendar year.
Stockholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these losses
are generally carried over by us for potential offset against our future income. Taxable distributions from us and gain from the disposition of shares of common stock will not be treated as passive activity income; stockholders generally will not be
able to apply any passive activity losses, such as losses from certain types of limited partnerships in which the stockholder is a limited partner, against such income. In addition, taxable distributions from us and gain from the
disposition of common stock generally will be treated as investment income for purposes of the investment interest limitations. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to
that year that constitute ordinary income, return of capital, and capital gain.
Taxation of United States Stockholders on the
Disposition of Shares of Common Stock.
In general, a United States stockholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of our shares of common stock as long-term capital gain or loss if
the United States stockholder has held the stock for more than one year, and otherwise as short-term capital gain or loss. However, a United States stockholder must treat any loss upon a sale or exchange of common stock held for six months or less
as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us which the United States stockholder treats as long-term capital gain. All or a portion of any loss that a United States
stockholder realizes upon a taxable disposition of common stock may be disallowed if the United States stockholder purchases other shares of our common stock within 30 days before or after the disposition.
Capital Gains and Losses
. The tax-rate differential between capital gain and ordinary income for non-corporate taxpayers may be
significant. A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is currently
39.6%. The maximum tax rate on long-term capital gain applicable to individuals is generally 20%. The maximum tax rate on long-term capital gain from the sale or exchange of section 1250 property (i.e., generally, depreciable real
property) is 25% to the extent of certain unrecaptured section 1250 gain. We generally may designate whether a distribution we designate as capital gain dividends (and any retained capital gain that we are deemed to distribute) is
taxable to non-corporate stockholders at a 20% or 25% rate.
The characterization of income as capital gain or ordinary income may affect
the deductibility of capital losses. A non-corporate taxpayer may deduct from its ordinary income capital losses not offset by capital gains only up to a maximum of $3,000 annually. A non-corporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain at corporate ordinary income rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains and unused losses may be carried back three years and
carried forward five years.
Certain United States individuals, estates, and trusts with taxable incomes in excess of certain thresholds
will be subject to an additional 3.8% tax on their net investment income.
Information Reporting Requirements 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. A United States stockholder may be subject to backup withholding at a rate of
up to 28% with respect to distributions unless the holder:
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is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or
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provides a taxpayer identification number, certifies, under penalty of perjury, as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding
rules.
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A United States stockholder who does not provide us with its correct taxpayer identification number also may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholders income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any
stockholder who fails to certify its non-foreign status to us. United States stockholders should consult their own tax advisors regarding their qualifications for exemption from backup withholding and the procedure for obtaining an exemption. For a
discussion of the backup withholding rules as applied to non-United States stockholders, see Taxation of Non-United States Stockholders.
Taxation of Tax-exempt Stockholders.
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual
retirement accounts, referred to as pension trusts, generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income. While many investments in real estate generate
unrelated business taxable income, the IRS has issued a ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute unrelated business taxable income so long as the exempt employee pension trust does not
otherwise use the shares of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts we distribute to tax-exempt stockholders generally should not constitute unrelated business taxable income. However, if a
tax-exempt stockholder were to finance its acquisition of common stock with debt, a portion of the income it received from us would constitute unrelated business taxable income pursuant to the debt-financed property rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under special provisions of the federal income tax laws are subject to different
unrelated business taxable income rules, which generally will require them to characterize distributions they receive from us as unrelated business taxable income. Finally, in certain circumstances, a qualified employee pension or profit-sharing
trust that owns more than 10% of our outstanding stock must treat a percentage of the dividends it receives from us as unrelated business taxable income. The percentage is equal to the gross income we derive from an unrelated trade or business,
determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. This rule applies to a pension trust holding more than 10% of our outstanding stock only if:
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the percentage of our dividends which the tax-exempt trust must treat as unrelated business taxable income is at least 5%;
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we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% in value of our outstanding stock be owned by five or fewer individuals, which modification allows the beneficiaries of the
pension trust to be treated as holding shares in proportion to their actual interests in the pension trust; and
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either of the following applies:
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one pension trust owns more than 25% of the value of our outstanding stock; or
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a group of pension trusts individually holding more than 10% of the value of our outstanding stock collectively owns more than 50% of the value of our outstanding stock.
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Taxation of Non-United States Stockholders.
The rules governing United States federal income taxation of nonresident alien individuals,
foreign corporations, foreign partnerships and other foreign stockholders are complex. This section is only a summary of such rules. We urge non-United States stockholders to consult their own tax advisors to determine the impact of U.S. federal,
state and local income and non-U.S. tax laws on ownership of shares of common stock, including any reporting requirements.
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A non-United States stockholder that receives a distribution which (1) is not attributable
to gain from our sale or exchange of United States real property interests (defined below) and (2) we do not designate as a capital gain dividend (or retained capital gain) will generally recognize ordinary income to the extent of
our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. Under some treaties, lower withholding rates
on dividends do not apply, or do not apply as favorably to, dividends from REITs. However, a non-United States stockholder generally will be subject to federal income tax at graduated rates on any distribution treated as effectively connected with
the non-United States stockholders conduct of a United States trade or business, in the same manner as United States stockholders are taxed on distributions. A corporate non-United States stockholder may, in addition, be subject to the 30%
branch profits tax. We plan to withhold United States income tax at the rate of 30% on the gross amount of any distribution paid to a non-United States stockholder unless:
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a lower treaty rate applies and the non-United States stockholder provides us with an IRS Form
W-8BEN
or W-8BEN-E evidencing eligibility for that reduced rate; or
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the non-United States stockholder provides us with an IRS Form W-8ECI claiming that the distribution is effectively connected income.
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A non-United States stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the
excess portion of the distribution does not exceed the adjusted basis of the stockholders shares of common stock. Instead, the excess portion of the distribution will reduce the adjusted basis of the shares. A non-United States stockholder
will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of its shares, if the non-United States stockholder otherwise would be subject to tax on gain from the sale or
disposition of shares of common stock, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will
withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-United States stockholder may obtain a refund of amounts we withhold if we later determine that a distribution in fact exceeded
our current and accumulated earnings and profits.
We may be required to withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. We may, therefore, withhold at a rate of 10% on any portion of a distribution to the extent we determined it is not subject to withholding at the 30% rate described above.
Furthermore, under the Foreign Account Tax Compliance Act, withholding is required at a rate of 30 percent on dividends in respect of, and,
after December 31, 2018, gross proceeds from the sale of, our common stock held by certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to
report, on an annual basis, information with respect to shares in the institution held by certain United States persons and by certain non-US entities that are wholly or partially owned by United States persons and to withhold certain amounts paid
to certain account holders and financial institutions. Similarly, dividends in respect of, and gross proceeds from the sale of, our common stock held by an investor that is a non-financial non-US entity will be subject to withholding at a rate of 30
percent, unless such entity either (i) certifies to us that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entitys substantial United States
owners, which we will in turn provide to the Secretary of the Treasury. Non-United States stockholders are encouraged to consult with their tax advisors regarding the possible implications of the legislation on their investment in our common
stock.
For any year in which we qualify as a REIT, a non-United States stockholder will incur tax on distributions attributable to gain
from our sale or exchange of United States real property interests under the FIRPTA provisions of the Code. The term United States real property interests includes interests in real property located in the United
States or the Virgin Islands and stocks in corporations at least 50% by value of whose real property interests and assets used or held for use in a trade or business consist of United States real property interests.
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Under the FIRPTA rules, a non-United States stockholder is taxed on distributions attributable to
gain from sales of United States real property interests as if the gain were effectively connected with the conduct of a United States business of the non-United States stockholder. A non-United States stockholder thus would be taxed on such a
distribution at the normal capital gain rates applicable to United States stockholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A non-United States corporate
stockholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. We must withhold 35% of any distribution that we could designate as a capital gain dividend. A non-United States
stockholder may receive a credit against our tax liability for the amount we withhold.
For non-United States stockholders of our
publicly-traded shares, capital gain distributions that are attributable to our sale of real property will not be subject to FIRPTA and therefore will be treated as ordinary dividends rather than as gain from the sale of a United States real
property interest, as long as the non-United States stockholder did not own more than 10% of the class of our stock on which the distributions are made for the one year period ending on the date of distribution. As a result, non-United States
stockholders generally would be subject to withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on ordinary dividends.
A non-United States stockholder generally will not incur tax under FIRPTA with respect to gain on a sale of shares of common stock as long as,
at all times, non-United States persons hold, directly or indirectly, less than 50% in value of our outstanding stock. For purposes of this test, we may treat any stockholder who owns less than 5% of our publicly traded stock as a United States
person unless we have actual knowledge that such stockholder is not a United States person. We cannot assure you that this test will be met. Even if we meet this test, pursuant to the wash sale rules under FIRPTA, a non-United States
stockholder may incur tax under FIRPTA to the extent such stockholder disposes of our common stock within a certain period prior to a capital gain distribution and directly or indirectly (including through certain affiliates) reacquires our common
stock within certain prescribed periods. In addition, even if we do not meet the domestically controlled test, a non-United States stockholder that owned, actually or constructively, 10% or less of the outstanding common stock at all
times during a specified testing period will not incur tax under FIRPTA on gain from a sale of common stock if the stock is regularly traded on an established securities market. Any gain subject to tax under FIRPTA will be treated in the
same manner as it would be in the hands of United States stockholders subject to alternative minimum tax, but under a special alternative minimum tax in the case of nonresident alien individuals.
A non-United States stockholder generally will incur tax on gain from the sale of common stock not subject to FIRPTA if:
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the gain is effectively connected with the conduct of the non-United States stockholders United States trade or business, in which case the non-United States stockholder will be subject to the same treatment as
United States stockholders with respect to the gain; or
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the non-United States stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year in which case the non-United States stockholder will incur a 30% tax
on capital gains.
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Other Tax Consequences
Tax Aspects of Our Investments in Our Operating Partnership.
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investment in our operating partnership and
any subsidiary partnerships or limited liability companies we form or acquire, each individually referred to as a Partnership and
collectively, as Partnerships. The following discussion does not cover state or local tax laws or any federal tax laws other than income tax laws.
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Classification as Partnerships.
We are entitled to include in our income our distributive
share of each Partnerships income and to deduct our distributive share of each Partnerships losses only if each Partnership is classified for federal income tax purposes as a partnership (or an entity that is disregarded for federal
income tax purposes if the entity has only one owner or member), rather than as a corporation or an association taxable as a corporation. An organization with at least two owners or members will be classified as a partnership, rather than as a
corporation, for federal income tax purposes if it:
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is treated as a partnership under the Treasury regulations relating to entity classification (the check-the-box regulations); and
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is not a publicly traded partnership.
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Under the check-the-box regulations, an
unincorporated entity with at least two owners or members may elect to be classified either as an association taxable as a corporation or as a partnership. If such an entity does not make an election, it generally will be treated as a partnership
for federal income tax purposes. We intend that each Partnership will be classified as a partnership for federal income tax purposes (or else a disregarded entity where there are not at least two separate beneficial owners).
A publicly traded partnership is a partnership whose interests are traded on an established securities market or are readily tradable on a
secondary market (or a substantial equivalent). A publicly traded partnership is generally treated as a corporation for federal income tax purposes, but will not be so treated for any taxable year for which at least 90% of the partnerships
gross income consists of specified passive income, including real property rents, gains from the sale or other disposition of real property, interest, and dividends (the 90% passive income exception).
Treasury regulations, referred to as PTP regulations, provide limited safe harbors from treatment as a publicly traded partnership. Pursuant
to one of those safe harbors, the private placement exclusion, interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (1) all interests in the partnership
were issued in a transaction or transactions that were not required to be registered under the Securities Act, and (2) the partnership does not have more than 100 partners at any time during the partnerships taxable year. For the
determination of the number of partners in a partnership, a person owning an interest in a partnership, grantor trust, or S corporation that owns an interest in the partnership is treated as a partner in the partnership only if
(1) substantially all of the value of the owners interest in the entity is attributable to the entitys direct or indirect interest in the partnership and (2) a principal purpose of the use of the entity is to permit the
partnership to satisfy the 100-partner limitation. We expect that each Partnership would qualify for the private placement exclusion.
An
unincorporated entity with only one separate beneficial owner generally may elect to be classified either as an association taxable as a corporation or as a disregarded entity. If such an entity is domestic and does not make an election, it
generally will be treated as a disregarded entity. A disregarded entitys activities are treated as those of a branch or division of its beneficial owner.
The operating partnership has not elected to be treated as an association taxable as a corporation. Therefore, our operating partnership is
treated as a partnership for federal income tax purposes. We intend that our operating partnership will continue to be treated as partnership for federal income tax purposes.
We have not requested, and do not intend to request, a ruling from the Internal Revenue Service that the operating partnership or any other
subsidiary entity will be classified as either a partnership or disregarded entity for federal income tax purposes. If for any reason any Partnership were taxable as a corporation, rather than as a partnership or a disregarded entity, for federal
income tax purposes, we likely would not be able to qualify as a REIT. See Requirements for QualificationGross Income Tests and Requirements for QualificationAsset Tests. In addition, any change in a
Partnerships status for tax purposes might be treated as a taxable
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event, in which case we might incur tax liability without any related cash distribution. See Requirements for QualificationDistribution Requirements. Further, items of
income and deduction of such Partnership would not pass through to its partners, and its partners would be treated as stockholders for tax purposes. Consequently, such Partnership would be required to pay income tax at corporate rates on its net
income, and distributions to its partners would constitute dividends that would not be deductible in computing such Partnerships taxable income.
Income Taxation of the Partnerships and Their Partners
Partners
, Not the Partnerships, Subject to Tax.
A partnership is not a taxable entity for federal income tax purposes. If each
Partnership is classified as a partnership, we will therefore take into account our allocable share of each such Partnerships income, gains, losses, deductions, and credits for each taxable year of each Partnership ending with or within our
taxable year, even if we receive no distribution from any Partnership for that year or a distribution less than our share of taxable income. Similarly, even if we receive a distribution, it may not be taxable if the distribution does not exceed our
adjusted tax basis in our interest in the Partnership. If any Partnership is classified as a disregarded entity, each Partnerships activities will be treated as if carried on directly by us.
Partnership Allocations.
Although a partnership agreement generally will determine the allocation of income and losses among partners,
allocations will be disregarded for tax purposes if they do not comply with the provisions of the federal income tax laws governing partnership allocations. If an allocation is not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect
to such item. Each Partnerships allocations of taxable income, gain, and loss are intended to comply with the requirements of the federal income tax laws governing partnership allocations.
Tax Allocations with Respect to Contributed Properties.
Income, gain, loss, and deduction attributable to appreciated or depreciated
property that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss
associated with the property at the time of the contribution. Similar rules apply with respect to property revalued on the books of a partnership. The amount of such unrealized gain or unrealized loss, referred to as built-in gain or built-in loss,
is generally equal to the difference between the fair market value of the contributed or revalued property at the time of contribution or revaluation and the adjusted tax basis of such property at that time, referred to as a book-tax difference.
Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The United States Treasury Department has issued regulations requiring partnerships
to use a reasonable method for allocating items with respect to which there is a book-tax difference and outlining several reasonable allocation methods. Our operating partnership generally intends to use the traditional method for
allocating items with respect to which there is a book-tax difference.
Basis in Partnership Interest.
Our adjusted tax basis in
any partnership interest we own generally will be:
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the amount of cash and the basis of any other property we contribute to the partnership;
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increased by our allocable share of the partnerships income (including tax-exempt income) and our allocable share of indebtedness of the partnership; and
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reduced, but not below zero, by our allocable share of the partnerships loss, the amount of cash and the basis of property distributed to us, and constructive distributions resulting from a reduction in our share
of indebtedness of the partnership.
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Loss allocated to us in excess of our basis in a partnership interest will not be taken into
account until we again have basis sufficient to absorb the loss. A reduction of our share of partnership indebtedness will be treated as a constructive cash distribution to us, and will reduce our adjusted tax basis. Distributions, including
constructive distributions, in excess of the basis of our partnership interest will constitute taxable income to us. Such distributions and constructive distributions normally will be characterized as long-term capital gain.
Partnership Audits.
Under recently enacted legislation (the New Partnership Audit Rules) that will apply for taxable years
beginning after December 31, 2017 (unless a Partnership elects to apply the legislative changes sooner), in the event of a federal income tax audit the Partnership, rather than the Partnerships partners, could be liable for the payment of
certain taxes, including interest and penalties, or the partners could be liable for the tax but be required to pay interest at a higher rate than would otherwise apply to underpayments. Furthermore, the partnership representative of the
Partnership will have exclusive authority to bind all partners to any federal income tax proceeding.
Depreciation Deductions Available
to Partnerships.
The initial tax basis of property is the amount of cash and the basis of property given as consideration for the property. A partnership in which we are a partner generally will depreciate property for federal income tax
purposes under the modified accelerated cost recovery system of depreciation, referred to as MACRS. Under MACRS, each Partnership generally will depreciate furnishings over a seven year recovery period and equipment over a five year recovery period
using a 200% declining balance method and a half-year convention. If, however, the partnership places more than 40% of its furnishings and equipment in service during the last three months of a taxable year, a mid-quarter depreciation convention
must be used for the furnishings and equipment placed in service during that year. Under MACRS, the partnership generally will depreciate buildings and improvements over a 39 year recovery period using a straight line method and a mid-month
convention. Each Partnerships initial basis in properties acquired solely in exchange for units of each Partnership should be the same as the transferors basis in such properties on the date of acquisition by the partnership. Although
the law is not entirely clear, each Partnership generally will depreciate such property for federal income tax purposes over the same remaining useful lives and under the same methods used by the transferors. Each Partnerships tax depreciation
deductions will be allocated among the partners in accordance with their respective interests in the partnership, except to the extent that any Partnership is required under the federal income tax laws governing partnership allocations to use a
method for allocating tax depreciation deductions attributable to contributed or revalued properties that results in our receiving a disproportionate share of such deductions.
Sale of a Partnerships Property
. Generally, any gain realized by a Partnership on the sale of property held for more than one
year will be long-term capital gain, except for any portion of the gain treated as depreciation or cost recovery recapture. Any gain or loss recognized by a Partnership on the disposition of contributed or revalued properties will be allocated first
to the partners who contributed the properties or who were partners at the time of revaluation, to the extent of their built-in gain or loss on those properties for federal income tax purposes. The partners built-in gain or loss on contributed
or revalued properties is the difference between the partners proportionate share of the book value of those properties and the partners tax basis allocable to those properties at the time of the contribution or revaluation. Any
remaining gain or loss recognized by the Partnership on the disposition of contributed or revalued properties, and any gain or loss recognized by the Partnership on the disposition of other properties, will be allocated among the partners in
accordance with the Partnerships allocation provisions (subject to the restrictions described above).
Our share of any Partnership
gain from the sale of inventory or other property held primarily for sale to customers in the ordinary course of each Partnerships trade or business will be treated as income from a prohibited transaction subject to a 100% tax. Income from a
prohibited transaction may have an adverse effect on our ability to satisfy the gross income tests for REIT status. See Requirements for QualificationGross Income Tests. We do not presently intend to acquire or hold, or to
allow any Partnership to acquire or hold, any property that is likely to be treated as inventory or property held primarily for sale to customers in the ordinary course of our, or any Partnerships, trade or business.
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Taxable REIT Subsidiaries.
As described above, we have formed and have made a timely
election to treat MPT TRS, MPT Covington TRS, Inc. and MPT Finance Corporation, as taxable REIT subsidiaries and may form or acquire additional taxable REIT subsidiaries in the future. A taxable REIT subsidiary may provide services to our tenants
and engage in activities unrelated to our tenants, such as third-party management, development, and other independent business activities.
We and any corporate subsidiary in which we own stock, other than a qualified REIT subsidiary, must make an election for the subsidiary to be
treated as a taxable REIT subsidiary. If a taxable REIT subsidiary directly or indirectly owns shares of a corporation with more than 35% of the value or voting power of all outstanding shares of the corporation, the corporation will automatically
also be treated as a taxable REIT subsidiary. Ernest and Capella and their corporate subsidiaries are automatically treated as taxable REIT subsidiaries under this rule. For tax years beginning before January 1, 2018, no more than 25% of the
value of our assets may consist of securities of one or more taxable REIT subsidiaries and for taxable years beginning on or after January 1, 2018, no more than 20% of the value of our assets may consist of securities of taxable REIT
subsidiaries, irrespective of whether such securities may also qualify under the 75% assets test, and no more than 25% of the value of our assets may consist of the securities that are not qualifying assets under the 75% test, including, among other
things, certain securities of a taxable REIT subsidiary, such as stock or non-mortgage debt.
Rent we receive from our taxable REIT
subsidiaries will qualify as rents from real property as long as at least 90% of the leased space in the property is leased to persons other than taxable REIT subsidiaries and related party tenants, and the amount paid by the taxable
REIT subsidiary to rent space at the property is substantially comparable to rents paid by other tenants of the property for comparable space. For tax years beginning after July 30, 2008, rents paid to a REIT by a taxable REIT subsidiary with
respect to a qualified health care property, (as defined above under Requirements for QualificationForeclosure Property) operated on behalf of such taxable REIT subsidiary by a person who is an eligible
independent contractor, (as defined above under Requirements for QualificationOrganizational Requirements) are qualifying rental income for purposes of the 75% and 95% gross income tests. The taxable REIT subsidiary
rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to us to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain
types of transactions between a taxable REIT subsidiary and us or our tenants that are not conducted on an arms-length basis.
A
taxable REIT subsidiary may not directly or indirectly operate or manage a health care facility, (as defined above under Requirements for QualificationOrganizational Requirements) though for tax years beginning
after July 30, 2008 a health care facility leased to a taxable REIT subsidiary from a REIT may be operated on behalf of the taxable REIT subsidiary by an eligible independent contractor. MPT Covington TRS, Inc. has been formed for the purpose
of, and is currently, leasing a health care facility from us, subleasing that facility to an entity in which MPT Covington TRS, Inc. owns an equity interest, and having that facility operated by an eligible independent contractor. We have obtained a
private letter ruling from the IRS holding that the ownership of the equity interest and the operation of the facility in accordance with the agreements of the parties do not adversely affect the taxable REIT subsidiary status of MPT Covington TRS,
Inc. We have structured other transactions in which MPT TRS owns an indirect equity interest in a tenant entity in a similar manner, including our leases with subsidiaries of Ernest, and may structure other such transactions in the future.
State and Local Taxes.
We and our stockholders may be subject to taxation by various states and localities, including those in which we
or a stockholder transact business, own property or reside. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, stockholders should consult their own tax advisors regarding the effect of
state and local tax laws upon an investment in our common stock.
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SELLING STOCKHOLDERS
Selling stockholders include certain persons or entities that, directly or indirectly, have acquired or may from time to time acquire from us,
shares of our common stock in various private transactions. Such selling stockholders may be parties to registration rights agreements with us, or we otherwise may have agreed or will agree to register their securities for resale. The initial
purchasers of our securities, as well as their transferees, pledges, donees or successors, all of whom we refer to as selling stockholders, may from time to time offer and sell the securities pursuant to this prospectus and any
applicable prospectus supplement.
The applicable prospectus supplement will set forth the name of each of the selling stockholders and
the number of shares of our common stock beneficially owned by such selling stockholders that are covered by such prospectus supplement. The applicable prospectus supplement will also disclose whether any of the selling stockholders has held any
position or office with us, has been employed by us or otherwise has had a material relationship with us during the three years prior to the date of the prospectus supplement.
PLAN OF DISTRIBUTION
We and/or the selling stockholders may sell the securities in any one or more of the following ways:
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directly to investors, including through a specific bidding, auction or other process;
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to investors through agents;
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to or through brokers or dealers;
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from time to time at prevailing market prices by the issuer or through a designated agent;
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to the public through underwriting syndicates led by one or more managing underwriters;
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to one or more underwriters acting alone for resale to investors or to the public; or
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through a combination of any such methods of sale.
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The securities may be sold domestically or
abroad. Selling stockholders to be named in a prospectus supplement may offer and sell, from time to time, the common stock and preferred stock up to such amounts as set forth in a prospectus supplement. Our common stock or preferred stock may be
issued upon the exchange of the debt securities of MPT Operating Partnership, L.P. or in exchange for other securities. We reserve the right to sell securities directly to investors on their own behalf in those jurisdictions where they are
authorized to do so.
If we or the selling stockholders sell securities to a dealer acting as principal, the dealer may resell such
securities at varying prices to be determined by such dealer in its discretion at the time of resale without consulting with us or the selling stockholders and such resale prices may not be disclosed in the applicable prospectus supplement.
Any underwritten offering may be on a best efforts or a firm commitment basis.
Sales of the securities may be effected from time to time in one or more transactions, including negotiated transactions:
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at a fixed price or prices, which may be changed;
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at market prices prevailing at the time of sale;
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at prices related to prevailing market prices; or
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Any of the prices may represent a discount from the then prevailing
market prices.
In the sale of the securities, underwriters or agents may receive compensation from us in the form of underwriting
discounts or commissions and may also receive compensation from purchasers of the securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Discounts, concessions and commissions may be changed from time to
time. Dealers and agents that participate in the distribution of the securities may be deemed to be underwriters under the Securities Act, and any discounts, concessions or commissions they receive from us and any profit on the resale of securities
they realize may be deemed to be underwriting compensation under applicable federal and state securities laws.
The applicable prospectus
supplement will, where applicable:
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identify any such underwriter, dealer or agent;
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describe any compensation in the form of discounts, concessions, commissions or otherwise received from us by each such underwriter or agent and in the aggregate by all underwriters and agents;
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describe any discounts, concessions or commissions allowed by underwriters to participating dealers;
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identify the amounts underwritten; and
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identify the nature of the underwriters or underwriters obligation to take the securities.
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Unless otherwise specified in the related prospectus supplement, each series of securities will be a new issue with no established trading
market, other than shares of our common stock, which are listed on the NYSE. Any common stock sold pursuant to a prospectus supplement will be listed on the NYSE, subject to official notice of issuance. We may elect to list any series of debt
securities or preferred stock, on an exchange, but we are not obligated to do so. It is possible that one or more underwriters may make a market in the securities, but such underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the liquidity of, or the trading market for, any offered securities.
We and/or the selling stockholders may enter into derivative transactions with third parties, or sell securities not covered by this
prospectus to third parties in privately negotiated transactions. If disclosed in the applicable prospectus supplement, in connection with those derivative transactions third parties may sell securities covered by this prospectus and such prospectus
supplement, including in short sale transactions. If so, the third party may use securities pledged by us and/or the selling stockholders, or borrowed from us, the selling stockholders or from others to settle those short sales or to close out any
related open borrowings of securities, and may use securities received from us in settlement of those derivative transactions to close out any related open borrowings of securities. If the third party is or may be deemed to be an underwriter under
the Securities Act, it will be identified in the applicable prospectus supplements.
Until the distribution of the securities is
completed, rules of the SEC may limit the ability of any underwriters and selling group members to bid for and purchase the securities. As an exception to these rules,
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underwriters are permitted to engage in some transactions that stabilize the price of the securities. Such transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the securities.
Underwriters may engage in overallotment. If any underwriters create a short position in the
securities in an offering in which they sell more securities than are set forth on the cover page of the applicable prospectus supplement, the underwriters may reduce that short position by purchasing the securities in the open market.
The lead underwriters may also impose a penalty bid on other underwriters and selling group members participating in an offering. This means
that if the lead underwriters purchase securities in the open market to reduce the underwriters short position or to stabilize the price of the securities, they may reclaim the amount of any selling concession from the underwriters and selling
group members who sold those securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to
discourage resales of the security before the distribution is completed.
We do not make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above might have on the price of the securities. In addition, we do not make any representation that underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Under agreements into which we or the selling stockholders may enter, underwriters,
dealers and agents who participate in the distribution of the securities may be entitled to indemnification by us or the selling stockholders against or contribution towards certain civil liabilities, including liabilities under the applicable
securities laws.
Underwriters, dealers and agents may engage in transactions with us, perform services for us or be our tenants in the
ordinary course of business.
If indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting
as our agents to solicit offers by particular institutions to purchase securities from us at the public offering price set forth in such prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on the date or
dates stated in such prospectus supplement. Each delayed delivery contract will be for an amount no less than, and the aggregate amounts of securities sold under delayed delivery contracts shall be not less nor more than, the respective amounts
stated in the applicable prospectus supplement. Institutions with which such contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable
institutions and others, but will in all cases be subject to our approval. The obligations of any purchaser under any such contract will be subject to the conditions that (a) the purchase of the securities shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which the purchaser is subject, and (b) if the securities are being sold to underwriters, we shall have sold to the underwriters the total amount of the securities less the
amount thereof covered by the contracts. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts.
To comply with applicable state securities laws, the securities offered by this prospectus will be sold, if necessary, in such jurisdictions
only through registered or licensed brokers or dealers. In addition, securities may not be sold in some states unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
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Underwriters, dealers or agents that participate in the offer of securities, or their affiliates
or associates, may have engaged, or engage in transactions with and perform services for us or our affiliates in the ordinary course of business for which they may have received or receive customary fees and reimbursement of expenses.
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