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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 the Indenture: (1) $1,142,875,000 aggregate
principal amount of Class A Senior Secured Floating Rate Notes (“Class A Notes”); (2) $82,000,000 aggregate principal amount
of Class A-S Senior Secured Floating Rate Notes (“Class A-S Notes”); (3) $92,250,000 aggregate principal amount of Class B
Secured Floating Rate Notes (“Class B Notes”); (4) $112,750,000 aggregate principal amount of Class C Secured Floating Rate
Notes (“Class C Notes”); (5) $148,625,000 aggregate principal amount of Class D Secured Floating Rate Notes (“Class
D Notes”); (6) $74,312,000 aggregate principal amount of Class E Secured Floating Rate Notes (“Class E Notes”); (7)
$138,375,000 aggregate principal amount of Class F Floating Rate Notes (“Class F Notes”); and (8) $71,750,000 aggregate principal
amount of Class G Floating Rate Notes (“Class G Notes”). Simultaneously with the issuance of the Notes, the Issuer also issued
and sold Preferred Shares with a notional amount of $187,063,000 to a consolidated subsidiary of Arbor and the Class F Notes and Class
G Notes were purchased by a consolidated subsidiary of Arbor.
As of February 11, 2022 (the “Closing Date”),
the Notes are secured by a portfolio of real estate related assets and cash with a face value of approximately $2,050,000,000, 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 $347,266,785
for the purpose of acquiring additional collateral interests for a period of up to 180 days from the Closing Date (or an additional 30
days in the case of collateral interests for which binding commitments to purchase have been entered into during the 180-day period),
at which point it is expected that the Issuer will own collateral interests with a face value of approximately $2,050,000,000. If the
Issuer is unable to invest any financing capacity in suitable collateral interests within such time period, remaining cash and cash equivalents
(excluding, at the election of the Collateral Manager (as defined below), an amount up to $15,000,000 to be held for the purchase of replacement
collateral interests) 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 1.81% plus Compounded SOFR. Interest payments on the Notes are payable monthly, beginning on March 15,
2022, to and including January 15, 2037, 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 monthly 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 January
15, 2037, 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 2.78 years and 4.81 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
Notes, Class B Notes, Class C Notes, Class D Notes, Class E Notes, Class F Notes and Class 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 Notes, Class C Notes, Class D Notes, Class E Notes, Class F Notes and Class 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 Notes, Class D
Notes, Class E Notes, Class F Notes and Class 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 Notes, Class E Notes, Class F Notes and Class
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 Notes, Class F Notes and Class 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 Notes and Class 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 August 15, 2024, and on any interest payment date thereafter, the Co-Issuers 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 or if ratings assigned
to the Notes as of the Closing Date are not confirmed after a 180-day period for the purchase of additional assets. 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 aggregate 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. for U.S. income tax purposes.