Equity Based Compensation

Equity Plan

The Company has adopted the American Realty Capital Properties, Inc. Equity Plan (the “Equity Plan”), which provides for the grant of stock options, stock appreciation rights, restricted shares of common stock, restricted stock units, dividend equivalent rights and other stock-based awards to the Company’s and its affiliates’ non-executive directors, officers and other employees and advisors or consultants who are providing services to the Company or its affiliates.

The Company authorized and reserved a total number of shares equal to 10.0% of the total number of issued and outstanding shares of common stock (on a fully diluted basis assuming the redemption of all OP Units for shares of common stock) to be issued at any time under the Equity Plan for equity incentive awards excluding an initial grant of 167,400 shares to its Former Manager in connection with the IPO, all of which were vested as of June 30, 2014. As of June 30, 2014, the Company has awarded 6,715,197 shares under the Equity Plan.

The fair value of restricted common stock awards under the Equity Plan is determined on the grant date using the closing stock price on NASDAQ that day. The fair value of restricted common stock awarded to the non-employees under the Equity Plan is expensed in full at the date of grant based on the closing stock price on NASDAQ that day.

Director Stock Plan

The Company has adopted a Non-Executive Director Stock Plan (the “Director Stock Plan”), which provides for the grant of restricted shares of common stock to each of the Company’s independent directors, each of whom is a non-executive director. Awards of restricted stock will vest ratably over a three-year period following the date of grant in increments of 34%, 33% and 33%, respectively, per annum, subject to the director’s continued service on the board of directors, and shall provide for “distribution equivalents” with respect to this restricted stock, whether or not vested, at the same time and in the same amounts as distributions are paid to the stockholders. At June 30, 2014, a total of 99,000 shares of common stock are reserved for issuance under the Director Stock Plan. As of June 30, 2014, the Company has awarded 60,854 shares under the Director Stock Plan.

The fair value of restricted common stock awards under the Director Stock Plan is determined on the grant date using the closing stock price on NASDAQ that day.

ARCT IV Restricted Share Plan

ARCT IV had an employee and director incentive restricted share plan (the “RSP”), which provided for the automatic grant of 1,333 restricted shares of common stock to each of its independent directors without any further action by ARCT IV’s board of directors or its stockholders on the date of initial election to the board of directors and on the date of each annual stockholder’s meeting thereafter. Restricted stock issued to independent directors vested over a five-year period following the date of grant in increments of 20% per annum. The RSP provided ARCT IV with the ability to grant awards of restricted shares to its directors, officers and employees (if ARCT IV ever had employees), employees of the ARCT IV Advisor and its affiliates, employees of entities that provided services to ARCT IV, directors of the ARCT IV Advisor or of entities that provided services to ARCT IV, certain consultants to ARCT IV and the ARCT IV Advisor and its affiliates or to entities that provided services to ARCT IV.

Immediately prior to the effective time of the ARCT IV Merger, each then-outstanding share of ARCT IV restricted stock fully vested. All shares of ARCT IV common stock then-outstanding as a result of the full vesting of shares of ARCT IV restricted stock, and the satisfaction of any applicable withholding taxes, received shares of the Company’s common stock based on the ARCT IV Exchange Ratio.

The following table details the restricted shares activity within the Equity Plan and Director Stock Plan during the six months ended June 30, 2014:



	Equity Plan				Director Stock Plan
	Shares of Restricted Common Stock		Weighted-Average Issue Price		Shares of Restricted Common Stock		Weighted-Average Issue Price
Unvested, December 31, 2013	931,442		$	13.82	15,000		$	14.45
Granted	5,528,224		13.20		42,854		13.99
Vested	(784,894	)	12.79		(22,202	)	—
Forfeited	(60,456	)	—		—		—
Unvested, June 30, 2014	5,614,316		$	13.35	35,652		$	14.11

For the three and six months ended June 30, 2014, compensation expense for restricted shares was $4.4 million and $22.5 million, respectively. Compensation expense for the six months ended June 30, 2014 includes $11.4 million of compensation expense recorded for 0.8 million restricted shares granted to affiliates. In addition, for the six months ended June 30, 2014, merger and other transaction related costs includes compensation expense of $0.5 million for the acceleration of vesting of certain restricted shares due to the Cole Merger. For the three and six months ended June 30, 2013, compensation expense for restricted shares was $3.5 million and $4.3 million, respectively.

Multi-Year Performance Plan

Upon consummation of the ARCT III Merger, the Company entered into the 2013 Advisor Multi-Year Outperformance Agreement (the “OPP”) with its Former Manager, whereby its Former Manager was able to potentially earn compensation upon the attainment of stockholder value creation targets.

Under the OPP, the Company’s Former Manager was granted 8,241,101 long-term incentive plan units of the OP (“LTIP Units”), which could be earned or forfeited based on the Company’s total return to stockholders (including both share price appreciation and common stock distributions) (“Total Return”), for the three-year period that commenced on December 11, 2012.

Pursuant to previous authorization of the Company’s board of directors, as a result of the termination of the Management Agreement, all 8,241,101 LTIP Units became fully earned, vested and convertible into OP units upon the consummation of the Company’s transition to self-management on January 8, 2014. During the six months ended June 30, 2014, the Company recorded expenses of $1.6 million for the LTIP Units under the OPP, which is recorded in merger and other transaction related expenses in the accompanying consolidated statements of operations. During the three and six months ended June 30, 2013, the Company recorded expenses of $3.1 million and $3.7 million, respectively, for the LTIP Units under the OPP, which is recorded in equity based compensation in the accompanying consolidated statements of operations. As of June 30, 2014, all LTIP Units under the OPP were earned and $93.9 million of the expense has been allocated to the non-controlling interest on the consolidated balance sheets.

New Multi-Year Outperformance Plan

On October 21, 2013, the Company approved a multi-year outperformance plan (the “New OPP”), which became effective upon the Company’s transition to self-management, which occurred on January 8, 2014. Under the New OPP, individual agreements were entered into between the Company and the participants selected by the Company’s board of directors (the “Participants”) that set forth the Participant’s participation percentage in the New OPP and the number of LTIP Units of the OP subject to the award (“OPP Agreements”). Under the New OPP and the OPP Agreements, the Participants are eligible to earn performance-based bonus awards equal to the Participant’s participation percentage of a pool that is funded up to a maximum award opportunity (the “New OPP Cap”) of $218.1 million, which is equal to approximately 5% of the Company’s equity market capitalization at the time of the approval of the New OPP (“the Initial Market Cap”). Subject to the New OPP Cap, the pool will equal an amount to be determined based on the Company’s level of achievement of total return to stockholders, including both share price appreciation and common stock distributions (“Total Return”), as measured against an absolute hurdle and against a peer group of companies for a three-year performance period that commenced on October 1, 2013 (the “Performance Period”), with valuation dates on which a portion of the LTIP Units up to a specified amount of the New OPP Cap could be earned on the last day of each 12-month period during the Performance Period (each an “Annual Period”) and the initial 24-month period of the Performance Period (the “Interim Period”), as follows:



		Performance Period	Annual Period	Interim Period
Absolute Component: 4% of any excess Total Return attained above an absolute hurdle measured from the beginning of such period:		21%	7%	14%
Relative Component: 4% of any excess Total Return attained above the median Total Return for the performance period of the Peer Group⁽¹⁾, subject to a ratable sliding scale factor as follows based on achievement of cumulative Total Return measured from the beginning of such period:
•	100% will be earned if cumulative Total Return achieved is at least:	18%	6%	12%
•	50% will be earned if a cumulative Total Return achieved is:	0%	0%	0%
•	0% will be earned if cumulative Total Return achieved is less than:	0%	0%	0%
•	a percentage from 50% to 100% calculated by linear interpolation will be earned if cumulative Total Return achieved is if between:	0% - 18%	0% - 6%	0%- 12%

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(1) The “Peer Group” is comprised of the following companies: EPR Properties; Getty Realty Corporation; Lexington Realty Trust; National Retail Properties, Inc.; Realty Income Corporation; and Spirit Realty Capital, Inc.

The New OPP provides for early calculation and vesting of the award in the event of a change in control of the Company, prior to the end of the Performance Period. Under the New OPP, treatment of a Participant’s award upon a termination of service will be governed by the terms of the Participant’s OPP Agreement or service agreement with the Company. In the event a Participant’s OPP Agreement or service agreement does not provide for treatment of the award upon the Participant’s termination, then the award will be forfeited upon such termination. The Participants are entitled to receive a tax gross-up in the event that any amounts paid to the Participant under the New OPP constitute “parachute payments” as defined in Section 280G of the Code. The LTIP Units granted under the New OPP represent units of equity ownership in the OP that are structured as a profits interest therein. Subject to the Participant’s continued service through each vesting date, one-third of any earned LTIP Units will vest on October 1, 2016, October 1, 2017 and October 1, 2018, respectively. The Participants are entitled to receive distributions on their LTIP Units to the extent provided for in the limited partnership agreement of the OP, as amended from time to time. During the three and six months ended June 30, 2014, the Company recorded expenses of $4.9 million and $9.4 million, respectively, for the New OPP, which is recorded in equity based compensation on the consolidated statement of operations.