Equity-based Compensation

Equity Plan

The General Partner 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 General Partner’s and its affiliates’ non-executive directors, officers and other employees and advisors or consultants who are providing services to the General Partner or its affiliates. For each share awarded under the Equity Plan, the Operating Partnership issues a General Partner OP Unit to the General Partner with identical terms.

The General Partner 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 the Former Manager in connection with the IPO, all of which were vested as of December 31, 2014. As of December 31, 2014, the General Partner had awarded 7,677,715 shares under the Equity Plan, of which 2,781,571 shares had been forfeited upon the resignations of certain senior executives during the fourth quarter. In accordance with the LPA, the Operating Partnership issued an equal number of General Partner OP Units to ARCP when the General Partner awarded shares under the Equity Plan.

The fair value of restricted common stock awards awarded to employees under the Equity Plan is generally determined on the grant date using the closing stock price on NASDAQ that day and is expensed over the requisite service period. The fair value of restricted common stock awarded to non-employees under the Equity Plan is measured based upon the fair value of goods or services received or the equity instruments granted, whichever is more reliably determinable and is expensed in full at the date of grant.

Director Stock Plan

The General Partner 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 General Partner’s non-executive directors. Awards of restricted stock will vest in accordance with the award agreements, which generally provide for ratable vesting over a five-year period following the date of grant. The awards of restricted stock 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 December 31, 2014, a total of 99,000 shares of common stock was reserved for issuance under the Director Stock Plan. As of December 31, 2014, the General Partner had awarded 45,000 shares under the Director Stock Plan. In accordance with the LPA, the Operating Partnership issued an equal number of General Partner OP Units to ARCP when the General Partner awarded shares under the Director Stock Plan.

The fair value of restricted common stock awards, as well as the underlying General Partner OP Units, 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. Concurrently, for each share of ARCP common stock issued, the Operating Partnership issued a General Partner OP Unit to the General Partner.

The following table details the restricted shares activity within the Equity Plan and Director Stock Plan during the years ended December 31, 2014, 2013, and 2012:

Restricted Share Awards:



	Equity Plan				RSP and Director Stock Plan
	Number of Restricted Common Shares		Weighted-Average Issue Price		Number of Restricted Common Shares		Weighted-Average Issue Price
Awarded January 1, 2012	167,400		12.50		14,700		11.50
Granted	93,683		10.65		30,634		10.45
Forfeited	(1,174	)	10.65		(13,650	)	11.54
Awarded December 31, 2012	259,909		$	11.84	31,684		$	10.47
Granted	932,527		13.82		20,768		14.58
Forfeited	(1,085	)	12.85		(3,000	)	12.99
Awarded December 31, 2013	1,191,351		$	13.39	49,452		$	12.04
Granted	6,484,105		13.09		3,000		13.99
Forfeited	(3,055,546	)	12.65		—		—
Awarded December 31, 2014	4,619,910		$	13.46	52,452		$	12.15

Unvested Restricted Share Awards:



	Equity Plan				Director Stock Plan
	Shares of Restricted Common Stock		Weighted-Average Issue Price		Shares of Restricted Common Stock		Weighted-Average Issue Price
Unvested, January 1, 2012	139,500		12.50		14,700		11.50
Granted	93,683		10.65		30,634		10.45
Vested	(59,556	)	12.38		(2,370	)	11.88
Forfeited	(1,174	)	10.65		(13,650	)	11.54
Unvested, December 31, 2012	172,453		$	11.55	29,314		$	10.35
Granted	932,527		13.82		20,768		14.58
Vested	(172,453	)	11.55		(28,207	)	11.03
Forfeited	(1,085	)	12.85		(3,000	)	12.99
Unvested, December 31, 2013	931,442		$	13.82	18,875		$	13.52
Granted	6,484,105		13.09		3,000		13.99
Vested	(1,675,939	)	13.11		(21,875	)	13.58
Forfeited	(3,055,546	)	12.65		—		—
Unvested, December 31, 2014	2,684,062		$	13.84	—		$	—

For the years ended December 31, 2014, 2013, and 2012, compensation expense, excluding an outperformance bonus expense related to the OPP, for restricted shares was $31.7 million, $8.0 million, and $1.2 million, respectively, which is recorded in general and administrative expense in the accompanying consolidated statement of operations.

Compensation expense for the year ended December 31, 2014 includes $11.4 million of compensation expense recorded for 0.8 million restricted shares granted to affiliates.

On October 1, 2014, the Company awarded a former executive 165,838 shares of common stock that were not subject to any vesting requirements. As such, the Company expensed $2.0 million related to these shares during the three months ended December 31, 2014. On December 15, 2014, the former executive resigned from the Company and agreed to return the shares awarded on October 1, 2014 resulting in the Company recording income of $1.5 million which is included in other income, net in the accompanying consolidated statement of operations.

Multi-Year Outperformance Plan

Upon consummation of the ARCT III Merger, the Company entered into the 2013 Advisor Multi-Year Outperformance Agreement (the “OPP”) with the Former Manager, whereby the Former Manager was able to 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 General Partner’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 General Partner’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 and were converted into OP Units on such date.

During the years ended December 31, 2014 and 2013, the Operating Partnership recorded expense of $1.6 million and $92.3 million for the LTIP Units under the OPP, which is recorded in general and administrative expense in the accompanying consolidated statements of operations. As of December 31, 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 sheet.

2014 Multi-Year Outperformance Plan

On October 3, 2013, the General Partner’s board of directors approved a multi-year outperformance plan (the “New OPP”), which became effective upon the General Partner’s transition to self-management, which occurred on January 8, 2014. Under the New OPP, individual agreements were entered into between the General Partner and the participants selected by the General Partner’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 were 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 approximately 5% of the General Partner’s equity market capitalization at the time of the approval of the New OPP (“the Initial Market Cap”).

In October 2013, the Compensation Committee approved an aggregate award pool to be measured by the General Partner’s market capitalization as of the date of such approval; however, the OPP was definitively documented to measure market capitalization on a pro forma basis as of the General Partner’s transition to self-management (including the pro forma impact of various transactions expected to be consummated prior to the General Partner’s transition to self-management on January 8, 2014), which was calculated in December 2013. After the Audit Committee’s and new management’s review of the OPP, it was determined that the Compensation Committee’s intention in respect of the OPP was that the maximum award pool opportunity (the “2014 OPP Cap”) should have been $120.0 million.

Subject to the New OPP Cap, the pool was to equal an amount to be determined based on the General Partner’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” was 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 provided for early calculation and vesting of the award in the event of a change in control of the General Partner, prior to the end of the Performance Period. The Participants were 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 represented units of equity ownership in the OP that were structured as a profits interest therein. Subject to the Participant’s continued service through each vesting date, one-third of any earned LTIP Units would vest on October 1, 2016, October 1, 2017 and October 1, 2018, respectively. The Participants were entitled to receive distributions on their LTIP Units to the extent provided for in the LPA, as amended from time to time.

During the three months ended December 31, 2014, all of the Participants of the New OPP departed from the Company and forfeited all interests they had in the New OPP. As such, no expenses were recorded for the New OPP for the year ended December 31, 2014. As of December 31, 2014, the Company had recorded a total payable for distributions on LTIP units related to the OPP and the New OPP of $6.9 million.