Item 2.03
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Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
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The aggregate principal amounts of the following
eight classes of Notes (each, a “Class”) were issued pursuant to the terms of an indenture, dated as of March 12, 2021
(the “Indenture”) by and among the Co-Issuers, Arbor Realty SR, Inc., as advancing agent, U.S. Bank, National Association,
as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent, notes registrar
and custodian: (1) $447,450,000 aggregate principal amount of Class A Senior Secured Floating Rate Notes; (2) $51,025,000 aggregate
principal amount of Class A-S Senior Secured Floating Rate Notes; (3) $36,306,000 aggregate principal amount of Class B Secured
Floating Rate Notes; (4) $45,137,000 aggregate principal amount of Class C Secured Floating Rate Notes; (5) $56,913,000 aggregate
principal amount of Class D Secured Floating Rate Notes; (6) $18,644,000 aggregate principal amount of Class E Secured Floating
Rate Notes; (7) $42,193,000 aggregate principal amount of Class F Floating Rate Notes; and (8) $26,494,000 aggregate principal
amount of Class G Floating Rate Notes. Simultaneously with the issuance of the Notes, the Issuer also issued and sold Preferred
Shares with a notional amount of $60,838,000 to a consolidated subsidiary of Arbor and the Class F and G Floating Rate Notes were
purchased by a consolidated subsidiary of Arbor.
As of March 12, 2021 (the “Closing
Date”), the Notes are secured by a portfolio of real estate related assets and cash with a face value of approximately $785,000,000,
with real estate related assets consisting primarily of first-lien mortgage bridge loans. Through its ownership of the equity of
the Issuer, Arbor intends to own the portfolio of collateral interests until its maturity and will account for the issuance of
the Offered Notes on its balance sheet as a financing. The financing has an approximate two-and-a-half-year replacement period
that allows the principal proceeds and sale proceeds (if any) of the collateral interests to be reinvested in qualifying replacement
collateral interests, subject to the satisfaction of certain conditions set forth in the Indenture. The proceeds of the issuance
of the securities also includes $149,802,991 for the purpose of acquiring additional collateral interests for a period of up to
180 days from the Closing Date, at which point it is expected that the Issuer will own collateral interests with a face value of
approximately $785,000,000. If the Issuer is unable to invest any financing capacity in suitable collateral interests within 180
days of the Closing Date, remaining cash and cash equivalents will be used to redeem the Notes in order of seniority pursuant to
the Indenture.
The collateral interests acquired on the
Closing Date were purchased by the Issuer from a consolidated subsidiary of Arbor, and the seller made certain representations
and warranties to the Issuer with respect to the collateral interests it sold. If any such representations or warranties are materially
inaccurate, the Issuer may compel the seller to repurchase the affected collateral interests from it for an amount not exceeding
par plus accrued interest and certain additional charges, if then applicable. Additional collateral interests and replacement collateral
interests are expected to be purchased on similar terms, pursuant to criteria and conditions set forth in the Indenture.
The Issuer entered into a Collateral Management
Agreement with Arbor Realty Collateral Management, LLC, a consolidated subsidiary of Arbor (the “Collateral Manager”)
pursuant to which the Collateral Manager has agreed to advise the Issuer on certain matters regarding the collateral interests
and other eligible investments securing the Notes. The Collateral Manager has waived its right to receive a management fee for
the services rendered under the Collateral Management Agreement.
The Issuer, the Collateral Manager and the
trustee entered into a Servicing Agreement with Arbor Multifamily Lending, LLC, a majority-owned subsidiary of Arbor (the “Servicer”)
pursuant to which the Servicer has agreed to act as the servicer and special servicer for the collateral interests. In connection
with its duties under the Servicing Agreement, the Servicer has waived its right to servicing and special servicing fees but will
be entitled to reimbursement of certain costs and expenses.
The Notes represent non-recourse obligations
of the Issuer payable solely from the collateral interests and certain other assets pledged under the Indenture. To the extent
the collateral interests and other pledged assets are insufficient to make payments in respect of the Notes, neither of the Co-Issuers
will have any obligation to pay any further amounts in respect of the Notes.
The Offered Notes have an initial weighted
average interest rate of approximately 1.33% plus one-month LIBOR. Interest payments on the Notes are payable monthly, beginning
on April 15, 2021, to and including December 15, 2035, the stated maturity date of the Notes. As advancing agent under the Indenture,
Arbor Realty SR, Inc., a consolidated subsidiary of Arbor, may be required to advance interest payments due on the Notes on the
terms and subject to the conditions set forth in the Indenture. Arbor Realty SR, Inc. is entitled to receive a fee, payable on
a quarterly basis in accordance with the priority of payments set forth in the Indenture, equal to 0.07% per annum on the aggregate
outstanding principal amount of the Notes.
Each Class of Notes will mature at par on
December 15, 2035, unless redeemed or repaid prior thereto. Principal payments on each Class of Notes will be paid at the stated
maturity in accordance with the priority of payments set forth in the Indenture. However, it is anticipated that the Notes will
be paid in advance of the stated maturity date in accordance with the priority of payments set forth in the Indenture. The weighted
average life of the Notes is currently expected to be between 3.55 years and 5.06 years. The calculation of the weighted average
lives of the Notes assumes certain collateral characteristics including that there are no prepayments, defaults, extensions or
delinquencies. There is no assurance that such assumptions will be met.
In general, payments of principal and interest
(including any defaulted interest amount) on the Class A Notes will be senior to all payments of principal and interest on the
Class A-S, B, C, D, E, F and G Notes; payments of principal and interest (including any defaulted interest amount) on the Class
A-S Notes will be senior to all payments of principal and interest on the Class B, C, D, E, F and G Notes; payments of principal
and interest (including any defaulted interest amount) on the Class B Notes will be senior to all payments of principal and interest
on the Class C, D, E, F and G Notes; payments of principal and interest (including any defaulted interest amount) on the Class
C Notes will be senior to all payments of principal and interest on the Class D, E, F and G Notes; payments of principal and interest
(including any defaulted interest amount) on the Class D Notes will be senior to all payments of principal and interest on the
Class E, F and G Notes; payments of principal and interest (including any defaulted interest amount) on the Class E Notes will
be senior to all payments of principal and interest on the Class F and G Notes; and payments of principal and interest (including
any defaulted interest amount or deferred interest amount) on the Class F Notes will be senior to all payments of principal and
interest on the Class G Notes. Payments on the Notes will be senior to dividends and all other distributions in respect of the
Preferred Shares.
The Notes are subject to a clean-up call
redemption (at the option of and at the direction of the Collateral Manager), in whole but not in part, on any interest payment
date on which the aggregate outstanding principal amount of the Notes has been reduced to 10% or less of the aggregate outstanding
principal amount of the Offered Notes outstanding on the issuance date.
Subject to certain conditions described
in the Indenture, on September 15, 2023, and on any interest payment date thereafter, the Issuer may redeem the Notes and the Preferred
Shares at the direction of the holders of a majority of the Preferred Shareholders.
The Notes are also subject to a mandatory
redemption on any interest payment date on which certain note protection tests set forth in the Indenture are not satisfied and
following the end of the 180-day period for acquisition of additional assets if the ratings assigned to the Notes as of the Closing
Date are downgraded or withdrawn. Any mandatory redemption of the Notes is to be paid from interest and principal proceeds of the
collateral interests in accordance with the priority of payments set forth in the Indenture, until the applicable note protection
tests are satisfied or the applicable ratings are reinstated.
If certain events occur that would make
the Issuer subject to paying U.S. income taxes or would make certain payments to or from the Issuer subject to withholding tax,
then the holders of a majority of the Preferred Shareholders may require that the Issuer prepay all of the Notes.
Arbor Realty SR, Inc. has agreed to comply
with the retention requirements of Regulation RR under the Securities Exchange Act of 1934, as amended, by causing a “majority-owned
affiliate” (as defined in Regulation RR) to retain Preferred Shares in an amount equal to not less than 5% of the fair value
of the Notes and Preferred Shares as of the Closing Date. However, if Regulation RR is modified or repealed, Arbor Realty SR, Inc.
may choose to comply with Regulation RR as is then in effect.
The redemption price for each Class of Notes
is generally the aggregate outstanding principal amount of such Class, plus accrued and unpaid interest (including any defaulted
interest amounts and deferred interest amounts, as applicable).
In addition to standard events of default,
the Indenture also contains the following events of default: (1) a requirement of the Issuer, Co-Issuer or pool of assets securing
the Notes to register as an investment company under the Investment Company Act of 1940, as amended, and (2) the loss of the Issuer’s
status as a qualified REIT subsidiary or other disregarded entity of Arbor Realty SR, Inc.