The following description, together with
the additional information we include in any applicable prospectus supplement, summarizes the material terms and provisions of
the units that we may offer under this prospectus. Units may be offered independently or together with common stock, preferred
stock and/or warrants offered by any prospectus supplement, and may be attached to or separate from those securities.
While the terms we have summarized below
will generally apply to any future units that we may offer under this prospectus, we will describe the particular terms of any
series of units that we may offer in more detail in the applicable prospectus supplement. The terms of any units offered under
a prospectus supplement may differ from the terms described below.
We will incorporate by reference into
the registration statement of which this prospectus is a part the form of unit agreement, including a form of unit certificate,
if any, that describes the terms of the series of units we are offering before the issuance of the related series of units. The
following summaries of material provisions of the units and the unit agreements are subject to, and qualified in their entirety
by reference to, all the provisions of the unit agreement applicable to a particular series of units. We urge you to read the applicable
prospectus supplement related to the units that we sell under this prospectus, as well as the complete unit agreements that contain
the terms of the units.
We may issue units consisting of common
stock, preferred stock, depositary shares, warrants, rights or any combination thereof. Each unit will be issued so that the holder
of the unit is also the holder of each security included in the unit. Thus, the holder of a unit will have the rights and obligations
of a holder of each included security. The unit agreement under which a unit is issued may provide that the securities included
in the unit may not be held or transferred separately, at any time, or at any time before a specified date.
We will describe in the applicable prospectus
supplement the terms of the series of units, including the following:
We may issue units in such amounts and
in such numerous distinct series as we determine.
Each unit agent will act solely as our
agent under the applicable unit agreement and will not assume any obligation or relationship of agency or trust with any holder
of any unit. A single bank or trust company may act as unit agent for more than one series of units. A unit agent will have no
duty or responsibility in case of any default by us under the applicable unit agreement or unit, including any duty or responsibility
to initiate any proceedings at law or otherwise, or to make any demand upon us. Any holder of a unit, without the consent of the
related unit agent or the holder of any other unit, may enforce by appropriate legal action its rights as holder under any security
included in the unit.
We, the unit agent and any of its agents
may treat the registered holder of any unit certificate as an absolute owner of the units evidenced by that certificate for any
purposes and as the person entitled to exercise the rights attaching to the units, despite any notice to the contrary.
The securities offered by means of this
prospectus may be issued in whole or in part in book-entry form, meaning that beneficial owners of the securities will not receive
certificates representing their ownership interests in the securities, except in the event the book-entry system for the securities
is discontinued. Securities issued in book entry form will be evidenced by one or more global securities that will be deposited
with, or on behalf of, a depositary identified in the applicable prospectus supplement relating to the securities. We expect that
The Depository Trust Company will serve as depository. Unless and until it is exchanged in whole or in part for the individual
securities represented by that security, a global security may not be transferred except as a whole by the depository for the global
security to a nominee of that depository or by a nominee of that depository to that depository or another nominee of that depository
or by the depository or any nominee of that depository to a successor depository or a nominee of that successor. Global securities
may be issued in either registered or bearer form and in either temporary or permanent form. The specific terms of the depositary
arrangement with respect to a class or series of securities that differ from the terms described here will be described in the
applicable prospectus supplement.
Unless otherwise indicated in the applicable
prospectus supplement, we anticipate that the provisions described below will apply to depository arrangements.
Upon the issuance of a global security,
the depository for the global security or its nominee will credit on its book-entry registration and transfer system the respective
principal amounts of the individual securities represented by that global security to the accounts of persons that have accounts
with such depository, who are called “participants.” Those accounts will be designated by the underwriters, dealers
or agents with respect to the securities or by us if the securities are offered and sold directly by us. Ownership of beneficial
interests in a global security will be limited to the depository’s participants or persons that may hold interests through
those participants. Ownership of beneficial interests in the global security will be shown on, and the transfer of that ownership
will be effected only through, records maintained by the applicable depository or its nominee (with respect to beneficial interests
of participants) and records of the participants (with respect to beneficial interests of persons who hold through participants).
The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form.
These limits and laws may impair the ability to own, pledge or transfer beneficial interest in a global security.
So long as the depository for a global
security or its nominee is the registered owner of such global security, that depository or nominee, as the case may be, will be
considered the sole owner or holder of the securities represented by that global security for all purposes under the applicable
indenture or other instrument defining the rights of a holder of the securities. Except as provided below or in the applicable
prospectus supplement, owners of beneficial interest in a global security will not be entitled to have any of the individual securities
of the series represented by that global security registered in their names, will not receive or be entitled to receive physical
delivery of any such securities in definitive form and will not be considered the owners or holders of that security under the
applicable indenture or other instrument defining the rights of the holders of the securities.
Payments of amounts payable with respect
to individual securities represented by a global security registered in the name of a depository or its nominee will be made to
the depository or its nominee, as the case may be, as the registered owner of the global security representing those securities.
None of us, our officers and directors or any trustee, paying agent or security registrar for an individual series of securities
will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership
interests in the global security for such securities or for maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
We expect that the depository for a series
of securities offered by means of this prospectus or its nominee, upon receipt of any payment of principal, premium, interest,
dividend or other amount in respect of a permanent global security representing any of those securities, will immediately credit
its participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal
amount of that global security for those securities as shown on the records of that depository or its nominee. We also expect that
payments by participants to owners of beneficial interests in that global security held through those participants will be governed
by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form
or registered in “street name.” Those payments will be the responsibility of these participants.
If a depository for a series of securities
is at any time unwilling, unable or ineligible to continue as depository and a successor depository is not appointed by us within
90 days, we will issue individual securities of that series in exchange for the global security representing that series of
securities. In addition, we may, at any time and in our sole discretion, subject to any limitations described in the applicable
prospectus supplement relating to those securities, determine not to have any securities of that series represented by one or more
global securities and, in that event, will issue individual securities of that series in exchange for the global security or securities
representing that series of securities.
Our charter and bylaws provide that the
number of directors we have may be established only by our board of directors but may not be fewer than the minimum number required
under the MGCL, which is one, and our bylaws provide that the number of our directors may not be more than 15. Because our board
of directors has the power to amend our bylaws, it could modify the bylaws to change that range. Subject to the terms of any class
or series of preferred stock, vacancies on our board of directors may be filled only by a majority of the remaining directors,
even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will hold office for the
remainder of the full term of the directorship in which the vacancy occurred and until his or her successor is duly elected and
qualifies.
Except as may be provided with respect
to any class or series of our stock, under the MGCL at each annual meeting of our stockholders, each of our directors is elected
by our stockholders to serve until the next annual meeting of our stockholders and until his or her successor is duly elected and
qualifies. A plurality of the votes cast in the election of directors is sufficient to elect a director, and holders of shares
of common stock have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares of common stock entitled to vote are able to elect all of our directors.
The Series A Preferred Stock articles
supplementary provides that if dividends on the Series A Preferred Stock are in arrears for six or more quarterly periods, whether
or not consecutive, holders of shares of the Series A Preferred Stock (voting together as a class with other voting preferred stock)
will be entitled to vote for the election of two additional directors to serve on our board of directors. The Series A Preferred
Stock articles supplementary also separately provide for the election, term, removal and filling of any vacancy in the office of
such directors elected by the holders of the Series A Preferred Stock.
Our charter provides that, subject to
the rights of holders of any class or series of our preferred stock to elect or remove one or more directors, a director may be
removed only with cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the
election of directors. This provision, when coupled with the exclusive power of our board of directors to fill vacancies on our
board of directors, precludes stockholders from (i) removing incumbent directors except with cause and upon a substantial affirmative
vote and (ii) filling the vacancies created by such removal with their own nominees.
As permitted by the MGCL, our charter
provides that stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines
that appraisal rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after
the date of such determination in connection with which stockholders would otherwise be entitled to exercise appraisal rights.
Our dissolution must be declared advisable
by a majority of our board of directors and approved by the affirmative vote of stockholders entitled to cast not less than a majority
of the votes entitled to be cast on such matter.
Our bylaws provide that, unless we consent
in writing to an alternative forum, the state and federal courts in Baltimore, Maryland are the exclusive forum for certain litigation,
including (i) derivative actions on our behalf, (ii) actions asserting claims of breach of any duty owed by any of our directors,
officers or employees, (iii) actions asserting a claim against us or any of our directors, officers or other employees arising
under the MGCL, our bylaws or our charter and (iv) actions governed by the internal affairs doctrine.
Under the MGCL, certain “business
combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder (defined generally
as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding
voting stock or 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) or an affiliate
of such an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder
becomes an interested stockholder. Thereafter, any such business combination must generally be recommended by the board of directors
of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding
voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected
or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation’s common
stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the interested stockholder for its shares. A person is not an interested stockholder under
the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested
stockholder. A Maryland corporation’s board of directors may provide that its approval is subject to compliance with any
terms and conditions determined by it. These provisions of the MGCL do not apply, however, to business combinations that are approved
or exempted by a Maryland corporation’s board of directors prior to the time that the interested stockholder becomes an interested
stockholder.
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 by the affirmative vote of at least two-thirds of the votes entitled
to be cast on the matter, excluding shares of stock in the corporation in respect of which any of the following persons is entitled
to exercise or direct the exercise of the voting power of such shares in the election of directors: (i) a person who makes or proposes
to make a control share acquisition, (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director
of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of
stock owned by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer 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 that the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. 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 and delivering an
“acquiring person statement” as described in the MGCL), may compel the 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 the statute, 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 acquirer or as 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 acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders 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 acquirer in the control share acquisition.
The control share acquisition statute
does not apply to (i) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction
or (ii) acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting
from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance
that such provision will not be amended or eliminated at any time in the future by our board of directors.
Subtitle 8 of the MGCL permits a Maryland
corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect
to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary
provision in the charter or bylaws, to any or all of five provisions of the MGCL which provide for:
Our charter provides that vacancies on
our board may be filled only by the remaining directors and for the remainder of the full term of the directorship in which the
vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (i) require the affirmative
vote of stockholders entitled to cast not less than two-thirds of all of the votes entitled to be cast generally in the election
of directors for the removal of any director from the board, only with cause, (ii) vest in the board of directors the exclusive
power to fix the number of directorships and (iii) require, unless called by our chairman of the board, our chief executive officer
or our board of directors, the written request of stockholders entitled to cast not less than a majority of all votes entitled
to be cast at such a meeting to call a special meeting of our stockholders.
Pursuant to our bylaws, a meeting of our
stockholders for the election of directors and the transaction of any business will be held annually on a date and at the time
and place set by our board of directors. The chairman of our board of directors, our chief executive officer or our board of directors
may call a special meeting of our stockholders. Subject to the procedural requirements specified in our bylaws, a special meeting
of our stockholders to act on any matter that may properly be brought before a meeting of our stockholders must also be called
by our secretary upon the written request of the stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting on such matter and containing the information required by our bylaws. Only the matters set forth in the notice of
special meeting may be considered and acted upon at such meeting. Additionally, the Series A Preferred Stock articles supplementary
provides the holders of Series A Preferred Stock certain rights to have a special meeting called upon their request in connection
with the election of the preferred stock directors.
Except for amendments to the provisions
of our charter relating to the removal of directors, and the vote required to amend this provision (which must be advised by our
board of directors and approved by the affirmative vote of stockholders entitled to cast not less than two-thirds of all the votes
entitled to be cast on the election), our charter generally may be amended only if advised by our board of directors and approved
by the affirmative vote of stockholders entitled to cast a majority of all of the votes entitled to be cast on the matter. As permitted
by the MGCL, our charter contains a provision permitting our directors, without any action by our stockholders, to amend the charter
to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to issue.
Our board of directors has the exclusive
power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.
Additionally, the Series A Preferred Stock
articles supplementary provides the holders of Series A Preferred Stock with voting rights with respect to certain amendments to
our charter.
Our bylaws provide that, with respect
to an annual meeting of stockholders, nominations of individuals for election to our board of directors and the proposal of other
business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction
of our board of directors or (iii) by a stockholder who was a stockholder of record both at the time of giving the notice required
by our bylaws and at the time of the meeting, who is entitled to vote at the meeting on such business or in the election of such
nominee and who has provided notice to us within the time period, and containing the information and other materials, specified
by the advance notice provisions set forth in our bylaws.
With respect to special meetings of stockholders,
only the business specified in our notice of meeting may be brought before the meeting. Nominations of individuals for election
to our board of directors may be made only (i) by or at the direction of our board of directors or (ii) provided that the meeting
has been called for the purpose of electing directors, by a stockholder who was a stockholder of record both at the time of giving
notice and at the time of the special meeting, who is entitled to vote at the meeting in the election of such nominee and who has
provided notice to us within the time period, and containing the information and other materials, specified by the advance notice
provisions set forth in our bylaws.
Our charter provides that stockholder
action can be taken at an annual or special meeting of stockholders and by consent in lieu of a meeting if such consent is approved
unanimously. These provisions, combined with the requirements of our bylaws regarding advance notice of nominations and other business
to be considered at a meeting of stockholders and the calling of a stockholder-requested special meeting of stockholders, may have
the effect of delaying consideration of a stockholder proposal.
The provisions of the MGCL, our charter
and our bylaws described above including, among others, the restrictions on ownership and transfer of our stock, the exclusive
power of our board of directors to fill vacancies on the board and the advance notice provisions of our bylaws could delay, defer
or prevent a change in control or other transaction that might involve a premium price for shares of our common stock or otherwise
be in the best interests of our stockholders. Likewise, if our board of directors were to opt in to the classified board or other
provisions of Subtitle 8 or if our board of directors were to opt in to the control share acquisition of the MGCL, these provisions
of the MGCL could have similar anti-takeover effects.
Maryland law permits a Maryland corporation
to include in its charter a provision eliminating 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 that was established by a final judgment and was material to the cause of action. Our charter
contains a provision that eliminates the liability of our directors and officers to the maximum extent permitted by Maryland law.
The MGCL requires us (unless our 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 proceeding to which he or she is made a party by reason of his or her service in that capacity. The MGCL
permits us to indemnify our present and former directors and officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to
be made a party by reason of their service in those or other capacities unless it is established that:
Under the MGCL, we may not indemnify a
director or officer in a suit by us or in our right in which the director or officer was adjudged liable to us or in a suit in
which the director or officer was adjudged liable on the basis that personal benefit was improperly received. Nevertheless, a court
may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even
though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal
benefit was improperly received. However, indemnification for an adverse judgment in a suit by us or in our right, or for a judgment
of liability on the basis that personal benefit was improperly received, is limited to expenses.
In addition, the MGCL permits us to advance
reasonable expenses to a director or officer upon our receipt of:
Our charter authorizes us to obligate
ourselves and our bylaws 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:
Our charter and bylaws also permit us
to indemnify and advance expenses to any individual who served any predecessor of our company, in any of the capacities described
above and any employee or agent of our company or a predecessor of our company.
We have entered into indemnification agreements
with each of our executive officers and directors, and expect to enter into indemnification agreements with future executive officers
and directors, that provide for indemnification to the maximum extent permitted by Maryland law.
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.
Our charter provides that our board of
directors may authorize us to revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines
that it is no longer in our best interests to attempt to, or continue to, qualify as a REIT. Our charter also provides that our
board of directors may determine that compliance with any restriction or limitation on ownership and transfer of our stock is no
longer required for us to qualify as a REIT.
Our Operating Partnership is a Delaware
limited partnership that was formed on June 20, 2016. We are the sole general partner of our Operating Partnership and own,
directly or through subsidiaries, 100% of the partnership interests in our Operating Partnership. Our Operating Partnership is
treated as a partnership for U.S. federal income tax purposes.
Our Operating Partnership has two classes
of partnership interests: general partnership interests and limited partnership interests. General partnership interests represent
an interest as a general partner in our Operating Partnership and we, as general partner, hold all such interests.
Limited partnership interests represent
an interest as a limited partner in our Operating Partnership. Our Operating Partnership may issue, at the sole discretion of the
General Partner, additional partnership interests and classes of partnership interests with rights different from, and superior
to, those of general partnership interests and/or limited partnership interests.
Our Operating Partnership is treated as
a partnership for U.S. federal income tax purposes. See the section entitled “Material U.S. Federal Income Tax Considerations
— Taxation of Our Operating Partnership.”
Our Operating Partnership is organized
as a Delaware limited partnership pursuant to the terms of the Operating Partnership Agreement. We are the general partner of our
Operating Partnership and conduct substantially all of our business through it. Pursuant to the Operating Partnership Agreement,
we, as the general partner, have full, exclusive and complete responsibility and discretion in the management and control of our
Operating Partnership.
Indemnification
To the extent permitted by law, the Operating
Partnership Agreement provides for indemnification of us when acting in good faith and in the best interests of our Operating Partnership
in our capacity as general partner. It also provides for indemnification of directors, officers and other persons that we may designate
under the same conditions, and subject to the same restrictions, applicable to the indemnification of officers, directors, employees
and stockholders under our charter. See the section entitled “Certain Provisions of Maryland Law and Our Charter and Bylaws
— Indemnification and Limitation of Directors’ and Officers’ Liability.”
Issuance of Additional Units
As general partner of our Operating Partnership,
we are able to cause our Operating Partnership to issue additional units representing general and/or limited partnership interests.
A new issuance may include preferred units, which may have rights which are different than, and/or superior to, those of general
partnership interests and limited partnership interests.
Capital Contributions
The Operating Partnership Agreement provides
that, if our Operating Partnership requires additional funds at any time, or from time to time, in excess of funds available to
it from prior borrowings, operating revenue or capital contributions, we, as general partner, have the right to raise additional
funds required by our Operating Partnership by causing it to borrow the necessary funds from third parties on such terms and conditions
as we deem appropriate. As an alternative to borrowing funds required by our Operating Partnership, we may contribute the amount
of such required funds as an additional capital contribution.
Liquidation
Upon the liquidation of our Operating
Partnership, after payment of debts and obligations, any remaining assets of the partnership will be distributed to partners pro
rata in accordance with their relative percentage interest ownership.
Distributions and Allocations
Distributions are made, and all items
of net income, net loss and any other individual items of income, gain, loss or deduction of our Operating Partnership are allocated
to the general partner and the limited partner based on their relative percentage interest ownership.
Term
Our Operating Partnership will continue
in full force and effect until December 31, 2099 or until sooner dissolved and terminated upon (i) our election to dissolve
the Partnership; (ii) the entry of a decree of judicial dissolution of our Operating Partnership; or (iii) by operation of law.
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S.
federal income tax considerations that you, as a prospective investor, may consider relevant in connection with the acquisition,
ownership and disposition of our securities and our election to be taxed as a REIT. As used in this section, the terms “we”
and “our” refer solely to Innovative Industrial Properties, Inc. and not any subsidiaries or other lower-tier entities
or affiliates, except as otherwise indicated.
This discussion does not exhaust all possible
tax considerations and does not provide a detailed discussion of any state, local or foreign tax considerations. Nor does this
discussion address all aspects of U.S. federal income taxation that may be relevant to particular investors in view of their personal
investment or tax circumstances, or to certain types of investors that are subject to special treatment under the U.S. federal
income tax laws, such as insurance companies, tax-exempt organizations, financial institutions, regulated investment companies,
broker-dealers, partnerships and other pass-through entities and trusts, persons holding our stock on behalf of other persons as
nominees, persons who receive our stock as compensation, persons subject to the alternative minimum tax, persons holding our stock
as part of a hedge, straddle or other risk reduction, constructive sale or conversion transaction, non-U.S. individuals and foreign
corporations (except to the limited extent discussed below under “— Taxation of Non-U.S. Holders”) and other
persons subject to special tax rules. Moreover, this summary assumes that holders will hold our securities as “capital assets”
for U.S. federal income tax purposes, which generally means property held for investment.
The statements in this section are based
on the current U.S. federal income tax laws, including the Code, the Treasury Regulations, rulings and other administrative interpretations
and practices of the Service, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations
or to change, possibly with retroactive effect. This discussion is for general purposes only and is not tax advice. We cannot assure
you that the Service would not assert, or that a court would sustain, a position contrary to any of the tax consequences described
below. Moreover, 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.
On December 22, 2017, tax legislation commonly
referred to as the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal
income tax rules for taxation of individuals and corporations (including corporations that have elected to be taxed as a REIT),
generally effective for taxable years beginning on or after January 1, 2018. In the case of individuals, the top federal income
tax rate is reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the
top effective tax rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends
received), and various deductions are eliminated or limited, including limiting the deduction for state and local taxes to $10,000
per year. Most of the changes applicable to individuals are temporary (including the new 20% deduction for qualified REIT dividends
that reduces the effective rate of regular income tax on such income) and will expire for taxable years beginning after 2025, unless
Congress acts to extend them. The top corporate income tax rate is reduced to 21%. There are only minor changes to the REIT rules
(other than the 20% deduction applicable to individuals for ordinary REIT dividends received). The Tax Cuts and Jobs Act makes
numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may
indirectly affect us.
While the changes in the Tax Cuts and Jobs
Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated
effects on us or our stockholders. Congressional leaders have recognized that the process of adopting extensive tax legislation
in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing
clarification and unintended consequences that will have to be revisited in subsequent tax legislation. To date, the Service has
issued only limited guidance on the changes made in the Tax Cuts and Jobs Act. It is unclear at this time whether Congress will
address these issues or when the Service will issue additional administrative guidance.
Prospective stockholders are urged to consult
with their tax advisors with respect to the status of the Tax Cuts and Jobs Act and any other regulatory or administrative developments
and proposals and their potential effect on investment in our stock.
The U.S. federal income tax treatment
of holders of our securities depends, in some instances, on determinations of fact and interpretations of complex provisions of
U.S. federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences to any
particular holder of our securities will depend on the holder’s particular tax circumstances. We urge you to consult your
own tax advisors regarding the U.S. federal, state, local, foreign, and other tax consequences of the acquisition, ownership and
disposition of our securities and of our intended election to be taxed as a REIT.
Taxation of Our Company
We were incorporated on June 15,
2016 as a Maryland corporation. We have been organized to operate our business so as to qualify to be taxed as a REIT, for U.S.
federal income tax purposes, commencing with our taxable year ended December 31, 2017. Our ability to continue to qualify as a
REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other
things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of
ownership of our stock. No assurances can be provided regarding our ability to maintain our qualification as a REIT because such
qualification depends on our ability to satisfy numerous asset, income, stock ownership and distribution tests described below,
the satisfaction of which will depend, in part, on our operating results.
The sections of the Code and Treasury
Regulations relating to qualification, operation and taxation as a REIT are highly technical and complex. The following discussion
sets forth only the material aspects of those sections. This summary is qualified in its entirety by the applicable Code provisions
and the related Treasury Regulations and administrative and judicial interpretations thereof.
In connection with the filing of the registration
statement of which this prospectus is a part, Foley & Lardner LLP has issued an opinion to us to the effect that, commencing
with our taxable year ended December 31, 2017, we have been organized and have operated in conformity with the requirements
for qualification and taxation as a REIT under the U.S. federal income tax laws, and our current and proposed method of operation
will enable us to continue to meet the requirements for qualification and taxation as a REIT under the U.S. federal income tax
laws. You should be aware that Foley & Lardner LLP’s opinion is based on the U.S. federal income tax laws governing qualification
as a REIT as of the date of such opinion (which are subject to change, possibly on a retroactive basis), is not binding on the
Service or any court, and speaks only as of the date issued. In addition, Foley & Lardner’s opinion is based
on customary assumptions and is conditioned upon certain representations made by us as to factual matters, including representations
regarding the nature of our assets and the future conduct of our business. Moreover, our qualification and taxation as a REIT will
depend on our ability to meet, on a continuing basis, through actual results, certain qualification tests set forth in the U.S.
federal income tax laws. Those qualification tests involve, among other things, the percentage of our gross income that we earn
from specified sources, the percentage of our assets that fall within specified categories, the diversity of our stock ownership
and the percentage of our earnings that we distribute. Foley & Lardner LLP will not review our compliance with those tests
on a continuing basis. Accordingly, we cannot assure you that the actual results of our operations for any particular taxable year
will satisfy such requirements. Foley & Lardner LLP’s opinion does not foreclose the possibility that we may have to
use one or more of the REIT savings provisions described below, which may require us to pay a material excise or penalty tax (and
interest) in order to maintain our REIT qualification. For a discussion of the tax consequences of our failure to maintain our
qualification as a REIT, see the section entitled “Failure to Qualify” below.
Provided we continue to qualify for taxation
as a REIT, we generally will not be subject to U.S. federal income tax on the taxable income that we distribute to our stockholders
because we will be entitled to a deduction for dividends that we pay. Such tax treatment avoids the “double taxation,”
or taxation at both the corporate and stockholder levels, that generally results from owning stock in a corporation. In general,
income generated by a REIT is taxed only at the stockholder level if such income is distributed by the REIT to its stockholders.
However, we will be subject to U.S. federal income tax in the following circumstances:
|
·
|
We will be subject to U.S. federal corporate income tax on any REIT taxable income, including net capital gain, that we do
not distribute to our stockholders during, or within a specified time period after, the calendar year in which the income is earned.
|
|
·
|
We may be subject to corporate “alternative minimum tax” for taxable years beginning before January 1, 2018.
|
|
·
|
We will be subject to tax, at the highest U.S. federal corporate income tax rate (currently 21%), on net income 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 other non-qualifying income from foreclosure property.
|
|
·
|
We will be subject to a 100% tax on net income from “prohibited transactions,” which are, in general, sales or
other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course
of business.
|
|
·
|
If we fail to satisfy one or both of the 75% gross income test or the 95% gross income test, as described below under “—
Gross Income Tests,” but nonetheless maintain our qualification as a REIT because we meet certain other requirements, we
will be subject to a 100% tax on:
|
|
·
|
the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, in either case, multiplied
by
|
|
·
|
a fraction intended to reflect our profitability.
|
|
·
|
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 required to be distributed from
earlier periods, then we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the sum
of (a) the amount we actually distributed; and (b) the amounts we retained and upon which we paid income tax at the corporate level.
|
|
·
|
If we fail any of the asset tests, other than a de minimis failure of the 5% asset test, the 10% vote test or the 10% value
test, as described below under “— Asset Tests,” as long as (1) the failure was due to reasonable cause and not
to willful neglect, (2) we file a description of each asset that caused such failure with the Service, and (3) we dispose of the
assets causing the failure or otherwise comply with the asset tests within six months after the last day of the quarter in which
we identify such failure, we will pay a tax with respect to such failure equal to the greater of $50,000 or the highest U.S. federal
corporate income tax rate (currently 21%) multiplied by the net income from the nonqualifying assets during the period in which
we failed to satisfy the asset tests.
|
|
·
|
If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests,
and such failure is due to reasonable cause and not to willful neglect, we will be required to pay a penalty of $50,000
for each such failure.
|
|
·
|
We will be subject to a 100% excise tax on transactions with a TRS that are not conducted on an arm’s-length basis.
|
|
·
|
We may be required to pay monetary penalties to the Service in certain circumstances, including if we fail to meet recordkeeping
requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described
below in “— Requirements for Qualification.”
|
|
·
|
If we acquired any asset while we were taxable as a C corporation or we acquire any asset from a C corporation, or a corporation
that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset
that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at
the highest U.S. federal corporate income tax rate (currently 21%) applicable if we recognize gain on the sale or disposition of
the asset during the five-year period after we acquire the asset. The amount of gain on which we will pay tax generally is the
lesser of:
|
|
·
|
the amount of gain that we recognize at the time of the sale or disposition, and
|
|
·
|
the amount of gain that we would have recognized if we had sold the asset at the time we acquired it.
|
|
·
|
The earnings of our subsidiary entities that are C corporations, including TRSs, will be subject to U.S. federal corporate
income tax.
|
In addition, we may be subject to a variety
of taxes, including payroll taxes and state, local and foreign income, property and other taxes on our assets and operations. We
also could be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification as
a REIT
A REIT is a corporation, trust or association
that satisfies each of the following requirements:
|
(1)
|
It is managed by one or more trustees or directors;
|
|
(2)
|
Its beneficial ownership is evidenced by transferable shares of stock, or by transferable shares or certificates of beneficial
interest;
|
|
(3)
|
It would be taxable as a domestic corporation, but for Sections 856 through 860 of the Code, i.e., the REIT provisions;
|
|
(4)
|
It is neither a financial institution nor an insurance company subject to special provisions of the U.S. federal income tax
laws;
|
|
(5)
|
At least 100 persons are beneficial owners of its stock or ownership shares or certificates (determined without reference to
any rules of attribution);
|
|
(6)
|
Not more than 50% in value of its outstanding stock or shares of beneficial interest are owned, directly or indirectly, by
five or fewer individuals, which the U.S. federal income tax laws define to include certain entities, during the last half of any
taxable year;
|
|
(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 Service that must be met to qualify to be taxed as a REIT for U.S. federal income
tax purposes;
|
|
(8)
|
It uses a calendar year for U.S. federal income tax purposes and complies with the recordkeeping requirements of the U.S. federal
income tax laws;
|
|
(9)
|
It meets certain other requirements described below, regarding the sources of its gross income, the nature and diversification
of its assets and the distribution of its income; and
|
|
(10)
|
It has no undistributed earnings and profits from any non-REIT taxable year at the close of any taxable year.
|
We must satisfy requirements 1 through
4, and 8 during our entire taxable year and must satisfy requirement 5 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. Requirements 5 and 6 applied to us beginning with our
2018 taxable year. If we comply with certain requirements for ascertaining the beneficial ownership of our outstanding stock in
a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for
that taxable year. For purposes of determining stock ownership under requirement 6, an “individual” generally includes
a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or
used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the U.S. federal income tax laws, and beneficiaries of such a trust will be treated
as holding our stock in proportion to their actuarial interests in the trust for purposes of requirement 6.
In addition, our charter provides for
restrictions regarding the ownership and transfer of shares of our capital stock. The restrictions in our charter are intended,
among other things, to assist us in satisfying requirements 5 and 6 described above. These restrictions, however, may not ensure
that we will be able to satisfy such share ownership requirements in all cases. If we fail to satisfy these share ownership requirements,
our qualification as a REIT may terminate.
To monitor compliance with the share ownership
requirements, we generally are required to maintain records regarding the actual ownership of our shares. To do so, we must demand
written statements each year from the record holders of significant percentages of our shares pursuant to which the record holders
must disclose the actual owners of the shares (i.e., the persons required to include our dividends in their gross income). We must
maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to
monetary penalties if we fail to comply with these record-keeping requirements. If you fail or refuse to comply with the demands,
you will be required by Treasury Regulations to submit a statement with your tax return disclosing your actual ownership of our
shares and other information. In addition, we must satisfy all relevant filing and other administrative requirements that must
be met to elect and maintain REIT status. We intend to comply with these requirements.
For purposes of requirement 8, we have
adopted December 31 as our year end for U.S. federal income tax purposes, and thereby satisfy this requirement.
Qualified REIT Subsidiaries. A
“qualified REIT subsidiary” generally is a corporation, all of the stock of which is owned, directly or indirectly,
by a REIT and that is not treated as a TRS. A corporation that is a “qualified REIT subsidiary” is treated as a division
of the REIT that owns, directly or indirectly, all of its stock and not as a separate entity for U.S. federal income tax purposes.
Thus, all assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated
as assets, liabilities, and items of income, deduction, and credit of the REIT that directly or indirectly owns the qualified REIT
subsidiary. Consequently, in applying the REIT requirements described herein, the separate existence of any “qualified REIT
subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such
subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.
Other Disregarded Entities and Partnerships. The
following discussion summarizes certain U.S. federal income tax considerations applicable to our direct or indirect investments
in our Operating Partnership and any subsidiary partnerships or limited liability companies that we form or acquire.
An unincorporated domestic entity, such
as a partnership or limited liability company, that has a single owner, as determined under U.S. federal income tax laws, generally
is not treated as an entity separate from its owner for U.S. federal income tax purposes. We own various direct and indirect interests
in entities that are classified as partnerships and limited liability companies for state law purposes. Nevertheless, many of these
entities currently are not treated as entities separate from their owners for U.S. federal income tax purposes because such entities
are treated as having a single owner for U.S. federal income tax purposes. Consequently, the assets and liabilities, and items
of income, deduction, and credit, of such entities will be treated as our assets and liabilities, and items of income, deduction,
and credit, for U.S. federal income tax purposes, including the application of the various REIT qualification requirements.
An unincorporated domestic entity with
two or more owners, as determined under the U.S. federal income tax laws, generally is taxed as a partnership for U.S. federal
income tax purposes. In the case of a REIT that is an owner in an entity that is taxed as a partnership for U.S. federal income
tax purposes, the REIT is treated as owning its proportionate share of the assets of the entity and as earning its allocable share
of the gross income of the entity for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the
assets and items of gross income of any partnership, joint venture, or limited liability company that is taxed as a partnership
for U.S. federal income tax purposes is treated as our assets and items of gross income for purposes of applying the various REIT
qualification tests. For purposes of the 10% value test (described in “— Asset Tests”), our proportionate share
is based on our proportionate interest in the equity interests and certain debt securities issued by the entity. For all of the
other asset and income tests, our proportionate share is based on our proportionate interest in the capital of the entity.
In the event that a disregarded subsidiary
of ours ceases to be wholly-owned — for example, if any equity interest in the subsidiary is acquired by a person other than
us or another disregarded subsidiary of ours — the subsidiary’s separate existence would no longer be disregarded for
U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership
or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various
asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or
indirectly, more than 10% of the total value or total voting power of the outstanding securities of another corporation. See “—
Asset Tests” and “— Gross Income Tests.”
We may from time to time be a limited
partner or non-managing member in a partnership or limited liability company. If a partnership or limited liability company in
which we own an interest takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax,
we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability
company could take an action which could cause us to fail a gross income or asset test, and that we would not become aware of such
action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a
timely basis. In that case, we could fail to qualify as a REIT unless we were entitled to relief, as described below.
Taxable REIT Subsidiaries. A
REIT is permitted to own, directly or indirectly, up to 100% of the stock of one or more TRSs. The subsidiary and the REIT generally
must jointly elect to treat the subsidiary as a TRS. However, a corporation of which a TRS directly or indirectly owns more than
35% of the voting power or value of the securities is automatically treated as a TRS without an election. We generally may not
own more than 10%, as measured by voting power or value, of the securities of a corporation that is not a qualified REIT subsidiary
or a REIT unless we and such corporation elect to treat such corporation as a TRS. Generally, no more than 20% of the value of
a REIT’s assets may consist of stock or securities of one or more TRSs.
Unlike a qualified REIT subsidiary, the
separate existence of a TRS is not ignored for U.S. federal income tax purposes and a TRS is a fully taxable corporation subject
to U.S. federal corporate income tax on its earnings. We will not be treated as holding the assets of any TRS or as receiving the
income earned by any TRS. Rather, we will treat the stock issued by any TRS as an asset and will treat any dividends paid to us
from any TRS as income. This treatment may affect our compliance with the gross income tests and asset tests.
Restrictions imposed on REITs and their
TRSs are intended to ensure that TRSs will be subject to appropriate levels of U.S. federal income taxation. These restrictions
limit the deductibility of interest paid or accrued by a TRS to its parent REIT and impose a 100% excise tax on transactions between
a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis, such as any redetermined
rents, redetermined deductions, excess interest or redetermined TRS service income. In general, redetermined rents are rents from
real property that are overstated as a result of any services furnished to any of our tenants by a TRS of ours, redetermined deductions
and excess interest represent any amounts that are deducted by a TRS of ours for amounts paid to us that are in excess of the amounts
that would have been deducted based on arm’s length negotiations, and redetermined TRS service income is income of a TRS
that is understated as a result of services provided to us or on our behalf. Rents we receive will not constitute redetermined
rents if they qualify for certain safe harbor provisions contained in the Code. Dividends paid to us from a TRS, if any, will be
treated as dividend income received from a corporation. The foregoing treatment of TRSs may reduce the cash flow generated by us
and our subsidiaries in the aggregate and our ability to make distributions to our stockholders and may affect our compliance with
the gross income tests and asset tests.
A TRS generally may be used by a REIT
to undertake indirectly activities that the REIT requirements might otherwise preclude the REIT from doing directly, such as the
provision of noncustomary tenant services or other services that would give rise to income that would not qualify under the REIT
rules, or the ownership of property held for sale to customers. See “— Gross Income Tests — Rents from Real Property”
and “— Gross Income Tests — Prohibited Transactions.”
Gross Income Tests
We must satisfy two gross income tests
annually to qualify and 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 mortgage
loans on real property or qualified temporary investment income. Qualifying income for purposes of the 75% gross income test generally
includes:
|
·
|
rents from real property;
|
|
·
|
interest on debt secured by mortgages on real property or on interests in real property, and interest on debt secured by mortgages
on both real and personal property if the fair market value of such personal property does not exceed 15% of the total fair market
value of all such property;
|
|
·
|
dividends or other distributions on, and gain from the sale of, shares in other REITs;
|
|
·
|
gain from the sale of real estate assets, other than gain from the sale of a debt instrument issued by a “publicly offered
REIT” (i.e., a REIT that is required to file annual and periodic reports with the SEC under the Exchange Act) to the extent
not secured by real property or an interest in real property, or a nonqualified publicly offered REIT debt instrument as defined
under Section 856(c)(5)(L)(ii) of the Code;
|
|
·
|
income and gain derived from foreclosure property (as described below);
|
|
·
|
income derived from a REMIC in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMIC’s
assets are real estate assets, in which case all of the income derived from the REMIC; and
|
|
·
|
income derived from the temporary investment of new capital that is attributable to the issuance of our shares 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.
|
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 (except
for income derived from the temporary investment of new capital), other types of interest and dividends, gain from the sale or
disposition of stock or securities (including interest and gain from nonqualified publicly offered REIT debt instruments as defined
under Section 856(c)(5)(L)(ii) of the Code) or any combination of these.
Certain income items do not qualify for
either gross income test. Other types of income are excluded from both the numerator and the denominator in one or both of the
gross income tests. For example, gross income from the sale of property that we hold primarily for sale to customers in the ordinary
course of business, income and gain from “hedging transactions,” as defined in “— Hedging Transactions,”
and gross income attributable to cancellation of indebtedness, or “COD,” income will be excluded from both the numerator
and the denominator for purposes of both the 75% and 95% gross income tests. For purposes of the 75% and 95% gross income tests,
we are treated as receiving our proportionate share of our Operating Partnership’s gross income. We will monitor the amount
of our non-qualifying income and will seek to manage our investment portfolio to comply at all time with the gross income tests.
Under the Tax Cuts and Jobs Act, we would have to accrue certain items of income before they would otherwise be taken into income
under the Code if they are taken into account in our applicable financial statements. The following paragraphs discuss the specific
application of the gross income tests to us.
Dividends. Our
share of any dividends received from any corporation (including dividends from any TRS that we may form, but excluding any REIT)
in which we own an equity interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross
income test. Our share of any dividends received from any other REIT in which we own an equity interest, if any, will be qualifying
income for purposes of both gross income tests.
Interest. The
term “interest,” as defined for purposes of both gross income tests, generally excludes any amount that is based in
whole or in part on the income or profits of any person. However, interest generally includes the following:
|
·
|
an amount that is based on a fixed percentage or percentages of receipts or sales; and
|
|
·
|
an amount that is based on the income or profits of a debtor, as long as the debtor derives substantially all of its income
from the real property securing the debt from leasing substantially all of its interest in the property, and only to the extent
that the amounts received by the debtor would be qualifying “rents from real property” if received directly by a REIT.
|
If a loan contains a provision that entitles
a REIT to a percentage of the borrower’s gain upon the sale of the real property securing the loan or a percentage of the
appreciation in the property’s value as of a specific date, income attributable to that loan provision will be treated as
gain from the sale of the property securing the loan, which generally is qualifying income for purposes of both gross income tests,
provided that the property is not inventory or dealer property in the hands of the borrower or the REIT.
Interest on debt secured by a mortgage
on real property or on interests in real property, including, for this purpose, market discount, original issue discount, discount
points, prepayment penalties, loan assumption fees, and late payment charges that are not compensation for services, generally
is qualifying income for purposes of the 75% gross income test. However, if the loan is secured by real property and other property
and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property
securing the loan as of (i) the date the REIT agreed to originate or acquire the loan or (ii) as discussed below, in the
event of a “significant modification,” the date we modified the loan, a portion of the interest income from such loan
will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95%
gross income test. The portion of the interest income that will not be qualifying income for purposes of the 75% gross income test
will be equal to the portion of the principal amount of the loan that is not secured by real property — that is, the amount
by which the loan balance exceeds the applicable value of the real estate that secures the loan.
Interest on debt secured by mortgages
on real property or on interests in real property, including, for this purpose, prepayment penalties, loan assumption fees
and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income
test. Under the applicable Treasury Regulation (referred to as the “interest apportionment regulation”), if we receive
interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal
amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired
the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from
the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the
real property. Even if a mortgage loan is not secured by real property, or is undersecured, the income that it generates may nonetheless
qualify for purposes of the 95% gross income test. In Revenue Procedure 2014-51, the Service interpreted the “principal amount”
of the loan for purposes of that test to be the face amount of the loan, despite the Code’s requirement that taxpayers treat
any market discount (discussed below) as interest rather than principal. In the case of real estate mortgage loans secured by both
real and personal property, if the fair market value of such personal property does not exceed 15% of the total fair market value
of all property securing the loan, then the personal property securing the loan will be treated as real property for purposes of
determining whether the interest income from such loan qualifies for purposes of the 75% gross income test.
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 floors, options to purchase such items, and futures and forward contracts.
Income and gain from “hedging transactions” will be excluded from gross income for purposes of both the 75% and 95%
gross income tests. A “hedging transaction” means (1) any transaction entered into in the normal course of our trade
or business primarily to manage the risk of interest rate or price changes or currency fluctuations with respect to borrowings
made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, (2) any transaction
entered into primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying
income under the 75% or 95% gross income test (or any property which generates such income or gain) or (3) any new transaction
entered into to hedge the income or loss from a prior hedging transaction, where the property or indebtedness which was the subject
of the prior hedging transaction was extinguished or disposed of. We are required to clearly identify any such hedging transaction
before the close of the day on which it was acquired, originated, or entered into and to satisfy other identification requirements.
To the extent that we hedge for other purposes, or to the extent that we do not properly identify a hedging transaction, the income
from those transactions will likely be treated as non-qualifying income for purposes of both gross income tests. We intend to structure
any hedging transactions in a manner that does not jeopardize our qualification as a REIT; however, no assurance can be given that
our hedging activities will give rise to income that is excluded from gross income or qualifies for purposes of either or both
of the gross income tests. We may conduct some or all of our hedging activities through a TRS or other corporate entity, the income
from which may be subject to U.S. federal income tax, rather than by participating in the arrangements directly or through pass-through
subsidiaries.
Rents from Real Property. To
the extent that we acquire real property or an interest therein, rents we receive will qualify as “rents from real property”
in satisfying the gross income requirements for a REIT described above only if the following conditions are met:
|
·
|
First, the amount of rent must not be based in whole or in part on the income or profits of any person. An amount received
or accrued generally will not be excluded, however, from rents from real property solely by reason of being based on fixed percentages
of receipts or sales.
|
|
·
|
Second, rents we receive from a “related party tenant” will not qualify as rents from real property in satisfying
the gross income tests unless the tenant is a TRS, at least 90% of the property is leased to unrelated tenants, the rent paid by
the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space and the rent is not attributable
to an increase in rent due to a modification of a lease with a “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). A tenant is a related party tenant if the REIT, or an actual
or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant.
|
|
·
|
Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of
the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents
from real property.
|
|
·
|
Fourth, we generally must not operate or manage our real property or furnish or render services to our tenants, other than
through an “independent contractor” who is adequately compensated and from whom we do not derive revenue. We may, however,
provide services directly to 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 “non-customary” services to the tenants of a property, other than through an independent
contractor, as long as our income from the services does not exceed 1% of our income from the related property. Furthermore, we
may own up to 100% of the stock of a TRS, which may provide customary and non-customary services to tenants without tainting our
rental income from the related properties.
|
If a portion of the rent that we receive
from a property 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 that is attributable to personal property will not be qualifying
income for purposes of either the 75% or 95% gross income test. Thus, if such rent attributable to personal property, plus any
other income that is non-qualifying 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 qualification. Further, the rent from a particular property does not qualify as
“rents from real property” if (i) the rent is considered based on the income or profits of the tenant, (ii)
the tenant either is a related party tenant or fails to qualify for the exceptions to the related party tenant rule for qualifying
taxable REIT subsidiaries or (iii) we furnish non-customary services to the tenants of the property, or manage or operate the property,
other than through a qualifying independent contractor or a taxable REIT subsidiary.
In addition to the rent, the tenants may
be required to pay certain additional charges. To the extent that such additional charges represent reimbursements of amounts that
we are obligated to pay to third parties such charges generally will qualify as “rents from real property.” To the
extent such additional charges represent penalties for nonpayment or late payment of such amounts, such charges should qualify
as “rents from real property.” However, to the extent that late charges do not qualify as “rents from real property,”
they instead will be treated as interest that qualifies for the 95% gross income test.
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. Any such income will be excluded
from the application of the 75% and 95% gross income tests. Whether a REIT holds an asset “primarily for sale to customers
in the ordinary course of a trade or business” depends on the facts and circumstances in effect from time to time, including
those related to a particular asset. No assurance, however, can be given that the Service will not successfully assert a contrary
position, in which case we would be subject to the prohibited transaction tax on the sale of those assets. A safe harbor to the
characterization of the sale of property by a REIT as a prohibited transaction and the resulting imposition of the 100% prohibited
transactions tax is available, however, if the following requirements are met:
|
·
|
the REIT has held the property for not less than two years;
|
|
·
|
the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of the
sale that are includable in the basis of the property do not exceed 30% of the selling price of the property;
|
|
·
|
either (1) during the year in question, the REIT did not make more than seven property sales other than sales of foreclosure
property or sales to which Section 1033 of the Code applies, (2) the aggregate adjusted bases of all such properties sold by the
REIT during the year did not exceed 10% of the aggregate bases of all of the assets of the REIT at the beginning of the year, (3)
the aggregate fair market value of all such properties sold by the REIT during the year did not exceed 10% of the aggregate fair
market value of all of the assets of the REIT at the beginning of the year or (4) either, (a) the REIT satisfies the requirements
of clause (2) applied by substituting “20%” for “10%” and the “3-year average adjusted bases percentage”
(as defined in the Code) for the taxable year does not exceed 10%, or (b) the REIT satisfies the requirements of clause (3) applied
by substituting “20%” for “10%” and the “3-year average fair market value percentage” (as defined
in the Code) for the taxable year does not exceed 10%;
|
|
·
|
in the case of property not acquired through foreclosure or lease termination, the REIT has held the property for at least
two years for the production of rental income; and
|
|
·
|
if the REIT has made more than seven property sales (excluding sales of foreclosure property) during the taxable year, substantially
all of the marketing and development expenditures with respect to the property were made through an independent contractor from
whom the REIT or a TRS derives no income.
|
We will attempt to comply with the terms
of the 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 will be able to comply with the safe-harbor provisions or that we will avoid
owning property that may be characterized as property held “primarily for sale to customers in the ordinary course of a trade
or business.” We may hold and dispose of certain properties through a taxable REIT subsidiary if we conclude that the sale
or other disposition of such property may not fall within the safe-harbor provisions. The 100% prohibited transactions tax will
not apply to gains from the sale of property that is held through a taxable REIT subsidiary although such income will be taxed
to the taxable REIT subsidiary at U.S. federal corporate income tax rates.
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. Gross income from foreclosure property will qualify, however, under the 75% and 95% gross income tests. Foreclosure property
is any real property, including interests in real property, and any personal property incident to such real property:
|
·
|
that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced
such property to ownership or possession by agreement or process of law, after there was a default or default was imminent on a
lease of such property or on indebtedness that such property secured;
|
|
·
|
for which the related loan or lease was acquired by the REIT at a time when the default was not imminent or anticipated; and
|
|
·
|
for which the REIT makes a proper election to treat the property as foreclosure property.
|
A REIT will not be considered, however,
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 longer if an extension is granted
by the Secretary of the U.S. Treasury Department. This grace period terminates and foreclosure property ceases to be foreclosure
property on the first day:
|
·
|
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 (disregarding income from foreclosure property), 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 (disregarding income from foreclosure property);
|
|
·
|
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
|
|
·
|
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
that is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive
any income.
|
Failure to Satisfy Gross Income
Tests. We intend to monitor our sources of income, including any nonqualifying income received by us,
and manage our assets so as to ensure our compliance with the 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 are entitled to qualify for relief
under certain provisions of the U.S. federal income tax laws. Those relief provisions generally will be available if:
|
·
|
our failure to meet those tests is due to reasonable cause and not to willful neglect; and
|
|
·
|
following such failure for any taxable year, a schedule of the sources of our income is filed with the Service in accordance
with regulations prescribed by the Secretary of the U.S. Treasury Department.
|
We cannot predict, however, whether any
failure to meet these tests will qualify for the relief provisions. If these relief provisions are inapplicable to a particular
set of circumstances involving us, we will not qualify as a REIT. As discussed above in the section entitled “— 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 amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by a fraction
intended to reflect our profitability.
Asset Tests
To qualify as a REIT, we also must satisfy
the following asset tests at the end of each quarter of each taxable year.
First, at least 75% of the value of our
total assets must consist of:
|
·
|
cash or cash items, including certain receivables and investments in money market funds;
|
|
·
|
interests in real property, including leaseholds and options to acquire real property and leaseholds;
|
|
·
|
interests in mortgage loans secured by real property;
|
|
·
|
interests in mortgage loans secured by both real property and personal property if the fair market value of such personal property
does not exceed 15% of the total fair market value of all such property;
|
|
·
|
stock or shares of beneficial interest in other REITs;
|
|
·
|
investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through
equity offerings or public offerings of debt with at least a five-year term;
|
|
·
|
personal property leased in connection with real property if the rent attributable to such personal property is not greater
than 15% of the total rent received under the lease;
|
|
·
|
debt instruments issued by “publicly offered REITs;” and
|
|
·
|
regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consist of assets that are qualifying
real estate-related assets under the U.S. federal income tax laws, determined as if we held such assets, we will be treated as
holding directly our proportionate share of the assets of such REMIC.
|
Second, of our investments not included
in the 75% asset class, the value of our interest in any one issuer’s securities may not exceed 5% of the value of our total
assets (the “5% asset test”).
Third, of our investments not included
in the 75% asset class, we may not own more than 10% of the total voting power or 10% of the total value of any one issuer’s
outstanding securities (the “10% vote test” and the “10% value test,” respectively).
Fourth, no more than 20% of the value
of our total assets may consist of the securities of one or more TRSs.
Fifth, no more than 25% of the value of
our total assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying
assets for purposes of the 75% asset test (the “25% securities test”).
Sixth, not more than 25% of the value
of our total assets may be represented by debt instruments of “publicly offered REITs” to the extent those debt instruments
are not secured by real property or an interest in real property.
For purposes of these assets tests, we
are treated as holding our proportionate share of our Operating Partnership’s assets. For purposes of the 5% asset test,
the 10% vote test and the 10% value test, the term “securities” does not include stock in another REIT, equity or debt
securities of a qualified REIT subsidiary or TRS, mortgage loans, or equity interests in a partnership. For purposes of the 10%
value test, the term “securities” does not include:
|
·
|
“straight debt” securities, which is defined as a written unconditional promise to pay on demand or on a specified
date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into stock, and (ii) the interest
rate and interest payment dates are not contingent on profits, the borrower’s 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” hold non-” straight” debt securities that have an aggregate value of more than 1% of the issuer’s
outstanding securities. However, “straight debt” securities include debt subject to the following contingencies:
|
|
·
|
a contingency relating to the time of payment of interest or principal, as long as either (i) there is no change to the
effective yield of the debt obligation, other than a change to the annual yield that does not exceed the greater of 0.25% or 5%
of the annual yield, or (ii) neither the aggregate issue price nor the aggregate face amount of the issuer’s 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;
and
|
|
·
|
a contingency relating to the time or amount of payment upon a default or prepayment of a debt obligation, as long as the contingency
is consistent with customary commercial practice;
|
|
·
|
any loan to an individual or an estate;
|
|
·
|
any “section 467 rental agreement,” other than an agreement with a related party tenant;
|
|
·
|
any obligation to pay “rents from real property;”
|
|
·
|
certain securities issued by governmental entities that are not dependent in whole or in part on the profits of (or
payments made by) a non-governmental entity;
|
|
·
|
any security (including debt securities) issued by another REIT;
|
|
·
|
any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes in which we are a partner to
the extent of our proportionate interest in the equity and certain debt securities issued by that partnership; or
|
|
·
|
any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes not described in the preceding
bullet points if at least 75% of the partnership’s gross income, excluding income from prohibited transactions, is qualifying
income for purposes of the 75% gross income test described above in “— Gross Income Tests.”
|
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, without
regard to the securities described in the last two bullet points above.
We intend that the assets that we will
hold will satisfy the foregoing asset test requirements. We will not obtain, however, nor are we required to obtain under
the U.S. federal income tax laws, independent appraisals to support our conclusions as to the value of our assets and securities
or the real estate collateral for any mortgage loans that we may originate or acquire. Therefore, we cannot assure you that we
will be able to satisfy the asset tests described above. We will monitor the status of our assets for purposes of the various asset
tests and seek to manage our portfolio to comply at all times with such tests. No assurance, however, can be given that we will
continue to be successful in this effort. In this regard, to determine our compliance with these requirements, we will have to
value our investment in our assets to ensure compliance with the asset tests. Although we seek to be prudent in making these estimates,
no assurances can be given that the Service might not disagree with these determinations and assert that a different value is applicable,
in which case we might not satisfy the 75% asset test and the other asset tests and, thus, would fail to qualify as a REIT.
If we fail to satisfy the asset tests
at the end of a calendar quarter, we will not lose our REIT qualification so long as:
|
·
|
we satisfied the asset tests at the end of the preceding calendar quarter; and
|
|
·
|
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.
|
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.
If we violate the 5% asset test, the 10%
vote test or the 10% value test described above at the end of any calendar quarter, we will not lose our REIT qualification if
(i) the failure is de minimis (up to the lesser of 1% of the total value of our assets or $10 million) and (ii) 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 such failure.
In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to reasonable cause and
not to willful neglect, we will not lose our REIT qualification if we (i) dispose of assets or otherwise comply with the asset
tests within six months after the last day of the quarter in which we identified such failure, (ii) file a schedule with the Service
describing the assets that caused such failure in accordance with regulations promulgated by the Secretary of the U.S. Treasury
Department and (iii) pay a tax equal to the greater of $50,000 or the product of the highest U.S. federal corporate tax
rate (currently, 21%) and the net income from the non-qualifying assets during the period in which we failed to satisfy the asset
tests. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will fail to qualify as
a REIT.
We intend that the assets that we may
hold will satisfy the foregoing asset test requirements. We will monitor the status of our assets and our future acquisition of
assets to ensure that we comply with those requirements, but we cannot assure you that we will be successful in this effort. No
independent appraisals will be obtained to support our estimates of and conclusions as to the value of our assets and securities,
or in many cases, the real estate collateral for the mortgage loans that support our assets. Moreover, the values of some assets
may not be susceptible to a precise determination. As a result, no assurance can be given that the Service will not contend that
our ownership of securities and other assets violates one or more of the asset tests applicable to REITs.
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 at least equal to:
|
·
|
90% of our REIT taxable income computed without regard to the dividends paid deduction and our net capital gain, and
|
|
·
|
90% of our after-tax net income, if any, from foreclosure property, minus
|
|
·
|
the sum of certain items of non-cash income.
|
We must make such distributions in the
taxable year to which they relate, or in the following taxable year if either (i) we declare the distribution before we timely
file our U.S. federal income tax return for the year and pay the distribution on or before the first regular dividend payment date
after such declaration or (ii) we declare the distribution in October, November or December of the taxable year, payable to stockholders
of record on a specified day in any such month, and we actually pay the dividend before the end of January of the following year.
The distributions under clause (i) are taxable to the stockholders in the year in which paid, and the distributions in clause (ii)
are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate to our prior taxable
year for purposes of the 90% distribution requirement.
In order for distributions to be counted
as satisfying the annual distribution requirements for REITs other than “publicly offered” REITs, and to provide a
REIT-level tax deduction for such REITs, the distributions must not be a “preferential dividend.” A distribution is
not a preferential dividend if the distribution is (i) pro-rata among all outstanding shares within a particular class and (ii)
in accordance with the preferences among different classes of shares as set forth in the REIT’s organizational documents.
Such preferential dividend rules will not apply to our distributions if we qualify as a “publicly offered” REIT. We
believe that we will be a “publicly offered” REIT.
We will pay U.S. federal income tax on
taxable income, including net capital gain, that we do not distribute to stockholders. Furthermore, if we fail to distribute 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, at least the sum of:
|
·
|
85% of our REIT ordinary income for such year,
|
|
·
|
95% of our REIT capital gain income for such year, and
|
|
·
|
any undistributed taxable income from prior periods.
|
We will incur a 4% nondeductible excise
tax on the excess of such required distribution over the amounts we actually distribute.
We may elect to retain and pay income
tax on the net long term capital gain we recognize in a taxable year. See the section above entitled “— Taxation of
U.S. Holders.” If we so elect, we will be treated as having distributed any such retained amount for purposes of the REIT
distribution requirements and the 4% nondeductible excise tax described above.
We intend to make timely distributions
in the future sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% nondeductible
excise tax. It is possible that, from time to time, we may experience timing differences between the actual receipt of cash, including
distributions from our subsidiaries, and actual payment of deductible expenses and the inclusion of that income and deduction of
such expenses in arriving at our REIT taxable income. As a result of the foregoing, we may have less cash than is necessary to
make distributions to our stockholders that are sufficient to avoid corporate income tax and the 4% nondeductible excise tax imposed
on certain undistributed income or even to meet the annual distribution requirements. In such a situation, we may need to borrow
funds or issue additional stock, or, if possible, pay dividends consisting, in whole or in part, of our stock or debt securities.
In order for distributions to be counted
as satisfying the annual distribution requirement applicable to REITs and to provide us with a REIT-level tax deduction, the distributions
must not be “preferential dividends.” A distribution is not a preferential dividend if the distribution is (1) pro
rata among all outstanding shares within a particular class, and (2) in accordance with the preferences among different classes
of stock as set forth in our organizational documents.
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 and may be
required to pay a penalty to the Service based upon the amount of any deduction we take for deficiency dividends.
The Tax Cuts and Jobs Act contains provisions
that may change the way that we calculate our REIT taxable income and that our subsidiaries calculate their taxable income in taxable
years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, we will have to accrue certain items of income before
they would otherwise be taken into income under the Code if they are taken into account in our applicable financial statements.
Additionally, for taxable years beginning after December 31, 2017, the Tax Cuts and Jobs Act limits interest deductions for businesses,
whether in corporate or pass-through form, to the sum of the taxpayer’s business interest income for the tax year and 30%
of the taxpayer’s adjusted taxable income for the tax year. This limitation could apply to our Operating Partnership and
any TRS. This limitation does not apply to an “electing real property trade or business.” We have not elected out of
the new interest expense limitation, but may do so in the future. One consequence of electing to be an “electing real property
trade or business” is that the new expensing rules will not apply to certain property used in an electing real property trade
or business. In addition, in the case of an electing real property trade or business, real property and “qualified improvement
property” are depreciated under the alternative depreciation system, with 40-year useful life for nonresidential real property
and a 20-year useful life for qualified improvement property (although a potential drafting error makes the useful life for qualified
improvement property uncertain). Finally, there are new limitations on use of net operating losses arising in taxable years beginning
after December 31, 2017.
Sale-Leaseback Transactions
Some of our investments have been, and
may in the future be, in the form of sale-leaseback transactions whereby we purchase real estate properties and lease them back
to the seller. We normally intend to treat these transactions as real estate purchases and true leases for federal income tax purposes.
However, depending on the terms of any specific transaction, the Service might take the position that the transaction is not a
sale-leaseback but is more properly treated in some other manner. In the event of a successful recharacterization, we would not
be entitled to claim the depreciation deductions available to an owner of the property. In addition, the recharacterization of
one or more of these transactions might cause us to fail to satisfy the asset tests or the gross income tests described above based
upon the asset we would be treated as holding or the income we would be treated as having earned, and such failure could result
in our failing to qualify as a REIT. Alternatively, the amount or timing of income inclusion or the loss of depreciation deductions
resulting from the recharacterization might cause us to fail to meet the distribution requirement described above for one or more
taxable years absent the availability of the deficiency distribution procedure or might result in a larger portion of our distributions
being treated as ordinary distribution income to our stockholders.
Recordkeeping Requirements
We must maintain certain records in order
to qualify as a REIT. In addition, to avoid a monetary penalty, we must request, on an annual basis, information from our stockholders
designed to disclose the actual ownership of our outstanding shares, and we must maintain a list of those persons failing or refusing
to comply with such request as part of our records. A stockholder that fails or refuses to comply with such request is required
by the Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of our stock and other information.
We intend to comply with these requirements.
Failure 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 our failure is
due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. In addition, there
are relief provisions for a failure of the gross income tests and asset tests, as described in “— Gross Income Tests”
and “— Asset Tests.”
If we fail to qualify as a REIT in any taxable
year, and no relief provision applies, we would be subject to U.S. federal income tax and any applicable alternative minimum tax
(for taxable years beginning before January 1, 2018) on our taxable income at regular corporate rates. In calculating our taxable
income in a year in which we fail to qualify as a REIT, we would not be able to deduct amounts paid out to stockholders. In fact,
we would not be required to distribute any amounts to stockholders in that year. In such event, to the extent of our current or
accumulated earnings and profits, all distributions to stockholders would be taxable as ordinary income. Subject to certain limitations
of the U.S. federal income tax laws, corporate stockholders might be eligible for the dividends received deduction and stockholders
taxed at individual rates might be eligible for the reduced U.S. federal income tax rate of 20% on such dividends. Unless we qualified
for relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. We cannot predict whether in all circumstances we would qualify
for such statutory relief.
Taxation of Our Operating Partnership
Our Operating Partnership currently is
treated as a partnership for U.S. federal income tax purposes.
Under the Code, a partnership generally
is not subject to U.S. federal income tax, but is required to file a partnership tax information return each year. In general,
the character of each partner’s share of each item of income, gain, loss, deduction, credit, and tax preference is determined
at the partnership level. Each partner is then allocated a distributive share of such items in accordance with the partnership
agreement and is required to take such items into account in determining such partner’s income. Each partner includes such
amount in income for any taxable year of the partnership ending within or with the taxable year of the partner, without regard
to whether the partner has received or will receive any cash distributions from the partnership. Cash distributions, if any, from
a partnership to a partner generally are not taxable unless and to the extent they exceed the partner’s basis in its partnership
interest immediately before the distribution. Any amounts in excess of such tax basis will generally be treated as a sale or exchange
of such partner’s interest in the partnership.
For purposes of the REIT income and asset
tests, we are treated as receiving or holding our proportionate share of our Operating Partnership’s income and assets, respectively.
We control, and intend to continue to control, our Operating Partnership and intend to operate it consistently with the requirements
for our qualification as a REIT.
The Bipartisan Budget Act of 2015 changed
the rules applicable to U.S. federal income tax audits of partnerships. Under the new rules (which generally are effective for
taxable years beginning after December 31, 2017), among other changes and subject to certain exceptions, any audit adjustment
to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s distributive share thereof) is determined,
and taxes, interest, or penalties attributable thereto are assessed and collected, at the partnership level. These rules could
result in the Operating Partnership being required to pay additional taxes, interest and penalties as a result of an audit adjustment,
and we could be required to bear the economic burden of those taxes, interest, and penalties even though we, as a REIT, may not
otherwise have been required to pay additional corporate-level taxes as a result of the related audit adjustment. Prospective stockholders
are urged to consult their tax advisors with respect to these changes and their potential impact on their investment in our securities.
The discussion above assumes that our
Operating Partnership is treated as a “partnership” for U.S. federal income tax purposes. Generally, a domestic unincorporated
entity with two or more partners is treated as a partnership for U.S. federal income tax purposes unless it affirmatively elects
to be treated as a corporation. However, certain “publicly traded partnerships” are treated as corporations for U.S.
federal income tax purposes. We intend to comply with one or more exceptions to treatment of our Operating Partnership as a corporation
under the publicly traded partnership rules. Failure to qualify for such an exception could prevent us from qualifying as a REIT.
Taxation of U.S. Holders
The term “U.S. holder” means
a beneficial owner of our securities that, for U.S. federal income tax purposes, is:
|
·
|
a citizen or resident of the United States;
|
|
·
|
a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized under
the laws of the United States, any of its States or the District of Columbia;
|
|
·
|
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
|
|
·
|
any trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one
or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) it has a valid election in place
to be treated as a U.S. person.
|
If a partnership, entity or arrangement
treated as a partnership for U.S. federal income tax purposes holds our securities, the U.S. federal income tax treatment of a
partner in the partnership will generally depend on the status of the partner and the activities of the partnership and certain
determinations made at the partner level. If you are a partner in a partnership holding our securities, you should consult your
tax advisor regarding the consequences of the purchase, ownership and disposition of our securities by the partnership.
Taxation of Taxable U.S. Holders
on Distributions on Shares. As long as we qualify as a REIT, a taxable U.S. holder must generally 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. Dividends paid to a U.S. holder will not qualify for the dividends received
deduction generally available to corporations. In addition, dividends paid to a U.S. holder generally will not qualify for the
20% tax rate for “qualified dividend income.”
The maximum tax rate for qualified dividend
income received by taxpayers taxed at individual rates is 20%. Qualified dividend income generally includes dividends paid to U.S.
holders taxed at individual rates by domestic C corporations and certain qualified foreign corporations. Because we are not generally
subject to U.S. federal income tax on the portion of our REIT taxable income distributed to our stockholders (see “— Taxation
of Our Company” above), our dividends generally will not be eligible for the 20% rate on qualified dividend income.
As a result, our ordinary REIT dividends
will be taxed at the higher tax rate applicable to ordinary income. Beginning in taxable years on or after January 1, 2018 and
before January 1, 2026, non-corporate U.S. stockholders will be entitled to deduct 20% of ordinary REIT dividends they receive.
In combination with the 37% maximum rate applicable to non-corporate U.S. stockholders in such years, ordinary REIT dividends are
subject to a maximum tax rate of 29.6%, as compared with the 39.6% rate applicable in taxable years beginning before January 1,
2018.
In addition, the 20% tax rate for qualified
dividend income will apply to our ordinary REIT dividends (i) attributable to dividends received by us from certain non-REIT corporations
(e.g., dividends from any domestic TRSs), (ii) to the extent 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) and (iii) attributable to income in the prior taxable
year from the sales of “built-in gain” property acquired by us from C corporations in carryover basis transactions
(less the amount of corporate tax on such income). In general, to qualify for the reduced tax rate on qualified dividend income,
a U.S. holder must hold our shares for more than 60 days during the 121-day period beginning on the date that is 60 days before
the date on which our shares of capital stock become ex-dividend. Individuals, trusts and estates whose income exceeds certain
thresholds are also subject to a 3.8% Medicare tax on dividends received from us. Dividends paid to a corporate U.S. stockholder
will not qualify for the dividends received deduction generally available to corporations.
A U.S. holder generally will take into
account distributions that we properly designate as capital gain dividends as long-term capital gain, to the extent that they do
not exceed our actual net capital gain for the taxable year, without regard to the period for which the U.S. holder has held our
shares of capital stock. Dividends designated as capital gain dividends may not exceed our dividends paid for the taxable year,
including dividends paid the following year that are treated as paid in the current year. A corporate U.S. holder may, however,
be required to treat up to 20% of certain capital gain dividends as ordinary income. Net capital gain is generally taxable at a
maximum U.S. federal income tax rate of 20%, in the case of U.S. stockholders who are individuals, and 21% for corporations. Capital
gain dividends attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% U.S. federal
income tax rate for U.S. stockholders who are individuals, trusts or estates, to the extent of previously claimed depreciation
deductions.
We may elect to retain and pay income
tax on the net long-term capital gain that we recognize in a taxable year. In that case, to the extent we designate such amount
on a timely notice to such stockholder, a U.S. holder would be taxed on its proportionate share of our undistributed long-term
capital gain. The U.S. holder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. holder
would increase the basis in its shares of capital stock by the amount of its proportionate share of our undistributed long-term
capital gain, minus its share of the tax we paid.
A U.S. holder 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 U.S. holder’s shares of capital stock. Instead, the distribution will reduce the adjusted basis of such shares of
capital stock. A U.S. holder will recognize a distribution in excess of both our current and accumulated earnings and profits and
the U.S. holder’s adjusted basis in his or her shares of capital stock as long-term capital gain, or short-term capital gain
if the shares of capital stock have been held for one year or less, assuming the shares of capital stock are a capital asset in
the hands of the U.S. holder. In addition, if we declare a distribution in October, November or December of any year that is payable
to a U.S. holder of record on a specified date in any such month, such distribution shall be treated as both paid by us and received
by the U.S. holder on December 31 of such year, provided that we actually pay the distribution during January of the following
calendar year, as described in “— Distribution Requirements.”
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 our shares of capital stock will not be treated as passive activity income and, therefore, a U.S. holder
generally will not be able to apply any “passive activity losses,” such as losses from certain types of limited partnerships
in which such U.S. holder is a limited partner, against such income. In addition, taxable distributions from us and gain from the
disposition of our shares of capital stock generally will be treated as investment income for purposes of the investment interest
limitations. Similarly, for taxable years beginning after December 31, 2017, non-corporate stockholders cannot apply “excess
business losses” against dividends that we distribute and gains arising from the disposition of our common stock. Dividends
that we distribute, to the extent they do not constitute a return of capital, generally will be treated as investment income for
purposes of computing the investment interest limitation. A U.S. stockholder that elects to treat capital gain dividends, capital
gains from the disposition of shares or qualified dividend income as investment income for purposes of the investment interest
limitation will be taxed at the ordinary income tax rate on such amounts. 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 Taxable U.S. Holders
on the Disposition of Shares. In general, a U.S. holder who is not a dealer in securities must treat any gain
or loss realized upon a taxable disposition of our shares of capital stock as long-term capital gain or loss if the U.S. holder
has held such shares of capital stock for more than one year and otherwise as short-term capital gain or loss. In general, a U.S.
holder will realize gain or loss in an amount equal to the difference between the sum of the fair market value of any property
and the amount of cash received in such disposition and the U.S. holder’s adjusted tax basis. A holder’s adjusted tax
basis generally will equal the U.S. holder’s acquisition cost, increased by the excess of net capital gain deemed distributed
to the U.S. holder (discussed above) less tax deemed paid by such U.S. holder on such gains and reduced by any returns of capital.
However, a U.S. holder must treat any loss upon a sale or exchange of shares of capital stock held by such holder 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
that such U.S. holder treats as long term capital gain. All or a portion of any loss that a U.S. holder realizes upon a taxable
disposition of our shares of capital stock may be disallowed if the U.S. holder purchases our shares of capital stock (or substantially
similar shares of capital stock) within 30 days before or after the disposition.
Capital Gains and Losses. 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 maximum tax rate on long-term capital gain applicable to U.S. holders taxed at individual
rates is 20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long-term capital gain from
the sale or exchange of “section 1250 property,” or depreciable real property, is 25%, which applies to the lesser
of the total amount of the gains or the accumulated depreciation on the Section 1250 property. Individuals, trusts and estates
whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on gain from the sale of our shares of capital
stock.
With respect to distributions that we
designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we will designate whether such
a distribution is taxable to U.S. holders taxed at individual rates at a 20% or 25% rate. The highest marginal individual income
tax rate currently is 37%. Thus, the tax rate differential between capital gain and ordinary income for those taxpayers may be
significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital
losses, including capital losses recognized upon the disposition of our shares. A non-corporate taxpayer may deduct capital losses
not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer
may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates (currently up to 21%). A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
If a U.S. stockholder recognizes a loss
upon a disposition of our stock in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury
Regulations involving “reportable transactions” could apply, resulting in a requirement to separately disclose the
loss-generating transaction to the Service. These Treasury Regulations are written quite broadly and apply to many routine and
simple transactions. A reportable transaction currently includes, among other things, a sale or exchange of stock resulting in
a tax loss in excess of (a) $10 million in any single year or $20 million in any combination of years in the case of stock held
by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in any
combination of years in the case of stock held by any other partnership or an S corporation, trust or individual, including losses
that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with
its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the Service’s Office
of Tax Shelter Analysis. The penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural
person and $50,000 in any other case.
Information Reporting Requirements
and Withholding. We or the applicable withholding agent will report to U.S. holders and to the Service the amount
and the tax character of distributions we pay during each calendar year, and the amount of tax we withhold, if any. Under the backup
withholding rules, a U.S. holder may be subject to backup withholding (currently at a rate of 24% ) with respect to distributions
unless such holder:
|
·
|
is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or
|
|
·
|
provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies
with the applicable requirements of the backup withholding rules.
|
A U.S. holder who does not provide
the applicable withholding agent with its correct taxpayer identification number also may be subject to penalties imposed by the
Service. Any amount paid as backup withholding will be creditable against the U.S. holder’s income tax liability. Backup
withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against
the U.S. holder’s U.S. federal income tax liability if certain required information is timely furnished to the Service. U.S.
holders are urged to consult their own tax advisors regarding application of backup withholding to them and the availability of,
and procedure for obtaining an exemption from, backup withholding. In addition, the applicable withholding agent may be required
to withhold a portion of distributions to any U.S. holders who fail to certify their U.S. status.
Taxation of Non-U.S. Holders
The term “non-U.S. holder”
means a beneficial owner of our shares of capital stock that is not a U.S. holder or a partnership (or an entity or arrangement
treated as a partnership for U.S. federal income tax purposes). The rules governing U.S. federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign holders are complex. This section is only a summary
of such rules. We urge non-U.S. holders to consult their tax advisors to determine the impact of U.S. federal, state and
local income tax laws on ownership of our shares of capital stock, including any reporting requirements.
A non-U.S. holder that receives a distribution
from us that is not attributable to gain from our sale or exchange of “United States real property interests,” as defined
below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent
that we pay the distribution out 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. If a distribution
is treated as effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business, the distribution will
not incur the 30% withholding tax, but the non-U.S. holder generally will be subject to U.S. federal income tax on the distribution
at graduated rates, in the same manner as U.S. holders are taxed on distributions and also may be subject to the 30% branch profits
tax in the case of a corporate non-U.S. holder. In general, non-U.S. holders will not be considered to be engaged in a U.S. trade
or business solely as a result of their ownership of our shares of capital stock. It is expected that the applicable withholding
agent will withhold U.S. income tax at the rate of 30% on the gross amount of any distribution that we do not designate as a capital
gain distribution or retained capital gain and is paid to a non-U.S. holder unless either:
|
·
|
a lower treaty rate applies and the non-U.S. holder files with the applicable withholding agent an IRS Form W-8BEN or IRS Form
W-8BEN-E evidencing eligibility for that reduced rate, or
|
|
·
|
the non-U.S. holder files with the applicable withholding agent an IRS Form W-8ECI claiming that the distribution is effectively
connected income.
|
Capital gain dividends received or deemed
received by a non-U.S. holder from us that are not attributable to gain from our sale or exchange of “United States real
property interests,” as defined below, are generally not subject to U.S. federal income or withholding tax, unless either
(1) the non-U.S. holder’s investment in our shares of capital stock is effectively connected with a U.S. trade or business
conducted by such non-U.S. holder (in which case the non-U.S. holder will be subject to the same treatment as U.S. holders with
respect to such gain) or (2) the non-U.S. holder is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and has a “tax home” in the United States (in which case the non-U.S. holder will
be subject to a 30% tax on the individual’s net capital gain for the year).
A non-U.S. holder will not incur tax on
a distribution on the shares of capital stock in excess of our current and accumulated earnings and profits if the excess portion
of the distribution does not exceed the adjusted tax basis of its shares of capital stock. Instead, the excess portion of the distribution
will reduce such non-U.S. holder’s adjusted tax basis of its shares of capital stock. A non-U.S. holder 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 of
capital stock, if the non-U.S. holder otherwise would be subject to tax on gain from the sale or disposition of its shares of capital
stock, as described below. Because we generally cannot determine at the time we make a distribution whether the distribution will
exceed our current and accumulated earnings and profits, it is expected that the applicable withholding agent normally will withhold
tax on the entire amount of any distribution at the same rate applicable to withholding on a dividend. To the extent that we do
not do so, we nevertheless may withhold at a rate of 15% on any portion of a distribution not subject to withholding at a rate
of 30%. However, a non-U.S. holder may obtain a refund of amounts that the applicable withholding agent withheld if we later determine
that a distribution in fact exceeded our current and accumulated earnings and profits.
For any year in which we qualify as a
REIT, a non-U.S. holder may incur tax on distributions that are attributable to gain from our sale or exchange of “United
States real property interests” under special provisions of the U.S. federal income tax laws known as “FIRPTA.”
The term “United States real property interests” includes interests in real property and shares in corporations at
least 50% of whose assets consist of interests in real property. Under the FIRPTA rules, a non-U.S. holder is taxed on distributions
attributable to gain from sales of United States real property interests as if the gain were effectively connected with a U.S.
business of the non-U.S. holder. A non-U.S. holder thus would be taxed on such a distribution at the normal capital gain rates
applicable to U.S. holders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of
a nonresident alien individual. A non-U.S. corporate holder not entitled to treaty relief or exemption also may be subject to the
30% branch profits tax on such a distribution. Unless a non-U.S. holder qualifies for the exception described in the next paragraph,
the applicable withholding agent must withhold 21% of any such distribution that we could designate as a capital gain dividend.
A non-U.S. holder may receive a credit against such holder’s tax liability for the amount withheld.
Capital gain distributions on our shares
of capital stock that are attributable to our sale of real property will be treated as ordinary dividends, rather than as gain
from the sale of a United States real property interest, if (i) the class of capital stock is “regularly traded” on
an established securities market in the United States and (ii) the non-U.S. holder does not own more than 10% of such class of
capital stock during the one-year period preceding the distribution date. As a result, non-U.S. holders 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.
If a class of our capital stock is not regularly traded on an established securities market in the United States or the non-U.S.
holder owned more than 10% of such class of capital stock at any time during the one-year period prior to the distribution, capital
gain distributions that are attributable to our sale of real property would be subject to tax under FIRPTA. Moreover, if a non-U.S.
holder disposes of our capital stock during the 30-day period preceding a dividend payment, and such non-U.S. holder (or a person
related to such non-U.S. holder) acquires or enters into a contract or option to acquire our capital stock within 61 days of the
1st day of the 30 day period described above, and any portion of such dividend payment would, but for the disposition, be
treated as a United States real property interest capital gain to such non-U.S. holder, then such non-U.S. holder will be treated
as having United States real property interest capital gain in an amount that, but for the disposition, would have been treated
as United States real property interest capital gain.
A non-U.S. holder generally will not incur
tax under FIRPTA with respect to gain realized upon a disposition of our shares of capital stock as long as we are not a United
States real property holding corporation during a specified testing period. If at least 50% of a REIT’s assets are United
States real property interests, then the REIT will be a United States real property holding corporation. We anticipate that we
will be classified as a United States real property holding corporation based on our investment strategy and current investments.
In that case, gains from the sale of our shares of capital stock by a non-U.S. holder could be subject to a FIRPTA tax. However,
a non-U.S. holder generally would not incur tax under FIRPTA on gain from the sale of our shares of capital stock if we were a
“domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes
a REIT in which, at all times during a specified testing period, less than 50% in value of its shares are held directly or indirectly
by non-U.S. persons.
If a class of our capital stock is regularly
traded on an established securities market, an additional exception to the tax under FIRPTA will be available with respect to such
class of our capital stock, even if we do not qualify as a domestically controlled qualified investment entity at the time the
non-U.S. holder sells such capital stock. Under that exception, the gain from such a sale by such a non-U.S. holder will not be
subject to tax under FIRPTA if (i) the class of our capital stock is treated as regularly traded under applicable Treasury Regulations
on an established securities market and (ii) the non-U.S. holder owned, actually or constructively, 10% or less of such class of
our capital stock at all times during a specified testing period. If the gain on the sale of our capital stock were taxed under
FIRPTA, a non-U.S. holder would be taxed on that gain in the same manner as U.S. holders, subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien individuals.
In addition, distributions to “qualified
shareholders” (generally, certain non-U.S. publicly traded shareholders that meet certain record-keeping and other requirements)
are exempt from FIRPTA, except to the extent owners of such qualified shareholders that are not also qualified shareholders own,
actually or constructively, more than 10% of our capital stock. Furthermore, distributions to “qualified foreign pension
funds,” or entities all of the interests of which are held by “qualified foreign pension funds,” are exempt from
FIRPTA. Non-U.S. holders should consult their tax advisors regarding the application of these rules.
Backup withholding will generally not
apply to payments of dividends made by us or our paying agents, in their capacities as such, to a non-U.S. holder provided that
the non-U.S. holder furnishes to the applicable withholding agent the required certification as to its non-U.S. status, such as
providing a valid IRS Form W-8BEN or W-8BEN-E or W-8ECI, or certain other requirements are met. Notwithstanding the foregoing,
backup withholding may apply if the applicable withholding agent has actual knowledge, or reason to know, that the holder is a
U.S. person that is not an exempt recipient. Payments of the net proceeds from a disposition or a redemption effected outside the
United States by a non-U.S. holder made by or through a foreign office of a broker generally will not be subject to information
reporting or backup withholding. However, information reporting (but not backup withholding) generally will apply to such a payment
if the broker has certain connections with the U.S. unless the broker has documentary evidence in its records that the beneficial
owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established. Payment of the net proceeds
from a disposition by a non-U.S. holder of shares of capital stock made by or through the U.S. office of a broker is generally
subject to information reporting and backup withholding unless the non-U.S. holder certifies under penalties of perjury that it
is not a U.S. person and satisfies certain other requirements, or otherwise establishes an exemption from information reporting
and backup withholding.
Backup withholding is not an additional
tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the non-U.S. holder’s U.S.
federal income tax liability if certain required information is timely furnished to the Service. Non-U.S. holders are urged to
consult their own tax advisors regarding application of backup withholding to them and the availability of, and procedure for obtaining
an exemption from, backup withholding.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act,
or FATCA, imposes a U.S. federal withholding tax on certain types of payments made to “foreign financial institutions”
and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligation requirements
are satisfied. FATCA generally imposes a U.S. federal withholding tax at a rate of 30% on dividends on, and gross proceeds from
the sale or other disposition of, our stock if paid to a foreign entity unless either (i) the foreign entity is a “foreign
financial institution” that undertakes certain due diligence, reporting, withholding, and certification obligations, or in
the case of a foreign financial institution that is a resident in a jurisdiction that has entered into an intergovernmental agreement
to implement FATCA, the entity complies with the diligence and reporting requirements of such agreement, (ii) the foreign entity
is not a “foreign financial institution” and identifies certain of its U.S. investors, or (iii) the foreign entity
otherwise is excepted under FATCA. If we determine withholding is appropriate in respect of our capital stock, we may withhold
tax at the applicable statutory rate, and we will not pay any additional amounts in respect of such withholding. Under recently
released proposed Treasury Regulations, gross proceeds from a sale or other disposition of our capital stock are not subject to
FATCA withholding. In the preamble to these proposed Treasury Regulations, the Internal Revenue Service has stated that taxpayers
may generally rely on the proposed Treasury Regulations until final Treasury Regulations are issued.
If withholding is required under FATCA
on a payment, holders of our capital stock that otherwise would not be subject to withholding (or that otherwise would be entitled
to a reduced rate of withholding) generally will be required to seek a refund or credit from the Service to obtain the benefit
of such exemption or reduction (provided that such benefit is available). Stockholders should consult their own tax advisors regarding
the effect of FATCA on an investment in our capital stock.
Redemption and Conversion of Preferred
Stock
Cash Redemption of Preferred Stock. A
redemption of preferred stock will be treated for federal income tax purposes as a distribution taxable as a dividend (to the extent
of our current and accumulated earnings and profits), unless the redemption satisfies one of the tests set forth in Section 302(b)
of the Code and is therefore treated as a sale or exchange of the redeemed shares. Such a redemption will be treated as a sale
or exchange if it (i) is “substantially disproportionate” with respect to the holder (which will not be the case
if only non-voting preferred stock is redeemed), (ii) results in a “complete termination” of the holder’s
equity interest in us, or (iii) is “not essentially equivalent to a dividend” with respect to the holder, all
within the meaning of Section 302(b) of the Code.
In determining whether any of these tests
has been met, shares of our common stock and preferred stock considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares of our common stock and preferred stock actually owned by the holder,
must generally be taken into account. If a holder of preferred stock owns (actually and constructively) no shares of our outstanding
common stock or an insubstantial percentage thereof, a redemption of shares of preferred stock of that holder is likely to qualify
for sale or exchange treatment because the redemption would be “not essentially equivalent to a dividend.” However,
the determination as to whether any of the alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of preferred stock depends upon the facts and circumstances at the time the determination must be made.
We urge prospective holders of preferred stock to consult their own tax advisors to determine such tax treatment.
If a redemption of preferred stock is
not treated as a distribution taxable as a dividend to a particular holder, it will be treated as a taxable sale or exchange by
that holder. As a result, the holder will recognize gain or loss for federal income tax purposes in an amount equal to the difference
between (i) the amount of cash and the fair market value of any property received (less any portion thereof attributable to
accumulated and declared but unpaid dividends, which will be taxable as a dividend to the extent of our current and accumulated
earnings and profits) and (ii) the holder’s adjusted tax basis in the shares of the preferred stock. Such gain or loss
will be capital gain or loss if the shares of preferred stock were held as a capital asset, and will be long-term gain or loss
if such shares were held for more than one year. If a redemption of preferred stock is treated as a distribution taxable as a dividend,
the amount of the distribution will be measured by the amount of cash and the fair market value of any property received by the
holder, and the holder’s adjusted tax basis in the redeemed shares of the preferred stock will be transferred to the holder’s
remaining shares of our stock. If the holder owns no other shares of our stock, such basis may, under certain circumstances, be
transferred to a related person or it may be lost entirely.
Conversion of Preferred Stock into
Common Stock. In general, no gain or loss will be recognized for federal income tax purposes upon
conversion of the preferred stock solely into shares of common stock. The basis that a stockholder will have for tax purposes in
the shares of common stock received upon conversion will be equal to the adjusted basis for the stockholder in the shares of preferred
stock so converted, and provided that the shares of preferred stock were held as a capital asset, the holding period for the shares
of common stock received would include the holding period for the shares of preferred stock converted. A stockholder will, however,
generally recognize gain or loss on the receipt of cash in lieu of fractional shares of common stock in an amount equal to the
difference between the amount of cash received and the stockholder’s adjusted basis for tax purposes in the preferred stock
for which cash was received. Furthermore, under certain circumstances, a stockholder of shares of preferred stock may recognize
gain or dividend income to the extent that there are accumulated and unpaid dividends on the shares at the time of conversion into
common stock.
Adjustments to Conversion Price. Adjustments
in the conversion price, or the failure to make such adjustments, pursuant to the anti-dilution provisions of the preferred stock
or otherwise, may result in constructive distributions to the stockholders of preferred stock that could, under certain circumstances,
be taxable to them as dividends pursuant to Section 305 of the Code. If such a constructive distribution were to occur, a
stockholder of preferred stock could be required to recognize ordinary income for tax purposes without receiving a corresponding
distribution of cash. Under proposed regulations, such constructive distributions, if any, would generally be deemed to occur on
the date adjustments to the conversion price are made in accordance with the terms of the relevant series of preferred stock.
Warrants
Upon the exercise of a warrant for common
stock, a holder will not recognize gain or loss and will have a tax basis in the common stock received equal to the tax basis in
such stockholder’s warrant plus the exercise price of the warrant. The holding period for the common stock purchased pursuant
to the exercise of a warrant will begin on the day following the date of exercise and will not include the period that the stockholder
held the warrant.
Upon a sale or other disposition of a
warrant, a holder will recognize capital gain or loss in an amount equal to the difference between the amount realized and the
holder’s tax basis in the warrant. Such a gain or loss will be long term if the holding period is more than one year. In
the event that a warrant lapses unexercised, a holder will recognize a capital loss in an amount equal to his tax basis in the
warrant. Such loss will be long term if the warrant has been held for more than one year.
State, Local and Foreign Taxes
We and/or our subsidiaries and holders
of securities may be subject to taxation by various states, localities or foreign jurisdictions, including those in which we, our
subsidiaries, or holders of our securities transact business, own property or reside. We or our subsidiaries may own properties
located in numerous jurisdictions and may be required to file tax returns in some or all of those jurisdictions. The state, local
and foreign tax treatment of us and holders of our securities may differ from the U.S. federal income tax treatment of us and holders
of our securities described above. Consequently, holders of our securities should consult their tax advisors regarding the application
and effect of state, local and foreign income and other tax laws upon an investment in our securities.
ERISA
CONSIDERATIONS
The following is a summary of some considerations
associated with the purchase and holding of our securities by (i) an employee benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, or ERISA, that is subject to Title I of ERISA, (ii) a plan (as defined in Section
4975 of the Code), which is subject to Section 4975 of the Code (including IRAs and Keogh plans) or (iii) any entity deemed to
hold plan assets of any of the foregoing by virtue of the plan’s investment in the entity (each such plan, account and entity
described above is referred to herein as a “Plan”), or any employee benefit plan that is subject to any federal, state,
local or other law that is substantially similar to the foregoing provisions of ERISA and the Code (“Similar Law”).
This summary is based on current provisions of ERISA and the Code, each as amended through the date of this prospectus, and the
relevant regulations, opinions and other authority issued by the Department of Labor and the Service. We cannot assure you that
there will not be adverse tax or labor decisions or legislative, regulatory or administrative changes that would significantly
modify the statements expressed herein. Any such changes may apply to transactions entered into prior to the date of their enactment.
General Fiduciary Obligations
Under ERISA and the Code, a person generally
is a fiduciary with respect to a Plan if, among other things, the person has discretionary authority or control over the administration
of the Plan or the management or disposition of Plan assets or provides investment advice for a fee or other compensation (direct
or indirect) with respect to the Plan. Each fiduciary of a Plan subject to ERISA (such as a profit sharing, Section 401(k) or pension
plan) or any other retirement plan or account subject to Section 4975 of the Code, such as an IRA, seeking to invest plan assets
in our securities must consider, taking into account the facts and circumstances of each such Plan, among other matters:
|
·
|
whether the investment is consistent with the applicable provisions of ERISA and the Code;
|
|
·
|
whether, under the facts and circumstances pertaining to the Plan in question, the fiduciary’s responsibility to the
Plan has been satisfied;
|
|
·
|
whether the investment will produce an unacceptable amount of “unrelated business taxable income” (“UBTI”)
to the Plan; and
|
|
·
|
the need to value the assets of the Plan annually.
|
Under ERISA, a Plan fiduciary’s
responsibilities include the following duties:
|
·
|
to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to
them, as well as defraying reasonable expenses of plan administration;
|
|
·
|
to invest plan assets prudently;
|
|
·
|
to diversify the investments of the plan, unless it is clearly prudent not to do so;
|
|
·
|
to ensure sufficient liquidity for the plan;
|
|
·
|
to ensure that plan investments are made in accordance with plan documents; and
|
|
·
|
to consider whether an investment would constitute or give rise to a non-exempt prohibited transaction under ERISA or the Code.
|
ERISA also requires that, with certain
exceptions, the assets of an employee benefit plan be held in trust and that the trustee, or a duly authorized named fiduciary
or investment manager, have exclusive authority and discretion to manage and control the assets of the plan. In considering an
investment in our securities, a Plan fiduciary should consider whether such an investment is appropriate for the Plan, taking into
account such fiduciary obligations described above.
Prohibited Transactions
Generally, both ERISA and the Code prohibit
Plans from engaging in certain transactions involving Plan assets with specified parties, such as sales or exchanges or leasing
of property, loans or other extensions of credit, furnishing goods or services, or transfers to, or use of, plan assets, unless
an exemption is available. The specified parties are referred to as “parties-in-interest” under ERISA and as “disqualified
persons” under the Code. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may
be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of a Plan that
engages in a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code, including
an obligation to restore to the Plan any profits they realized as a result of the transaction or breach and make up for any losses
incurred by the Plan as a result of the transaction or breach. With respect to an IRA that invests in our securities, the occurrence
of a non-exempt prohibited transaction involving the individual who established the IRA, or his or her beneficiary, would cause
the IRA to lose its tax-exempt status under Section 408(e)(2) of the Code. Accordingly, the fiduciary of a Plan or any other person
making investment decisions for a Plan should consider the application of the prohibited transaction rules (and the available exemptions,
if any) of ERISA and the Code prior to making any decision to purchase and hold our securities. There can be no assurance that
the conditions of any of the available prohibited transaction exemptions will be satisfied. In addition, if we are deemed to hold
plan assets (as described below), our management could be characterized as fiduciaries with respect to such assets, and each would
be deemed to be a party-in-interest under ERISA and a disqualified person under the Code with respect to investing Plans. Whether
or not we are deemed to hold plan assets, if we or our affiliates are affiliated with a Plan investor, we might be a disqualified
person or party-in-interest with respect to such Plan investor, resulting in a non-exempt prohibited transaction merely upon investment
by such Plan in our securities.
Plan Asset Considerations
In order to determine whether an investment
in our securities by a Plan creates or gives rise to the potential for either non-exempt prohibited transactions or a commingling
of assets as referred to above, a Plan fiduciary must consider whether an investment in our securities will cause our assets to
be treated as assets of the investing Plan and subject to ERISA. Section 3(42) of ERISA defines the term “plan assets”
to mean plan assets as defined in regulations (the Plan Assets Regulation) promulgated by the Department of Labor. These regulations
provide guidelines as to whether, and under what circumstances, the underlying assets of an entity will be deemed to constitute
assets of a Plan when the Plan invests in that entity. Under the Plan Assets Regulation, the assets of an entity in which a Plan
makes an equity investment will generally be deemed to be assets of the Plan, unless one of the exceptions to this general rule
applies.
In the event that our underlying assets
were treated as the assets of investing Plans, our management would be treated as fiduciaries with respect to each Plan holder
of our securities and an investment in our securities might constitute an ineffective delegation of fiduciary responsibility to
our advisors, and expose the fiduciary of the Plan to co-fiduciary liability under ERISA for any breach by our advisor of the fiduciary
duties mandated under ERISA. Further, if our assets are deemed to be “plan assets,” an investment by an IRA in our
securities might be deemed to result in an impermissible commingling of IRA assets with other property.
If our advisor or its affiliates were
treated as fiduciaries with respect to Plan holders of our securities, the prohibited transaction restrictions of ERISA and the
Code would apply to any transaction involving our assets. These restrictions could, for example, require that we avoid transactions
with persons that are affiliated with or related to us or our affiliates or require that we restructure our activities in order
to obtain an administrative exemption from the prohibited transaction restrictions. Alternatively, we might have to provide Plan
holders of our securities with the opportunity to sell their securities to us or we might dissolve.
The Plan Assets Regulation provides that
the underlying assets of an entity such as a REIT will be treated as assets of a Plan investing therein unless the entity satisfies
one of the exceptions to the general rule.
Exception for “Publicly-Offered
Securities.” If a Plan acquires “publicly-offered securities,” the assets of the issuer
of the securities will not be deemed to be “plan assets” under the Plan Assets Regulation. A publicly-offered security
must be:
|
·
|
(i) sold as part of a public offering registered under the Securities Act and be part of a class of securities registered under
the Exchange Act within a specified time period or (ii) sold as part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act;
|
|
·
|
part of a class of securities that is owned by 100 or more persons who are independent of the issuer and one another; and
|
Whether a security is “freely transferable”
depends upon the particular facts and circumstances. The Plan Assets Regulation provides several examples of restrictions on transferability
that, absent unusual circumstances, will not prevent the rights of ownership in question from being considered “freely transferable”
if the minimum investment is $10,000 or less. Where the minimum investment in a public offering of securities is $10,000 or less,
the presence of the following restrictions on transfer will not ordinarily affect a determination that such securities are “freely
transferable”:
|
·
|
any restriction on, or prohibition against, any transfer or assignment that would either result in a termination or reclassification
of the entity for federal or state tax purposes or that would violate any state or federal statute, regulation, court order, judicial
decree or rule of law;
|
|
·
|
any requirement that not less than a minimum number of shares or units of such security be transferred or assigned by any investor,
provided that such requirement does not prevent transfer of all of the then remaining shares or units held by an investor;
|
|
·
|
any prohibition against transfer or assignment of such security or rights in respect thereof to an ineligible or unsuitable
investor; and
|
|
·
|
any requirement that reasonable transfer or administrative fees be paid in connection with a transfer or assignment.
|
fOur structure has been established with
the intent to satisfy the criteria to be a “publicly-offered security”, however, there is no assurance that our securities
will meet such requirement.
Exception for Insignificant Participation
by Plan Investors. The Plan Assets Regulation provides that the assets of an entity will not be deemed to
be the assets of a Plan investing in such entity if equity participation in the entity by employee benefit plans, including Plans,
is not significant. The Plan Assets Regulation provides that equity participation in an entity by Plan investors is “significant”
if at any time 25% or more of the value of any class of equity interest is held by Plan investors. In calculating the value of
a class of equity interests, the value of any equity interests held by us or any of our affiliates must be excluded. We cannot
provide any assurance that Plan investors will hold less than 25% of the value of our securities.
Other Prohibited Transactions
Regardless of whether our securities qualify
for the “publicly-offered securities” exception of the Plan Assets Regulation, a prohibited transaction could occur
if we, our advisors, any selected broker-dealer or any of their affiliates is a fiduciary (within the meaning of Section 3(21)
of ERISA) with respect to any Plan purchasing our securities. Accordingly, unless an administrative or statutory exemption applies,
securities should not be purchased by a Plan with respect to which any of the above persons is a fiduciary.
Further, certain employee benefit plans,
such as governmental, non-U.S. or church plans, generally are not subject to the requirements of Title I of ERISA of relevant Code
provisions; provided, however, such plans may be subject to Similar Laws that affect their ability to acquire or hold our securities.
Such plans should consult their own advisors regarding the applicability of any such Similar Laws.
Representation
By acceptance of any of our securities,
each purchaser and subsequent transferee of our securities will be deemed to have represented and warranted that either (i) no
portion of the assets used by such purchaser or transferee to acquire or hold such securities constitutes assets of any Plan or
a plan subject to Similar Law or (ii) the purchase and holding of such securities by such purchaser or transferee will not constitute
a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable
Similar Laws.
The sale of our securities to a Plan is
in no respect a representation by us or any other person associated with the offering that such an investment meets all relevant
legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate
for Plans generally or any particular Plan.
The preceding discussion is only a summary
of certain ERISA and Code implications of an investment in the securities and does not purport to be complete. Prospective investors
should consult with their own legal, tax, financial and other advisors prior to investing to review these implications in light
of such investor’s particular circumstances.
Each purchaser or transferee that is
or is acting on behalf of a Plan or a plan subject to Similar Law should consult with its legal advisor concerning the potential
consequences to the Plan under ERISA, Section 4975 of the Code or applicable Similar Law of an investment in our securities.